10-Q

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 March 31, 2006

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

(Formerly Duke Energy Holding Corp.)

(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, or a non-accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

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, without par value, outstanding as of May 4, 2006…1,234,981,992

DUKE ENERGY CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006

INDEX

Item		Page
PART I. FINANCIAL INFORMATION
1.	Financial Statements	5
	Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005	5
	Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005	8
	Consolidated Statements of Common Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2006 and 2005	9
	Notes to Consolidated Financial Statements	10
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
3.	Quantitative and Qualitative Disclosures About Market Risk	62
4.	Controls and Procedures	64
PART II. OTHER INFORMATION
1.	Legal Proceedings	66
1A.	Risk Factors	66
2.	Unregistered Sales of Equity Securities and Use of Proceeds	68
4.	Submission of Matters to a Vote of Security Holders	68
6.	Exhibits	69
	Signatures	70

2

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Duke Energy Corporation’s (Duke Energy) reports, filings and other public announcements may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other similar words. Those statements represent Duke Energy’s intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside Duke Energy’s control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Those factors include the risk factors set forth in Item 1A of the Form 10-K of Duke Energy and of Cinergy Corp. for the year ended December 31, 2005 as well as the following:

• State, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed at and degree to which competition enters the electric and natural gas industries

• The outcomes of litigation and regulatory investigations, proceedings or inquiries

• Industrial, commercial and residential growth in Duke Energy’s service territories

• Additional competition in electric or gas 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 company operations, including the economic, operational and other effects of hurricanes and ice storms

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

• General economic conditions, including any potential effects arising from terrorist attacks and any consequential hostilities or other hostilities

• Changes in environmental and other laws and regulations to which Duke Energy and its subsidiaries are subject

• 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

• The amount of collateral required to be posted from time to time in Duke Energy’s transactions

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

• The performance of electric generation, pipeline and gas processing facilities and of projects undertaken by Duke Energy’s non-regulated businesses

• The extent of success in connecting natural gas supplies to gathering and processing systems and in connecting and expanding gas and electric markets

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

3

• Conditions of the capital markets and equity markets during the periods covered by the forward-looking statements and

• The ability to successfully complete merger, acquisition or divestiture plans, including the prices at which Duke Energy is able to sell assets; regulatory or other limitations imposed as a result of a merger, acquisition or divestiture; and the success of the business following a merger, acquisition or divestiture

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.

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DUKE ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per-share amounts)

	Three Months Ended March 31,
	2006			2005
Operating Revenues
Non-regulated electric, natural gas, natural gas liquids and other	$	596		$	2,901
Regulated electric		1,286			1,259
Regulated natural gas and natural gas liquids		1,319			1,168
Total operating revenues		3,201			5,328
Operating Expenses
Natural gas and petroleum products purchased		738			2,750
Operation, maintenance and other		757			808
Fuel used in electric generation and purchased power		399			349
Depreciation and amortization		396			481
Property and other taxes		148			153
Impairment and other charges		—			121
Total operating expenses		2,438			4,662
Gains on Sales of Investments in Commercial and Multi-Family Real Estate		26			42
Gains on Sales of Other Assets and Other, net		33			9
Operating Income		822			717
Other Income and Expenses
Equity in earnings of unconsolidated affiliates		175			41
Gains on sales of equity investments		—			1,239
Other income and expenses, net		12			24
Total other income and expenses		187			1,304
Interest Expense		250			290
Minority Interest Expense		15			420
Earnings From Continuing Operations Before Income Taxes		744			1,311
Income Tax Expense from Continuing Operations		258			451
Income From Continuing Operations		486			860
(Loss) Income From Discontinued Operations, net of tax		(128	)		8
Net Income		358			868
Dividends and Premiums on Redemption of Preferred and Preference Stock		—			2
Earnings Available For Common Stockholders	$	358		$	866
Common Stock Data
Weighted-average shares outstanding
Basic		928			954
Diluted		963			990
Earnings per share (from continuing operations)
Basic	$	0.53		$	0.90
Diluted	$	0.50		$	0.87
(Loss) Earnings per share (from discontinued operations)
Basic	$	(0.14	)	$	0.01
Diluted	$	(0.13	)	$	0.01
Earnings per share
Basic	$	0.39		$	0.91
Diluted	$	0.37		$	0.88
Dividends per share	$	0.31		$	0.275

See Notes to Unaudited Consolidated Financial Statements

5

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

	March 31, 2006		December 31, 2005
ASSETS
Current Assets
Cash and cash equivalents	$	785	$	511
Short-term investments		32		632
Receivables (net of allowance for doubtful accounts of $160 at March 31, 2006 and $127 at December 31, 2005)		2,071		2,580
Inventory		799		863
Assets held for sale		326		1,528
Unrealized gains on mark-to-market and hedging transactions		49		87
Other		1,148		1,756
Total current assets		5,210		7,957
Investments and Other Assets
Investments in unconsolidated affiliates		2,037		1,933
Nuclear decommissioning trust funds		1,585		1,504
Goodwill		3,782		3,775
Notes receivable		145		138
Unrealized gains on mark-to-market and hedging transactions		58		62
Assets held for sale		2,614		3,597
Investments in residential, commercial and multi-family real estate (net of accumulated depreciation of $17 at March 31, 2006 and $17 at December 31, 2005)		1,326		1,281
Other		2,679		2,743
Total investments and other assets		14,226		15,033
Property, Plant and Equipment
Cost		41,414		40,823
Less accumulated depreciation and amortization		11,955		11,623
Net property, plant and equipment		29,459		29,200
Regulatory Assets and Deferred Debits
Deferred debt expense		264		269
Regulatory assets related to income taxes		1,372		1,338
Other		886		926
Total regulatory assets and deferred debits		2,522		2,533
Total Assets	$	51,417	$	54,723

See Notes to Unaudited Consolidated Financial Statements

6

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)

	March 31, 2006		December 31, 2005
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	1,315	$	2,431
Notes payable and commercial paper		153		83
Taxes accrued		475		327
Interest accrued		253		230
Liabilities associated with assets held for sale		378		1,488
Current maturities of long-term debt		1,418		1,400
Unrealized losses on mark-to-market and hedging transactions		197		204
Other		1,913		2,255
Total current liabilities		6,102		8,418
Long-term Debt		14,601		14,547
Deferred Credits and Other Liabilities
Deferred income taxes		5,188		5,253
Investment tax credit		142		144
Unrealized losses on mark-to-market and hedging transactions		21		10
Liabilities associated with assets held for sale		988		2,085
Asset retirement obligations		2,090		2,058
Other		5,006		5,020
Total deferred credits and other liabilities		13,435		14,570
Commitments and Contingencies
Minority Interests		727		749
Common Stockholders’ Equity
Common stock, no par, 2 billion shares authorized; 927 million and 928 million shares outstanding at March 31, 2006 and December 31, 2005, respectively		10,340		10,388
Retained earnings		5,405		5,335
Accumulated other comprehensive income		807		716
Total common stockholders’ equity		16,552		16,439
Total Liabilities and Common Stockholders’ Equity	$	51,417	$	54,723

See Notes to Unaudited Consolidated Financial Statements

7

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

	Three Months Ended March 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	358		$	868
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including amortization of nuclear fuel)		438			550
Gains on sales of investments in commercial and multi-family real estate		(26	)		(42	)
Gains on sales of equity investments and other assets		(11	)		(1,272	)
Impairment charges		—			121
Deferred income taxes		(40	)		195
Minority Interest		15			413
Equity in earnings of unconsolidated affiliates		(175	)		(41	)
Purchased capacity levelization		(2	)		(3	)
Contribution to company-sponsored pension plans		(11	)		(13	)
(Increase) decrease in
Net realized and unrealized mark-to-market and hedging transactions		66			16
Receivables		545			36
Inventory		174			195
Other current assets		817			(95	)
Increase (decrease) in		—			—
Accounts payable		(1,093	)		(75	)
Taxes accrued		(64	)		107
Other current liabilities		(379	)		(192	)
Capital expenditures for residential real estate		(115	)		(91	)
Cost of residential real estate sold		42			38
Other, assets		27			(23	)
Other, liabilities		154			185
Net cash provided by operating activities		720			877
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(560	)		(503	)
Investment expenditures		(69	)		(5	)
Acquisitions, net of cash acquired		(90	)		—
Purchases of available-for-sale securities		(7,705	)		(11,143	)
Proceeds from sales and maturities of available-for-sale securities		8,256			11,352
Net proceeds from the sales of equity investments and other assets, and sales of and collections on notes receivable		28			1,322
Proceeds from the sales of commercial and multi-family real estate		56			51
Settlement of net investment hedges and other investing derivatives		(36	)		(162	)
Other		(7	)		—
Net cash (used in) provided by investing activities		(127	)		912
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the:
Issuance of long-term debt		6			4
Issuance of common stock and common stock related to employee benefit plans		14			14
Payments for the redemption of:
Long-term debt		(40	)		(419	)
Notes payable and commercial paper		68			184
Distributions to minority interests		(157	)		(195	)
Contributions from minority interests		137			192
Dividends paid		(289	)		(266	)
Repurchase of common shares		(69	)		(834	)
Other		11			—
Net cash used in financing activities		(319	)		(1,320	)
Changes in cash and cash equivalents included in assets held for sale		—			(1	)
Net increase in cash and cash equivalents		274			468
Cash and cash equivalents at beginning of period		511			533
Cash and cash equivalents at end of period	$	785		$	1,001
Supplemental Disclosures
Significant non-cash transactions:
AFUDC - equity component	$	10		$	5

See Notes to Unaudited Consolidated Financial Statements

8

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In millions)

	Common Stock Shares		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)										Total
									Foreign Currency Adjustments		Net Gains (Losses) on Cash Flow Hedges			Minimum Pension Liability Adjustment			Other
Balance December 31, 2004	957		$	11,252		$	4,539		$	540	$	526		$	(416	)	$	—	$	16,441
Net income	—			—			868			—		—			—			—		868
Other Comprehensive Income
Foreign currency translation adjustments (a)	—			—			—			47		—			—			—		47
Net unrealized gains on cash flow hedges (b)	—			—			—			—		143			—			—		143
Reclassification into earnings from cash flow hedges (c)	—			—			—			—		59			—			—		59
Total comprehensive income																				1,117
Dividend reinvestment and employee benefits	1			18			7			—		—			—			—		25
Stock repurchase	(30	)		(834	)		—			—		—			—			—		(834	)
Common stock dividends	—			—			(263	)		—		—			—			—		(263	)
Preferred and preference stock dividends	—			—			(2	)		—		—			—			—		(2	)
Balance March 31, 2005	928		$	10,436		$	5,149		$	587	$	728		$	(416	)	$	—	$	16,484
Balance December 31, 2005	928		$	10,388		$	5,335		$	846	$	(87	)	$	(60	)	$	17	$	16,439
Net income	—			—			358			—		—			—			—		358
Other Comprehensive Income
Foreign currency translation adjustments (a)	—			—			—			59		—			—			—		59
Net unrealized gains on cash flow hedges (b)	—			—			—			—		5			—			—		5
Reclassification into earnings from cash flow hedges (c)	—			—			—			—		11			—			—		11
Other (d)	—			—			—			—		—			—			16		16
Total comprehensive income																				449
Dividend reinvestment and employee benefits	1			21			1			—		—			—			—		22
Stock repurchase	(2	)		(69	)		—			—		—			—			—		(69	)
Common stock dividends	—			—			(289	)		—		—			—			—		(289	)
Balance March 31, 2006	927		$	10,340		$	5,405		$	905	$	(71	)	$	(60	)	$	33	$	16,552

(a) Foreign currency translation adjustments, net of $0 tax expense in 2006 and $62 tax benefit in 2005. The 2005 tax benefit related to the settled net investment hedges (see Note 14). Substantially all of the 2005 tax benefit is a correction of an immaterial accounting error related to prior periods.

(b) Net unrealized gains on cash flow hedges, net of $3 tax expense in 2006 and $74 tax expense in 2005.

(c) Reclassification into earnings from cash flow hedges, net of $7 tax expense in 2006 and $30 tax expense in 2005. Reclassification into earnings from cash flow hedges for the three months ended March 31, 2006, is due primarily to the recognition of Duke Energy North America’s (DENA’s) unrealized net gains related to hedges on forecasted transactions which will no longer occur as a result of the announced plan to sell or otherwise dispose of substantially all of DENA’s assets and contracts outside of the Midwestern United States and certain contractual positions related to the Midwestern assets (see Notes 12 and 14).

(d) Net of $8 tax expense in 2006.

See Notes to Unaudited Consolidated Financial Statements

9

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Nature of Operations and Basis of Consolidation. Duke Energy Corporation (collectively with its subsidiaries, Duke Energy), is a leading energy company located in the Americas with a real estate subsidiary. These 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 Consolidated Financial Statements also reflect Duke Energy’s 12.5% undivided interest in the Catawba Nuclear Station.

Duke Energy Holding Corp. (Duke Energy HC) was incorporated in Delaware on May 3, 2005 as Deer Holding Corp., a wholly-owned subsidiary of Duke Energy Corporation (“Old Duke Energy”). On April 3, 2006, in accordance with their previously announced merger agreement, Old Duke Energy and Cinergy Corp. (Cinergy) merged into wholly-owned subsidiaries of Duke Energy HC, resulting in Duke Energy HC becoming the parent entity. In connection with the closing of the merger transactions, Duke Energy HC changed its name to Duke Energy (“New Duke Energy”) and Old Duke Energy converted into a limited liability Company named Duke Power Company LLC. As a result of the merger transactions, each outstanding share of Cinergy common stock was converted into 1.56 shares of common stock of New Duke Energy, which resulted in the issuance of approximately 313 million shares. Additionally, each share of common stock of Old Duke Energy was converted into one share of New Duke Energy common stock. Old Duke Energy is the predecessor of New Duke Energy for purposes of U.S. securities regulations governing financial statement filing. Therefore, the accompanying Consolidated Financial Statements reflect the results of operations and financial position of Old Duke Energy for the periods presented. However, references to amounts for periods after the closing of the mergers relate to New Duke Energy. New Duke Energy had no separate operations for the periods presented. Both Old Duke Energy and New Duke Energy are referred to as Duke Energy herein.

These 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 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. These 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, 2005.

Effective July 1, 2005, Duke Energy deconsolidated Duke Energy Field Services, LLC (DEFS) due to a reduction in ownership and its inability to exercise control over DEFS. DEFS has been accounted for as an equity method investment since July 1, 2005.

Use of Estimates. To conform with generally accepted accounting principles (GAAP) in the United States, management makes estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and Notes. Although these estimates are based on management’s best available knowledge at the time, actual results could differ.

Reclassifications. The accompanying Consolidated Statement of Cash Flows for the three months ended March 31, 2005 reflects a change in the classification of expenditures for equipment related to clean air legislation in the state of North Carolina from cash flows from operating activities to cash flows from investing activities. As a result, net cash provided by operating activities for the three months ended March 31, 2005 has

10

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

increased by $52 million, while net cash used in investing activities for the three months ended March 31, 2005 increased the same amount.

Certain other prior period amounts have been reclassified to conform to the presentation for the current period.

2. Earnings Per Common Share (EPS)

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

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 months ended March 31, 2006 and 2005.

(in millions, except per-share data)	Income			Average Shares	EPS
Three Months Ended March 31, 2006
Income from continuing operations	$	486
Less: Dividends and premiums on redemption of preferred and preference stock		—
Income from continuing operations – basic	$	486		928	$	0.53
Effect of dilutive securities:
Stock options, phantom, performance and unvested stock				3
Contingently convertible bond		2		32
Income from continuing operations – diluted	$	488		963	$	0.50
Three Months Ended March 31, 2005
Income from continuing operations	$	860
Less: Dividends and premiums on redemption of preferred and preference stock		(2	)
Income from continuing operations – basic	$	858		954	$	0.90
Effect of dilutive securities:
Stock options, phantom, performance and unvested stock, and common stock derivatives				3
Contingently convertible bond		2		33
Income from continuing operations – diluted	$	860		990	$	0.87

The decrease in weighted-average shares outstanding for the three months ended March 31, 2006 compared to the same period in 2005 was due primarily to the repurchase and retirement of 35 million shares of Duke Energy common stock, of which 2.4 million shares were repurchased during the first quarter of 2006 (see Note 3) and 32.6 million shares were repurchased throughout 2005.

Options, unvested stock, performance and phantom stock awards related to approximately 17 million shares as of March 31, 2006 and 20 million shares as of March 31, 2005 were not included in the “effect of dilutive

11

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

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.

In April 2006, in connection with the merger with Cinergy, Duke Energy issued 1.56 shares of Duke Energy common stock for each outstanding share of Cinergy common stock. This resulted in the issuance of approximately 313 million shares of Duke Energy common stock.

3. Common Stock

In February 2005, Duke Energy announced plans to execute up to approximately $2.5 billion in common stock repurchases over a three year period. In May 2005, in connection with the announcement of the merger with Cinergy, Duke Energy suspended additional repurchases, pending further assessment. At the time of suspension, Duke Energy had repurchased approximately $933 million of common stock. In the first quarter of 2006, as a result of the March 10, 2006 shareholder approval of the merger, Duke Energy’s Board of Directors authorized the repurchase of up to an additional $1 billion of common stock under the previously announced share repurchase plan. During the quarter ended March 31, 2006, Duke Energy repurchased 2.4 million shares for total consideration of approximately $69 million. The repurchases and corresponding commissions and other fees were recorded in Common Stockholder’s Equity as a reduction in common stock.

In April 2006, Duke Energy repurchased approximately 4 million shares of common stock for total consideration of approximately $118 million.

On March 18, 2005, Duke Energy entered into an accelerated share repurchase transaction whereby Duke Energy repurchased and retired 30 million shares of its common stock from an investment bank at the March 18, 2005 closing price of $27.46 per share. Total consideration paid to repurchase the shares of approximately $834 million, including approximately $10 million in commissions and other fees, was recorded in Common Stockholders’ Equity as a reduction in Common Stock.

In April 2006, Duke Energy’s $742 million of convertible debt became convertible into approximately 31.7 million shares of Duke Energy common stock due to the market price of Duke Energy common stock. Holders of the convertible debt may exercise their right to convert on or prior to June 30, 2006.

See Note 2 for discussion of common stock issued in April 2006 as a result of the merger with Cinergy.

4. Stock-Based Compensation

Effective January 1, 2006, Duke Energy adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment”. SFAS No. 123(R) establishes 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. Duke Energy previously applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion 25)” and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). Since the exercise price for all options granted under those plans was equal to the market value of the underlying common stock on the grant date, no compensation cost was recognized in the accompanying Consolidated Statements of Operations.

Compensation expense for awards with graded vesting provisions is recognized in accordance with FIN 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” Duke Energy elected to adopt the modified prospective application method as provided by SFAS No.123(R), and accordingly,

12

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

financial statement amounts from the prior periods presented in this Form 10-Q have not been restated. There were no modifications to outstanding stock options prior to the adoption of SFAS 123(R).

Duke Energy recorded stock-based compensation expense for the three months ended March 31, 2006 and 2005 as follows, the components of which are further described below:

	Three Months Ended March 31 (in millions)
	2006		2005
Stock Options	$	2	$	—
Stock Appreciation Rights		—		1
Phantom Stock		4		4
Performance Awards		5		7
Other Stock Awards		1		—
Total		12		12

The tax benefit associated with the recorded expense for the three months ended March 31, 2006 and 2005 was approximately $5 million. There were no material differences in income from continuing operations, income from income taxes, net income, cash flows, or basic and diluted earnings per share from the adoption of SFAS No. 123(R).

The following table shows what earnings available for common stockholders, basic earnings per share and diluted earnings per share would have been if Duke Energy had applied the fair value recognition provisions of SFAS No. 123 to all stock-based compensation awards during prior periods.

Pro Forma Stock-Based Compensation (in millions, except per share amounts)

	Three months ended March 31, 2005
Earnings available for common stockholders, as reported	$	866
Add: stock-based compensation expense included in reported net income, net of related tax effects		7
Deduct: total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects		(7	)
Pro forma earnings available for common stockholders, net of related tax effects	$	866
Earnings per share
Basic—as reported	$	0.91
Basic—pro forma	$	0.91
Diluted—as reported	$	0.88
Diluted—pro forma	$	0.88

Duke Energy’s 1998 Long-term Incentive Plan, as amended (the 1998 Plan), reserved 60 million shares of common stock for awards to employees and outside directors. Under the 1998 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. Duke Energy issues new shares upon exercising or vesting of share-based awards.

13

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

Upon the acquisition of Westcoast, Duke Energy converted all stock options outstanding under the 1989 Westcoast Long-term Incentive Share Option Plan to Duke Energy Corporation stock options. Certain of these options also provide for share appreciation rights under which the holder of a stock option may, in lieu of exercising the option, exercise the share appreciation right. The exercise price of these options equals the market price on the date of grant and the maximum option term is 10 years. The vesting periods range from immediate to four years.

Stock Option Activity

	Options (in thousands)		Weighted- Average Exercise Price		Weighted-Average Remaining Life (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 2005	25,506		$	29
Exercised	(715	)		22
Forfeited or expired	(490	)		30
Outstanding at March 31, 2006	24,301			30	4.9	$	97
Exercisable at March 31, 2006	21,822			31	4.7		64

On December 31, 2005, Duke Energy had 22 million exercisable options with a $32 weighted-average exercise price. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was approximately $5 million and $8 million, respectively. Cash received from options exercised during the three months ended March 31, 2006 was approximately $16 million, with a related tax benefit of approximately $2 million.

There were no option grants during the three months ended March 31, 2006 or during the year ended December 31, 2005. Remaining compensation expense to be recognized for unvested options was determined using a Black-Scholes model.

The 1998 Plan allows for a maximum of twelve million shares of common stock to be issued under various stock-based awards. Payments for cash settled awards during the period were immaterial.

Stock-based performance awards outstanding under the 1998 Plan vest over periods from three to seven years. Vesting for certain stock-based performance awards can occur in three years, at the earliest, if performance is met. Duke Energy awarded 1,272,390 shares (fair value of approximately $34 million, based on the market price of Duke Energy’s common stock at the grant date) in the first quarter of 2005.

The following table summarizes information about stock-based performance awards outstanding at March 31, 2006:

	Shares		Weighted Average Grant Date Fair Value
Number of Stock-based Performance Awards:
Outstanding at December 31, 2005	2,940,768		$	25
Granted	—			—
Vested	(114,000	)		27
Forfeited	(52,786	)		25
Canceled	—			—
Outstanding at March 31, 2006	2,773,982			25

14

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

The total fair value of the shares vested during the three months ended March 31, 2006 and 2005 was approximately $3 million. As of March 31, 2006, Duke Energy had approximately $25 million of compensation expense which is expected to be recognized over a weighted-average period of 1.2 years.

Phantom stock awards outstanding under the 1998 Plan vest over periods from one to five years. Duke Energy awarded 1,038,920 shares (fair value of approximately $28 million, based on the market price of Duke Energy’s common stock at the grant date) in the first quarter of 2005.

The following table summarizes information about phantom stock awards outstanding at March 31, 2006:

	Shares		Weighted Average Grant Date Fair Value
Number of Phantom Stock Awards:
Outstanding at December 31, 2005	2,517,020		$	25
Granted	—			—
Vested	(493,329	)		25
Forfeited	(19,352	)		25
Canceled	—			—
Outstanding at March 31, 2006	2,004,339			25

The total fair value of the shares vested during the three months ended March 31, 2006 and 2005 was approximately $12 million and $7 million, respectively. As of March 31, 2006, Duke Energy had approximately $23 million of compensation expense which is expected to be recognized over a weighted-average period of 2.8 years.

Other stock awards outstanding under the 1998 Plan vest over periods from three to five years. Duke Energy awarded 238,000 shares (fair value of approximately $7 million, based on the market price of Duke Energy’s common stock at the grant date) in the first quarter of 2006 and 35,000 shares (fair value of approximately $1 million, based on the market price of Duke Energy’s common stock at the grant date) in the first quarter of 2005.

The following table summarizes information about other stock awards outstanding at March 31, 2006:

	Shares		Weighted Average Grant Date Fair Value
Number of Other Stock Awards:
Outstanding at December 31, 2005	178,337		$	25
Granted	238,000			28
Vested	(18,630	)		24
Forfeited	—			—
Canceled	—			—
Outstanding at March 31, 2006	397,707			27

The total fair value of the shares vested during the three months ended March 31, 2006 and 2005 was less than $1 million and approximately $1 million, respectively. As of March 31, 2006, Duke Energy had approximately $9 million of compensation expense which is expected to be recognized over a weighted-average period of 3.6 years.

15

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

5. Inventory

Inventory is recorded at the lower of cost or market value, primarily using the average cost method.

Inventory (in millions)
	March 31, 2006		December 31, 2005
Materials and supplies	$	467	$	434
Natural gas		140		269
Coal held for electric generation		162		115
Petroleum products		30		45
Total inventory	$	799	$	863

6. Debt and Credit Facilities

As discussed in Note 3, in April 2006, Duke Energy’s $742 million of convertible debt became convertible into approximately 31.7 million shares of Duke Energy common stock due to the market price of Duke Energy common stock.

Available Credit Facilities and Restrictive Debt Covenants. During the three months ended March 31, 2006, Duke Energy’s consolidated credit capacity decreased by $200 million due to the termination of a $100 million one-year bi-lateral credit facility and a $100 million 364-day bi-lateral credit facility.

The issuance of commercial paper, letters of credit and other borrowings reduces the amount available under the available credit facilities.

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 March 31, 2006, Duke Energy was in compliance with those covenants. In addition, credit agreements allow for acceleration of payments or termination of the agreements due to nonpayment, or in some cases, due 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.

16

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

Credit Facilities Summary as of March 31, 2006 (in millions)

	Expiration Date	Credit Facilities Capacity		Amounts Outstanding
				Commercial Paper		Letters of Credit		Total
Duke Energy
$500 multi-year syndicated (a), (b)	June 2010
$150 364-day bi-lateral (a), (b)	September 2006
Total Duke Energy		$	650	$	453	$	—	$	453
Duke Capital LLC
$800 364-day syndicated (a), (b)	June 2006
$600 multi-year syndicated (a), (b)	June 2009
$130 three-year bi-lateral (b)	October 2007
$120 multi-year bi-lateral (b)	July 2009
$260 364-day bi-lateral (a), (b)	June 2006
Total Duke Capital LLC			1,910		—		408		408
Westcoast Energy Inc.
$86 364-day syndicated (b), (c)	June 2006
$172 multi-year syndicated (b), (d)	June 2010
Total Westcoast Energy Inc.			258		—		—		—
Union Gas Limited
$258 364-day syndicated (e), (f)	June 2006		258		—		—		—
Total		$	3,076	$	453	$	408	$	861

(a) 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%.

(c) Credit facility is denominated in Canadian dollars totaling 100 million Canadian dollars.

(d) Credit facility is denominated in Canadian dollars totaling 200 million Canadian dollars.

(e) Credit facility contains a covenant requiring the debt-to-total capitalization ratio to not exceed 75%. Credit facility is denominated in Canadian dollars totaling 300 million Canadian dollars.

(f) Credit facility contains an option at maturity allowing for the conversion of all outstanding loans to a term loan repayable up to one year after maturity date but not exceeding 18 months from the date of draw.

17

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

7. Employee Benefit Obligations

The following table shows the components of the net periodic pension costs for the Duke Energy U.S. retirement plan and Westcoast Energy, Inc. (Westcoast) Canadian retirement plans.

Components of Net Periodic Pension Costs (in millions) – for the three month period ended March 31,

	Duke Energy U.S.						Westcoast
	2006			2005			2006			2005
Service cost	$	17		$	15		$	3		$	2
Interest cost on projected benefit obligation		38			39			8			7
Expected return on plan assets		(56	)		(57	)		(8	)		(6	)
Amortization of loss		13			9			2			1
Net periodic pension costs	$	12		$	6		$	5		$	4

Duke Energy’s policy is to fund amounts for its US retirement plan on an actuarial basis to provide assets sufficient to meet benefit payments to be paid to plan participants. Duke Energy has not made contributions to its U.S. retirement plan for the three months ended March 31, 2006 and does not anticipate making a contribution to the U.S. retirement plan for the remainder of 2006.

Westcoast’s policy is to fund the defined benefit (DB) retirement plans on an actuarial basis and in accordance with Canadian pension standards legislation, in order to accumulate assets sufficient to meet benefit payments to plan participants. Contributions to the defined contribution (DC) retirement plans are determined in accordance with the terms of the plans. Duke Energy has contributed $10 million to the Westcoast DB plans for the three months ended March 31, 2006 compared to $12 million for the three months ended March 31, 2005, and anticipates that it will make total contributions of approximately $40 million in 2006. Duke Energy has contributed $1 million to the Westcoast DC plans for the three months ended March 31, 2006 and March 31, 2005, and anticipates that it will make total contributions of approximately $3 million in 2006.

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

Components of Net Periodic Post-Retirement Benefit Costs (in millions) – for the three month period ended March 31,

	Duke Energy U.S.						Westcoast
	2006			2005			2006		2005
Service cost benefit	$	2		$	1		$	1	$	1
Interest cost on accumulated post-retirement benefit obligation		10			11			1		1
Expected return on plan assets		(4	)		(4	)		—		—
Amortization of net transition liability		4			4			—		—
Amortization of loss		3			2			1		—
Net periodic post-retirement benefit costs	$	15		$	14		$	3	$	2

Duke Energy also sponsors employee savings plans that cover substantially all U.S. employees. Duke Energy expensed employer matching contributions of $24 million for the three months ended March 31, 2006 compared to $20 million for the three months ended March 31, 2005.

18

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

As a result of the merger with Cinergy, effective April 3, 2006, the net periodic pension costs for the U.S. plans contained in the above tables are not indicative of the full year costs for Duke Energy post-merger.

8. Marketable Securities

During the three-months ended March 31, 2006, Duke Energy’s Natural Gas Transmission business unit received shares of stock as consideration for settlement of a customer’s transportation contract. The market value of the equity securities, determined by quoted market prices on the date of receipt, of approximately $23 million is reflected in Gains on Sales of Other Assets and Other, net in the Consolidated Statements of Operations for the three months ended March 31, 2006. Subsequent to receipt, these securities were accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” as trading securities. During the three months ended March 31, 2006, these securities were sold and an additional gain of approximately $1 million was recognized in Other Income and Expenses, net in the Consolidated Statements of Operations for the three months ended March 31, 2006.

9. Acquisitions and Dispositions

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 date of acquisition. The purchase price minus the estimated fair value of the acquired assets and liabilities meeting the definition of a business as defined in 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 information on known contingencies existing at the date of acquisition becomes available within one year after the acquisition, and longer for certain income tax items.

During the first quarter of 2006, Duke Energy International (DEI) closed on two transactions which resulted in the acquisition of an additional 27.1% interest in the Aguaytia Integrated Energy Project (Aguaytia), located in Peru, for approximately $31 million (approximately $18 million net of cash acquired). The project’s scope includes the production and processing of natural gas, sale of liquefied petroleum gas (LPG) and natural gas liquids and the generation, transmission and sale of electricity from a 169-megawatt power plant. These acquisitions increased DEI’s ownership in Aguaytia to approximately 65% and resulted in Duke Energy accounting for Aguaytia as a consolidated entity. Prior to the acquisition of this additional interest, Aguaytia was accounted for as an equity method investment.

During the first quarter of 2006, Duke Energy North America (DENA) acquired the remaining 33 ¹/3% interest in Bridgeport Energy LLC (Bridgeport) from United Bridgeport Energy LLC (UBE) for approximately $71 million. The assets and liabilities of Bridgeport have been classified as Assets Held For Sale in the accompanying Consolidated Balance Sheet as of March 31, 2006, and are included as part of DENA’s power generation assets which were sold to a subsidiary of LS Power Equity Partners (LS Power) (see Note 12).

On April 3, 2006, the previously announced merger between Duke Energy and Cinergy was consummated (see Note 1 for additional information). The merger will be accounted for under the purchase method of accounting with Duke Energy treated as the acquirer for accounting purposes. See Note 15 for discussion of regulatory impacts of the merger. Based on the market price of Duke Energy common stock during the period including the two trading days before through the two trading days after May 9, 2005, the date Duke Energy and Cinergy announced the merger, the transaction is valued at approximately $9 billion and will result in incremental goodwill to Duke Energy estimated at approximately $4 billion. The allocation of purchase price to individual assets and liabilities has not been finalized due to the recent closing of the merger.

19

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

Dispositions. For the three months ended March 31, 2006, the sale of other assets and businesses resulted in approximately $28 million in proceeds and net pre-tax gains of $33 million recorded in Gains on Sales of Other Assets and Other, net. These sales exclude assets that were held for sale and reflected in discontinued operations, both of which are discussed in Note 12, and sales by Crescent Resources LLC (Crescent) which are discussed separately below. Significant sales of other assets during the three months ended March 31, 2006 are detailed as follows:

• Natural Gas Transmission’s sale of certain Stone Mountain natural gas gathering system assets resulted in proceeds of $18 million (which is reflected in Net proceeds from the sales of equity investments and other assets, and sales of and collections on notes receivable within Cash Flows from Investing Activities in the Consolidated Statements of Cash Flows), and pre-tax gain of $5 million which was recorded in Gains in Sales of Other Assets and Other, net in the accompanying Consolidated Statements of Operations. In addition, Natural Gas Transmission’s sale of stock, received as consideration for the settlement of a customers transportation contract, resulted in proceeds of approximately $24 million (which is reflected in Other, assets within Cash Flows From Operating Activities in the Consolidated Statements of Cash Flows) and a pre-tax gain of $24 million, of which approximately $23 million was recorded in Gains on Sales of Other Assets and Other, net and approximately $1 million was recorded in Other Income and Expenses, net in the accompanying Consolidated Statements of Operations (see Note 8).

For the three months ended March 31, 2006, Crescent commercial and multi-family real estate sales resulted in $56 million of proceeds and $26 million of net pre-tax gains recorded in Gains on Sales of Investments in Commercial and Multi-Family Real Estate on the Consolidated Statements of Operations. Sales consisted of several large land tract sales.

For the three months ended March 31, 2005, the sale of other assets and businesses resulted in approximately $1.2 billion in proceeds, net pre-tax gains of $9 million recorded in Gains (Losses) on Sales of Other Assets and Other, net and pre-tax gains of $1.2 billion recorded in Gains on Sales of Equity Investments on the Consolidated Statements of Operations. These sales exclude assets held for sale as of March 31, 2005 and reflected in discontinued operations, both of which are discussed in Note 12, and sales by Crescent which are discussed separately below. Significant sales of other assets and equity investments during the three months ended March 31, 2005 are detailed as follows:

• In February 2005, DEFS sold its wholly owned subsidiary Texas Eastern Products Pipeline Company, LLC (TEPPCO GP), which is the general partner of TEPPCO Partners, LP (TEPPCO LP), for approximately $1.1 billion and Duke Energy sold its limited partner interest in TEPPCO LP for approximately $100 million, in each case to Enterprise GP Holdings LP, an unrelated third party. These transactions resulted in pre-tax gains of $1.2 billion, which have been classified as Gains on Sales of Equity Investments in the Consolidated Statement of Operations for the three months ended March 31, 2005. Minority Interest Expense of $343 million was recorded in the Consolidated Statement of Operations for the three months ended March 31, 2005 to reflect ConocoPhillips’ proportionate share in the pre-tax gain on sale of the TEPPCO GP.

For the three months ended March 31, 2005, Crescent’s commercial and multi-family real estate sales resulted in $51 million of proceeds and $42 million of net pre-tax gains recorded in Gains on Sales of Investments in Commercial and Multi-Family Real Estate on the Consolidated Statements of Operations. Sales consisted of several large land tract sales.

10. Severance

As discussed further in Note 12, during the third quarter of 2005, the Board of Directors of Duke Energy authorized and directed management to execute the sale or disposition of substantially all of DENA’s remaining assets and contracts outside the Midwestern United States and certain contractual positions related to the

20

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

Midwestern assets. As a result of this exit plan, DENA anticipates involuntary termination of approximately 250 employees by the end of the third quarter of 2006. Management anticipates future severance costs related to this exit plan not included in the following table will be immaterial.

Severance Reserve (in millions)	Balance at January 1, 2006		Provision/ Adjustments			Cash Reductions			Balance at March 31, 2006
Natural Gas Transmission	$	3	$	(1	)	$	—		$	2
DENA		25		(8	)		(3	)		14
Other		3		1			—			4
Total (a)	$	31	$	(8	)	$	(3	)	$	20

(a) Substantially all remaining severance payments are expected to be applied to the reserves within one year from the date that the provision was recorded.

11. Impairments and Other Charges

Field Services. During the three months ended March 31, 2005, the Field Services business unit recorded a charge of approximately $120 million due to the reclassification into earnings of pre-tax unrealized losses from AOCI as a result of the discontinuance of certain cash flow hedges entered into to hedge Field Services’ commodity price risk. See Note 14 for a discussion of the impacts of the DEFS disposition transaction on certain cash flow hedges.

12. Discontinued Operations and Assets Held for Sale

The following table summarizes the results classified as Discontinued Operations, net of tax, in the Consolidated Statements of Operations.

			Operating (Loss) Income									Net Loss on Dispositions									(Loss) Income from Discontinued Operations, Net of Tax
Discontinued Operations (in millions)	Operating Revenues		Pre-tax Operating (Loss) Income			Income Tax Expense (Benefit)			Operating (Loss) Income, Net of Tax			Pre-tax Loss on Dispositions			Income Tax (Benefit) Expense			Loss on Dispositions, Net of Tax
Three Months Ended March 31, 2006
DENA	$	354	$	(10	)	$	7		$	(17	)	$	(156	)	$	(57	)	$	(99	)	$	(116	)
International Energy		—		—			—			—			(19	)		(7	)		(12	)		(12	)
Total consolidated	$	354	$	(10	)	$	7		$	(17	)	$	(175	)	$	(64	)	$	(111	)	$	(128	)
Three Months Ended March 31, 2005
Field Services	$	4	$	—		$	—		$	—		$	(1	)	$	—		$	(1	)	$	(1	)
DENA		491		4			(3	)		7			—			—			—			7
International Energy		—		2			—			2			—			—			—			2
Total consolidated	$	495	$	6		$	(3	)	$	9		$	(1	)	$	—		$	(1	)	$	8

21

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

The following table presents the carrying values of the major classes of assets and associated liabilities held for sale in the Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005.

Summarized Balance Sheet Information for Assets and Associated Liabilities Held for Sale

(in millions)

	March 31, 2006		December 31, 2005
Current assets	$	326	$	1,528
Investments and other assets		1,085		2,059
Property, plant and equipment, net		1,529		1,538
Total assets held for sale	$	2,940	$	5,125
Current liabilities	$	378	$	1,488
Long-term debt		61		61
Deferred credits and other liabilities		927		2,024
Total liabilities associated with assets held for sale	$	1,366	$	3,573

DENA

During the third quarter of 2005, Duke Energy’s Board of Directors authorized and directed management to execute the sale or disposition of substantially all of DENA’s remaining assets and contracts outside the Midwestern United States and certain contractual positions related to the Midwestern assets. The DENA assets to be divested include:

• Approximately 6,100 MW of power generation located primarily in the Western and Eastern United States, including all of the commodity contracts (primarily forward gas and power contracts) related to these facilities,

• All remaining commodity contracts related to DENA’s Southeastern generation operations, which were substantially disposed of in 2004, and certain commodity contracts related to DENA’s Midwestern power generation facilities, and

• Contracts related to DENA’s energy marketing and management activities, which include gas storage and transportation, structured power and other contracts.

Management has retained DENA’s Midwestern generation assets, consisting of approximately 3,600 MW of power generation, and certain contracts related to the Midwestern generating facilities, as the merger with Cinergy provides a sustainable business model for those assets (see Notes 9 and 15 for further details on the Cinergy merger). The exit plan is expected to be completed by the end of the third quarter of 2006. In addition, management will continue to wind down the limited remaining operations of DETM. The financial statement presentation for the assets and contracts to be sold, and the related results of operations, are discussed below.

Approximately $3 million of pre-tax deferred net losses remain in AOCI at March 31, 2006 related to hedges of forecasted transactions that are expected to occur prior to the anticipated disposal of the generation assets. This amount will be reclassified to earnings during the remainder of 2006 as the forecasted transactions occur. In addition, as of the September 2005 exit announcement date, management anticipated that additional charges would be incurred related to the exit plan, including termination costs for gas transportation, storage, structured power and other contracts of approximately $600 million to $800 million, which included

22

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

approximately $40 million to $60 million of severance, retention and other transaction costs (see Note 10). Approximately $625 million has been incurred from the announcement date through March 31, 2006, of which approximately $160 million was incurred during the three month period ended March 31 2006 and was recognized in (Loss) Income From Discontinued Operations, net of tax. The actual amount of future additional charges related to the DENA exit plan will vary depending upon changes in market conditions and other factors, and could differ materially from the original estimate.

During 2006 and 2005, DENA entered into agreements to sell or terminate certain of its contract portfolio, including certain transportation contracts. The total cash paid by Duke Energy under such contract sales or terminations during 2006 was approximately $155 million, excluding approximately $600 million of cash paid to Barclays Bank, PLC (Barclays), as discussed hereafter. These transactions resulted in pre-tax losses on sale of approximately $160 million during the three month period ended March 31, 2006, which were recorded in (Loss) Income From Discontinued Operations, net of tax, and are included in the $625 million incurred from the announcement date through March 31, 2006, as discussed above. Included in this amount are the effects of DENA’s November 2005 agreement to sell substantially all of its commodity contracts related to the Southeastern generation operations, which were substantially disposed of in 2004, certain commodity contracts related to DENA’s Midwestern power generation facilities, and contracts related to DENA’s energy marketing and management activities. Excluded from the contracts sold to Barclays are commodity contracts associated with the near-term value of DENA’s West and Northeastern generation assets and with remaining gas transportation and structured power contracts. Among other things, the agreement provided that effective upon execution all economic benefits and burdens under the contracts were transferred to Barclays. Cash consideration paid to Barclays amounted to approximately $600 million in January 2006. Additionally, in January 2006 Barclays provided DENA with cash equal to the net cash collateral posted by DENA under the contracts of approximately $540 million. DENA will continue to service, for a monthly fee, the contracts until novation or assignment. The novation or assignment of physical power contracts was subject to FERC approval, which was received in January 2006.

In January 2006, Duke Energy signed an agreement to sell to LS Power DENA’s entire fleet of power generation assets outside the Midwest, representing approximately 6,100 megawatts of power generation located in the Western and Northeast United States. In May 2006, the transaction with LS Power closed and total proceeds from the sale are expected to be approximately $1.56 billion, including certain working capital adjustments. Additional proceeds of up to approximately $40 million are subject to LS Power obtaining certain state regulatory approvals. Subject to the resolution of these contingencies, an additional gain on the disposition of these assets could be recognized in a future period.

As of March 31, 2006 and December 31, 2005, DENA’s assets and liabilities to be disposed of under the exit plan were classified as Assets Held for Sale in the Consolidated Balance Sheets.

The results of operations of DENA’s Western and Eastern United States generation assets, including related commodity contracts, certain contracts related to DENA’s energy marketing and management activities and certain general and administrative costs, are required to be classified as discontinued operations for current and prior periods in the accompanying Consolidated Statements of Operations. GAAP requires an ongoing assessment of the continued qualification for discontinued operations presentation for the period up through one year following disposal. While this assessment requires judgment, management is not currently aware of any matters or events that are likely to occur that would impact the presentation of these operations as discontinued operations.

DENA’s Midwestern generation assets are being retained and, therefore, the results of operations for these assets, including related commodity contracts, do not qualify for discontinued operations classification and

23

Part I

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

remain in continuing operations. Additionally, as discussed further in Note 14, DENA’s Southeastern generation operations, including related commodity contracts do not meet the requirements for discontinued operations classification due to Duke Energy’s continuing involvement with these operations. In addition, the results for Duke Energy Trading and Marketing, LLC (DETM) will continue to be reported in continuing operations until the wind down of these operations is complete.

In the first quarter of 2005, DENA’s Grays Harbor facility was sold to an affiliate of Invenergy LLC, resulting in a pre-tax gain of approximately $21 million (excludes any potential contingent consideration).

International Energy

International Energy has recognized a receivable from Norsk Hydro ASA that relates to purchase price adjustments on the prior sale of International Energy’s European business. During the three months ended March 31, 2006, based on management’s best estimate of recoverability, International Energy recorded an allowance of approximately $19 million ($12 million after tax) against this receivable, which was recorded in (Loss) Income From Discontinued Operations, net on the Consolidated Statements of Operations. At March 31, 2006 and December 31, 2005, the carrying value of the receivable was approximately $24 million and $42 million, respectively, and is included in Receivables in the Consolidated Balance Sheets.

Field Services

In December 2004, based upon management’s assessment of the probable disposition of certain plant and transportation assets in Wyoming, Field Services classified these assets as Assets Held for Sale in the Consolidated Balance Sheets as of December 31, 2004. The book value of those assets was written down by $4 million ($3 million net of minority interest) to $10 million in December 2004, which represents the estimated fair value less cost to sell. The results of operations related to these assets were included in (Loss) Income From Discontinued Operations, net of tax, in the Consolidated Statements of Operations. In February 2005, these assets were exchanged for certain gathering assets in Oklahoma of equivalent fair value.

In September 2004, Field Services recorded a pre-tax impairment charge of approximately $23 million ($16 million net of minority interest) related to management’s assessment of some additional gathering, processing, compression and transportation assets in Wyoming being held for sale. The estimated fair value of these assets less cost to sell was $27 million and they were classified as Assets Held For Sale in the Consolidated Balance Sheets as of December 31, 2004. The after-tax loss and results of operations were included in (Loss) Income From Discontinued Operations, net of tax, in the Consolidated Statements of Operations. In the first quarter of 2005, Field Services sold these assets for proceeds of approximately $28 million.

13. Business Segments

Duke Energy operates the following business units: Franchised Electric, Natural Gas Transmission, Field Services, DENA, International Energy and Crescent. Duke Energy’s chief operating decision maker regularly reviews financial information about each of these business units in deciding how to allocate resources and evaluate performance. Except for DENA, all of the business units are considered reportable segments under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Prior to the September 2005 announcement of the exiting of the majority of DENA’s businesses, DENA’s operations were considered a separate reportable segment. There is no aggregation within Duke Energy’s defined business segments.

The remainder of Duke Energy’s operations is presented as “Other.” While it is not considered a business segment, Other primarily includes DENA’s continuing operations, certain unallocated corporate costs, certain

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discontinued hedges, DukeNet Communications, LLC, Duke Energy Merchants, LLC (DEM), Bison Insurance Company Limited (Bison), Duke Energy’s wholly owned, captive insurance subsidiary, and Duke Energy’s 50% interest in Duke/Fluor Daniel (D/FD).

In February 2005, DEFS sold its wholly owned subsidiary TEPPCO GP, which is the general partner of TEPPCO LP, and Duke Energy sold its limited partner interest in TEPPCO LP, in each case to Enterprise GP Holdings LP, an unrelated third party (see Note 9).

During the first quarter of 2005, Duke Energy discontinued hedge accounting for certain contracts related to Field Services’ commodity price risk and changes in the fair value of these contracts subsequent to hedge discontinuance have been classified in Other. See Note 14 for further discussion.

During the first quarter of 2005, Duke Energy recognized a charge to increase liabilities associated with mutual insurance companies of $28 million in Other, which was a correction of an immaterial accounting error related to prior periods.

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, 2005. 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 associated realized and unrealized gains and losses from foreign currency transactions and interest and dividend income on those balances are excluded from the segments’ EBIT.

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Transactions between reportable segments are accounted for on the same basis as unaffiliated revenues and expenses in the accompanying Consolidated Financial Statements.

Business Segment Data (in millions) (a)

	Unaffiliated Revenues		Intersegment Revenues			Total Revenues			Segment EBIT / Consolidated Earnings from Continuing Operations before Income Taxes
Three Months Ended March 31, 2006
Franchised Electric	$	1,288	$	4		$	1,292		$	359
Natural Gas Transmission		1,468		6			1,474			438
Field Services (c)		—		—			—			144
International Energy		231		—			231			87
Crescent		71		—			71			42
Total reportable segments		3,058		10			3,068			1,070
Other		143		19			162			(85	)
Eliminations		—		(29	)		(29	)		—
Interest expense		—		—			—			(250	)
Interest income and other (b)		—		—			—			9
Total consolidated	$	3,201	$	—		$	3,201		$	744
Three Months Ended March 31, 2005
Franchised Electric	$	1,260	$	5		$	1,265		$	336
Natural Gas Transmission		1,155		36			1,191			411
Field Services (c)		2,575		83			2,658			919
International Energy		168		—			168			68
Crescent		64		—			64			52
Total reportable segments		5,222		124			5,346			1,786
Other		106		(59	)		47			(202	)
Eliminations		—		(65	)		(65	)		—
Interest expense		—		—			—			(290	)
Interest income and other (b)		—		—			—			17
Total consolidated	$	5,328	$	—		$	5,328		$	1,311

(a) Segment results exclude results of any discontinued operations.

(b) Other includes foreign currency transaction gains and losses, and additional minority interest expense not allocated to the segment results.

(c) In July 2005, Duke Energy completed the previously announced agreement with ConocoPhillips to reduce Duke Energy’s ownership interest in DEFS from 69.7% to 50%. Field Services segment data includes DEFS as a consolidated entity for the three months ended March 31, 2005 and as an equity method investment for the three months ended March 31, 2006.

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Segment assets in the following table are net of intercompany advances, intercompany notes receivable, intercompany current assets, intercompany derivative assets and investments in subsidiaries.

Segment Assets (in millions)

	March 31, 2006			December 31, 2005
Franchised Electric	$	18,821		$	18,840
Natural Gas Transmission		18,695			18,692
Field Services		1,415			1,423
DENA (a)		4,100			7,304
International Energy		3,406			3,163
Crescent		1,662			1,541
Total reportable segments		48,099			50,963
Other		4,021			4,496
Eliminations and reclassifications (b)		(703	)		(736	)
Total consolidated assets	$	51,417		$	54,723

(a) DENA’s segment assets include DENA assets held for sale and other assets not included in DENA’s continuing operations as of March 31, 2006 and December 31, 2005.

(b) Represents reclassification of federal tax balances in consolidation and the elimination of intercompany assets, such as accounts receivable and interest receivable.

In conjunction with the merger with Cinergy, effective April 3, 2006, Duke Energy has adopted new business segments that management believes properly align the various operations of the merged companies with how the chief operating decision maker will view the business. Accordingly, effective with the second quarter of 2006, the Duke Energy reportable business segments are as follows:

• U.S. Franchised Electric & Gas – will consist of Duke Power Company, Cincinnati Gas & Electric Company’s (CG&E’s) regulated transmission and distribution, PSI Energy (PSI) and The Union Light, Heat and Power Company (ULH&P)

• Natural Gas Transmission – segment will be the same as former Duke Energy business segment

• Field Services – segment will be the same as former Duke Energy business segment

• Commercial Power – Cincinnati Gas & Electric Company’s non-regulated generation including DENA’s Midwestern operations, Duke Energy Generation Services and Commercial Energy Management

• International – will consist of Duke Energy International (DEI) and a portion of Cinergy’s international operations

• Crescent – segment will be the same as former Duke Energy business segment

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14. Risk Management Instruments

The following table shows the carrying value of Duke Energy’s derivative portfolio as of March 31, 2006, and December 31, 2005.

Derivative Portfolio Carrying Value (in millions)

	March 31, 2006			December 31, 2005
Hedging	$	(20	)	$	(17	)
Trading		—			5
Undesignated		(91	)		(53	)
Total	$	(111	)	$	(65	)

The amounts in the table above represent the combination of assets and (liabilities) for unrealized gains and losses on mark-to-market and hedging transactions on Duke Energy’s Consolidated Balance Sheets, excluding approximately $1.2 billion of derivative assets and $1.3 billion of derivative liabilities which were transferred to assets and liabilities held for sale.

The $38 million decrease in the undesignated derivative portfolio fair value is due primarily to realization of mark-to-market gains at DENA and mark-to-market movements as a result of higher commodity prices, partially offset by realized losses on certain contracts held by Duke Energy related to Field Services’ commodity price risk. As a result of the transfer of 19.7% interest in DEFS to ConocoPhillips and the third quarter 2005 deconsolidation of its investment in DEFS, Duke Energy has discontinued hedge accounting for certain contracts held by Duke Energy related to Field Services’ commodity price risk, which were previously accounted for as cash flow hedges. These contracts were originally entered into as hedges of forecasted future sales by Field Services, and have been retained as undesignated derivatives. Since discontinuance of hedge accounting, these contracts have been marked-to-market in the Consolidated Statements of Operations. As a result, approximately $230 million of pre-tax losses were recognized in earnings by Duke Energy as of March 31, 2005. These charges have been classified in the accompanying Consolidated Statements of Operations as follows: upon discontinuance of hedge accounting approximately $120 million of pre-tax losses were recognized as a component of Impairments and Other Charges, while approximately $110 million of pre-tax losses were recognized prior to the deconsolidation of DEFS as a component of Non-Regulated Electric, Natural Gas, Natural Gas Liquids, and Other Revenues as of March 31, 2005. Approximately $24 million of realized and unrealized pre-tax losses related to these contracts were recognized in earnings by Duke Energy during the three months ended March 31, 2006 as a component of Other Income and Expenses, net as of a result of Duke Energy’s investment in DEFS being accounted for using the equity method. Cash settlements on these contracts during the three months ended March 31, 2006 of approximately $40 million are classified as a component of net cash used in investing activities in the accompanying Consolidated Statements of Cash Flows.

Included in Other Current Assets in the Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 are collateral assets of approximately $657 million and $1,279 million, respectively, which represents cash collateral posted by Duke Energy with other third parties. Included in Other Current Liabilities in the Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 are collateral liabilities of approximately $584 million and $664 million, respectively, which represents cash collateral posted by other third parties to Duke Energy. Subsequent to December 31, 2005, in connection with the sale to Barclays of contracts related to DENA’s energy marketing and management activities, which includes structured power and other

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contracts, Barclays provided DENA cash equal to the net collateral posted by DENA under the contracts. Net cash collateral received by Duke Energy in January 2006 was approximately $540 million based on current market prices of the contracts (see Note 12).

During the first quarter of 2005, Duke Energy settled certain hedges which were documented and designated as net investment hedges of the investment in Westcoast on their scheduled maturity and paid approximately $162 million. Losses recognized on this net investment hedge have been classified in AOCI as a component of foreign currency adjustments and will not be recognized in earnings unless the complete or substantially complete liquidation of Duke Energy’s investment in Westcoast occurs.

Commodity Cash Flow Hedges. Some Duke Energy subsidiaries are exposed to market fluctuations in the prices of various commodities related to their ongoing power generating and natural gas gathering, distribution, processing and marketing activities. Duke Energy closely monitors the potential impacts of commodity price changes and, where appropriate, enters into contracts to protect margins for a portion of future sales and generation revenues and fuel expenses. Duke Energy uses commodity instruments, such as swaps, futures, forwards and options as cash flow hedges for natural gas, electricity and natural gas liquid transactions. Duke Energy’s hedging exposures to the price variability of these commodities does not extend beyond one year.

As of March 31, 2006, $33 million of the pre-tax deferred net losses on derivative instruments related to commodity cash flow hedges were accumulated on the Consolidated Balance Sheet in AOCI, and are expected to be recognized in earnings during the next 12 months as the hedged transactions occur. This amount includes approximately $3 million of pre-tax deferred net losses related to the DENA exit plan discussed in Note 12. However, due to the volatility of the commodities markets, the corresponding value in AOCI will likely change prior to its reclassification into earnings.

The ineffective portion of commodity cash flow hedges resulted in the recognition of pre-tax losses of approximately $10 million and $25 million in the three months ended March 31, 2006 and March 31, 2005, respectively. The amount recognized for transactions that no longer qualified as cash flow hedges was not material as of March 31, 2006 and was a pre-tax loss of approximately $120 million as of March 31, 2005, and are reported in (Loss) Income From Discontinued Operations, net of tax and Impairments and Other Charges in the Consolidated Statements of Operations, respectively.

Commodity Fair Value Hedges. Some Duke Energy subsidiaries are exposed to changes in the fair value of some unrecognized firm commitments to sell generated power or natural gas due to market fluctuations in the underlying commodity prices. Duke Energy actively evaluates changes in the fair value of such unrecognized firm commitments due to commodity price changes and, where appropriate, uses various instruments to hedge its market risk. These commodity instruments, such as swaps, futures and forwards, serve as fair value hedges for the firm commitments associated with generated power. The ineffective portion of commodity fair value hedges resulted in a pre-tax gain of $7 million and $1 million in the three months ended March 31, 2006 and March 31, 2005, respectively.

15. Regulatory Matters

Merger with Cinergy. As discussed in Note 9, on April 3, 2006, the merger between Duke Energy and Cinergy was consummated. Approvals in connection with the merger were obtained from several federal and state agencies. Conditions of approval by such agencies include the following:

• The Public Utilities Commission of Ohio (PUCO) approved the merger with conditions, including a requirement for CG&E to provide a rate credit of approximately $15 million for one year to facilitate

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economic development of increasing rates and a credit of approximately $21 million to CG&E’s gas and electric customers in Ohio for one year, with both credits beginning January 1, 2006.

• The Federal Energy Regulatory Commission (FERC) approved the merger without conditions. On January 19, 2006, Public Citizen’s Energy Program, Citizen’s Action Coalition of Indiana, Ohio Partners for Affordable Energy and Southern Alliance for Clean Energy requested rehearing of the FERC approval. On February 21, 2006, the FERC issued an order granting rehearing of FERC’s order for further consideration.

• The Public Service Commission of South Carolina (PSCSC) approved the merger with certain conditions which included a $40 million rate reduction for one year and a three-year extension to the Bulk Power Marketing profit sharing arrangement.

• The Kentucky Public Service Commission approved the merger with conditions which included a $7.6 million rate credit over 5 years.

• While the merger transaction itself was not subject to approval by the Indiana Utility Regulatory Commission (IURC), the IURC approved certain affiliate agreements in connection with the merger on March 15, 2006, subject to certain conditions including a:

• Rate credit of approximately $40 million to Indiana electric customers through a reduction of base rates over a one year period beginning 30 to 60 days following the close of the merger, and

• $5 million for low income energy assistance and clean coal technology.

• The North Carolina Utilities Commission (NCUC) approved the merger with conditions that require a:

• Rate reduction of approximately $117.5 million for Duke Energy’s North Carolina customers. The rate reduction will flow through as a credit rider to existing base rates for a one-year period following the close of the merger, and

• $12 million to support various low income, environmental, economic development and educationally beneficial programs.

In its order, 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 2007, Duke Power is required to file a general rate case or demonstrate that Duke Power’s existing rates and charges should not be changed. This review will be consolidated with the proceeding that the NCUC is required to undertake in connection with the North Carolina clean air legislation to review the company’s environmental compliance costs. The NCUC specifically noted that it has made no determination that the rates currently being charged by Duke Power are in fact unjust or unreasonable.

In April 2006, The Office of the Ohio Consumers’ Counsel (OCC) filed a Notice of Appeal with the Supreme Court of Ohio, requesting the Court remand the PUCO’s merger approval for a full evidentiary hearing. The Office of the Ohio Consumers’ Counsel alleges that the PUCO committed reversible error on both procedural and substantive grounds, in and among other things, failing to set the matter for a full evidentiary hearing, failing to consider evidence regarding the transfer of the Duke Energy North America (DENA) assets to CG&E, and failing to lift the stay on discovery. CG&E and OCC have resolved this matter through settlement and the OCC is expected to withdraw it’s appeal.

On April 4, 2006, Citizens Action Coalition of Indiana, Inc., filed a Verified Petition for Rehearing and Reconsideration claiming that PSI should be ordered to provide an additional $5 million in rate credits to customers to be consistent with the NCUC merger approval order. An order on the Petition is expected in the second quarter of 2006.

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Franchised Electric. Rate Related Information. The NCUC and the PSCSC approve rates for retail electric sales within their states. The FERC approves Franchised Electric’s rates for electric sales to regulated wholesale customers.

In 2002, the state of North Carolina passed clean air legislation that freezes 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, to significantly reduce emissions of sulfur dioxide (SO₂) and nitrogen oxides (NOx) from coal-fired power plants in the state. The legislation allows electric utilities, including Duke Energy, to accelerate the recovery of compliance costs by amortizing them over seven years (2003-2009). The legislation provides for significant flexibility in the amount of annual amortization 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). Franchised Electric’s amortization expense related to this clean air legislation totals approximately $700 million from inception, with approximately $62 million recorded for the first quarter 2006 and $85 million recorded for the first quarter 2005. As of March 31, 2006, cumulative expenditures totaled $504 million, with $79 million incurred in the first quarter 2006 and $52 million incurred in the first quarter 2005 and are included in Net Cash (Used in) Provided by Investing Activities on the Consolidated Statements of Cash Flows. Duke Energy has changed the classification of these expenditures for clean air legislation from cash flows used in operating activities to cash flows used in investing activities, as discussed in Note 1. In recent filings with the NCUC, Franchised Electric has estimated the costs to comply with the legislations as approximately $1.7 billion. Actual costs may be higher or lower than the estimate based on changes in construction costs, final federal and state environmental regulations, including, among other things, the North Carolina Clean Air legislation and the Clean Air Interstate Rule, and Franchised Electric’s continuing analysis of its overall environmental compliance plan. Any change in compliance costs will be included in future filings with the NCUC.

Other. Franchised Electric is engaged in planning efforts to meet projected load growth in its service territory. Long-term projections indicate a need for significant capacity additions, which may include new nuclear and coal facilities. Because of the long lead times required to develop such assets, Franchised Electric is taking steps now to ensure those options are available. In March 2006, Duke Power announced that it has entered into an agreement with Southern Company to evaluate potential construction of a new nuclear plant at a site jointly owned in Cherokee County, South Carolina. With selection of the Cherokee County site, Duke Power is moving forward with previously announced plans to develop an application to the U.S. Nuclear Regulatory Commission (NRC) for a combined construction and operating license (COL) for two Westinghouse AP1000 (advanced passive) reactors. Each reactor is capable of producing approximately 1,117 megawatts. The COL application submittal to the NRC is anticipated in late 2007 or early 2008. Submitting the COL application does not commit Duke Power to build nuclear units. Duke Power will decide whether to proceed with construction at a later date. Steps are also being taken to maintain the option to bring a new coal facility on line as early as 2011.

        Natural Gas Transmission. Rate Related Information. In November 2005, The British Columbia Pipeline System (BC Pipeline) filed an application with the National Energy Board (NEB) for interim and final tolls for 2006. In December 2005, the NEB approved the 2006 interim tolls as filed and BC Pipeline started negotiations with its shippers to reach a settlement on final tolls for years 2006 and 2007. BC Pipeline reached a toll settlement agreement in principle with its customers for the 2006 and 2007 fiscal years on March 30, 2006. This agreement includes an increase in the equity percentage used in rate purposes from 31% in 2005 to 35% in 2006 and 36% in 2007. The toll settlement agreement is in the process of being finalized, at which time it will be presented to the NEB for approval.

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Union Gas has rates that are approved by the OEB. Effective January 1, 2006, Union Gas implemented new rates approved by the OEB in December 2005, reflecting items previously approved. Union Gas’ earnings for 2006 continue to be subject to the earnings sharing mechanism implemented by the OEB in 2005.

In December 2005, Union Gas filed an application with the OEB for new rates effective January 1, 2007. A decision from the OEB is expected in late 2006. Rates for the sale of gas are adjusted quarterly to reflect updated commodity price forecasts. The difference between the approved and the actual cost of gas incurred in the current period is deferred for future recover from or return to customers, subject to approval by the OEB. These differences are directly flowed through to customers and, therefore, no rate of return is earned on the related deferred balances. The OEB’s review and approval of these gas purchase costs primarily considers the prudence of the cost incurred.

Effective January 1, 2005, new rates for Maritimes & Northeast Pipeline L.L.C. (M&N) took effect, subject to refund, as a result of a rate case filed by M&N in 2004. In June 2005, a settlement agreement to resolve the proceeding was reached with customers that would provide for a rate increase over rates charged prior to January 1, 2005. This settlement agreement has been filed with FERC for its review and approval.

Management believes that the effects of these matters will have no material adverse effect on Duke Energy’s future consolidated results of operations, cash flows or financial position.

16. 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.

Remediation activities. Like others in the energy industry, 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 believes that completion or resolution of these matters will have no material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position.

Clean Water Act. The U. S. Environmental Protection Agency’s (EPA’s) final Clean Water Act Section 316(b) rule became effective July 9, 2004. The rule establishes 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. Eight of Duke Energy’s eleven coal and nuclear-fueled generating facilities in North Carolina and South Carolina, and its three natural gas-fired generating facilities in California are affected sources under the rule. The three California facilities are part of the DENA business and were sold as part of the transaction announced in January 2006 that closed in May 2006 (see Note 12). The rule requires a Comprehensive Demonstration Study (CDS) for each affected facility to provide

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information needed to determine necessary facility-specific modifications and cost estimates for implementation. These studies will be completed over the next three to five years. Once compliance measures are determined and approved by regulators, a facility will typically have five or more years to implement the measures. Due to the wide range of measures potentially applicable to a given facility, and since the final selection of compliance measures will be at least partially dependent upon the CDS information, Duke Energy is not able to estimate its cost for complying with the rule at this time.

Clean Air Mercury Rule. The EPA’s final Clean Air Mercury Rule (CAMR) was published in the Federal Register May 18, 2005. The rule limits total annual mercury emissions from coal-fired power plants across the United States through a two-phased cap-and-trade program. Phase 1 begins in 2010 and Phase 2 begins in 2018. The rule gives states the option of participating in the national trading program. If a state chooses not to participate, then the rule sets a fixed limit on that state’s annual emissions. The emission controls Duke Energy is installing to comply with North Carolina clean air legislation will contribute significantly to achieving compliance with the CAMR requirements. Duke Energy currently estimates that the additional cost of complying with Phase 1 of the CAMR will have no material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position, and is currently unable to estimate the cost of complying with Phase 2 of the CAMR.

Clean Air Interstate Rule. The EPA’s final Clean Air Interstate Rule (CAIR) was published in the Federal Register May 12, 2005. The rule limits total annual SO₂ and NOx emissions from electric generating facilities across the Eastern United States through a two-phased cap-and-trade program. Phase 1 begins in 2009 for NOx and in 2010 for SO₂. Phase 2 begins in 2015 for both NOx and SO₂. The rule gives states the option of participating in the national trading program. If a state chooses not to participate, then the rule sets a fixed limit on that state’s annual emissions. The emission controls Duke Energy is installing to comply with North Carolina clean air legislation will contribute significantly to achieving compliance with the CAIR requirements. Duke Energy currently estimates that the additional cost of complying with Phase 1 of the CAIR will have no material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position, and is currently unable to estimate the cost of complying with Phase 2 of the CAIR. On July 11, 2005, Duke Energy and others filed petitions with the U.S. Court of Appeals for the District of Columbia Circuit requesting the Court to review certain elements of the EPA’s CAIR. Duke Energy is seeking to have the EPA revise the method of allocating SO₂ emission allowances to entities under the rule.

Extended Environmental Activities, Accruals. Included in Other Current Liabilities and Other Deferred Credits and Other Liabilities on the Consolidated Balance Sheets were total accruals related to extended environmental-related activities of approximately $55 million as of both March 31, 2006 and December 31, 2005. 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 believes that completion or resolution of these matters will have no material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position.

Litigation

New Source Review (NSR)/EPA Litigation. In 2000, the U.S. Justice Department, acting on behalf of the EPA, filed a complaint against Duke Energy in the U.S. District Court in Greensboro, North Carolina, for alleged violations of the Clean Air Act (CAA). The EPA claims that 29 projects performed at 25 of Duke Energy’s coal-fired units were major modifications, as defined in the CAA, and that Duke Energy violated the CAA when it undertook those projects without obtaining permits and installing emission controls for SO₂, NOx and particulate matter. The complaint asks the Court to order Duke Energy to stop operating the coal-fired units identified in the complaint, install additional emission controls and pay unspecified civil penalties.

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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 August 2003, the trial Court issued a summary judgment opinion adopting Duke Energy’s legal positions, and on April 15, 2004, the Court entered Final Judgment in favor of Duke Energy. The government appealed the case to the U.S. Fourth Circuit Court of Appeals. On June 15, 2005, the Fourth Circuit ruled in favor of Duke Energy and effectively adopted Duke Energy’s view that permitting of projects is not required unless the work performed implicates a net increase in the hourly rate of emissions. The EPA filed a request for rehearing with the Fourth Circuit, which was denied. The EPA decided not to petition the U.S. Supreme Court to hear an appeal of the matter. Some environmental groups who intervened in the early stages in the case have filed their petition for appeal. The Supreme Court has not yet determined whether it would hear the matter. Based on the current rulings, Duke Energy does not believe the outcome of this matter will have a material adverse effect on its consolidated results of operations, cash flows or financial position.

Western Energy and Natural Gas Litigation and Regulatory Matters. Duke Energy and several of its affiliates, as well as other energy companies, are parties to 34 lawsuits filed by or on behalf of electricity and/or natural gas purchasers in several Western states. Many of the suits seek class-action certification. The plaintiffs allege that the defendants conspired to manipulate the electricity and/or natural gas markets in violation of state and/or federal antitrust, 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. Plaintiffs seek aggregate damages or restitution of billions of dollars from the defendants. Six of these cases were dismissed on filed rate and/or federal preemption grounds, and the plaintiffs in each of these dismissed cases have appealed their respective rulings to the U.S. Ninth Circuit Court of Appeals. 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.

In 2002, Southern California Edison Company (SCE) initiated arbitration proceedings regarding disputes with DETM relating to amounts owed in connection with the termination of bi-lateral power contracts between the parties in early 2001. This matter proceeded to hearing in November 2005. In January 2006, the parties reached an agreement in principle to resolve the matters at issue in the arbitration. The parties entered into a Settlement Agreement and Mutual Release dated as of March 10, 2006, and on March 24, 2006, DETM paid the settlement amount, including interest, into escrow. The agreement will require regulatory approval. Based on the terms of the Settlement Agreement and Mutual Release, Duke Energy does not expect that the resolution of this matter will have a material adverse effect on its consolidated results of operations, cash flows or financial position.

Trading Related Litigation. Commencing August 2003, plaintiffs filed three class-action lawsuits in the U.S. District Court for the Southern District of New York on behalf of entities who bought and sold natural gas futures and options contracts on the New York Mercantile Exchange during the years 2000 through 2002. DETM, along with numerous other entities, is named as a defendant. The plaintiffs claim that the defendants violated the Commodity Exchange Act by reporting false and misleading trading information to trade publications, resulting in monetary losses to the plaintiffs. Plaintiffs seek class action certification, unspecified damages and other relief. On September 24, 2004, the court denied a motion to dismiss the plaintiffs’ claims filed on behalf of DETM and other defendants, and on September 30, 2005, the court certified the class. Duke Energy has reached an agreement with the plaintiffs in these consolidated cases to resolve all issues and on February 8, 2006, the court granted preliminary approval of this settlement. The agreement is subject to final court approval after notification to all class members. Duke Energy does not expect that the resolution of this matter will have a material adverse effect on its consolidated results of operations, cash flows or financial position.

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On January 28, 2005, four plaintiffs filed suit in Tennessee Chancery Court against Duke Energy affiliates and other energy companies seeking class action certification on behalf of indirect purchasers of natural gas who allege that they have been harmed by defendants’ manipulation of the natural gas markets by various means, including providing false information to natural gas trade publications and unlawfully exchanging information, resulting in artificially high natural gas prices paid by plaintiffs in the State of Tennessee. Alleging that defendants violated state antitrust laws and other laws, plaintiffs seek unspecified damages and other relief. Defendants removed this case to the United States District Court for the Western District of Tennessee in March 2005, and the case was transferred to a federal judge in Nevada in Multidistrict Litigation (MDL) proceeding 1566. Plaintiffs filed a motion to remand the case to state court, and the defendants filed motions to dismiss the complaint on various grounds, including the filed rate doctrine and federal preemption. The court has yet to rule on these motions. Duke Energy is unable to express an opinion regarding the probable outcome of these matters at this time.

On August 8, 2005, a plaintiff filed a lawsuit in state court in Kansas against Duke Energy and DETM, as well as other energy companies, claiming that the plaintiff was 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. Duke Energy removed this case to the United States District Court for the District of Kansas on September 8, 2005, and the case was subsequently transferred to a federal judge in the MDL 1566 proceeding. Plaintiffs motion to remand the case to state court, was denied on April 26, 2006. On September 26, 2005, a class action petition was filed by two plaintiffs in state court in Kansas against various defendants including Duke Energy and DETM, based on substantially similar allegations. This matter also was moved to federal court, and defendants are seeking to have the case transferred to the MDL 1566 proceeding. Plaintiffs have filed a motion to remand the case to state court. The plaintiffs in the foregoing cases claim the defendants violated Kansas’ antitrust laws and seek damages in unspecified amounts. Duke Energy is unable to express an opinion regarding the probable outcome of these matters at this time.

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 at this time.

        Sonatrach/Sonatrading Arbitration. Duke Energy LNG Sales Inc. (Duke LNG) claims in an arbitration commenced in January 2001 in London that Sonatrach, the Algerian state-owned energy company, together with its subsidiary, Sonatrading Amsterdam B.V. (Sonatrading), breached their shipping obligations under a liquefied natural gas (LNG) purchase agreement and related transportation agreements (the LNG Agreements) relating to Duke LNG’s purchase of LNG from Algeria and its transportation by LNG tanker to Lake Charles, Louisiana. Duke LNG seeks damages of approximately $27 million. Sonatrading and Sonatrach, on the other hand, claim that Duke LNG repudiated the LNG Agreements by allegedly failing to diligently perform LNG marketing obligations. Sonatrading and Sonatrach seek damages in the amount of approximately $250 million. In 2003, an arbitration tribunal issued a Partial Award on liability issues, finding that Sonatrach and Sonatrading breached their obligations to provide shipping. The tribunal also found that Duke LNG breached the LNG Purchase Agreement by failing to perform marketing obligations. The final hearing on damages was concluded in March 2006 and the parties are awaiting a ruling from the tribunal.

Citrus Trading Corporation (Citrus) Litigation. In conjunction with the Sonatrach LNG Agreements, Duke LNG entered into a natural gas purchase contract (the Citrus Agreement) with Citrus. Citrus filed a lawsuit in March 2003 in the U.S. District Court for the Southern District of Texas against Duke LNG and PanEnergy Corp

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alleging that Duke LNG breached the Citrus Agreement by failing to provide sufficient volumes of gas to Citrus. Duke LNG contends that Sonatrach caused Duke LNG to experience a loss of LNG supply that affected Duke LNG’s obligations and termination rights under the Citrus Agreement. Citrus seeks monetary damages and a judicial determination that Duke LNG did not experience such a loss. After Citrus filed its lawsuit, Duke LNG terminated the Citrus Agreement and filed a counterclaim asserting that Citrus had breached the agreement by, among other things, failing to provide sufficient security under a letter of credit for the gas transactions. Citrus denies that Duke LNG had the right to terminate the agreement and contends that Duke LNG’s termination of the agreement was itself a breach, entitling Citrus to terminate the agreement and recover damages in the amount of approximately $187 million. The parties filed cross motions for partial summary judgment regarding the letter of credit issue which were subsequently denied by the Court. Other motions for partial summary judgment remain pending. No trial date has been set. 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 Sonatrach and Citrus matters.

Exxon Mobil Disputes. In April 2004, Mobil Natural Gas, Inc. (MNGI) and 3946231 Canada, Inc. (3946231, and collectively with MNGI, Exxon Mobil) filed a Demand for Arbitration against Duke Energy, DETMI, DTMSI Management Ltd. (DTMSI) and other affiliates of Duke Energy. MNGI and DETMI are the sole members of DETM. DTMSI and 3946231 are the sole beneficial owners of Duke Energy Marketing Limited Partnership (DEMLP, and with DETM, the Ventures). Among other allegations, Exxon Mobil alleges that DETMI and DTMSI engaged in wrongful actions relating to affiliate trading, payment of service fees, expense allocations and distribution of earnings in breach of agreements and fiduciary duties relating to the Ventures. Exxon Mobil seeks to recover actual damages, plus attorneys’ fees and exemplary damages; aggregate damages were not specified in the arbitration demand. Duke Energy denies these allegations, and has filed counterclaims asserting that Exxon Mobil breached its Ventures obligations and other contractual obligations. By order dated May 2, 2005, the arbitrators granted Duke Energy’s Motion for Partial Summary Judgment, effectively eliminating a significant portion of Exxon Mobil’s claims. Exxon Mobil filed a motion for reconsideration of the ruling as well as for an extension of the date for the arbitration hearing. Exxon Mobil also filed a motion to dismiss certain of Duke Energy’s counterclaims. Following a hearing in December 2005 on the motion for reconsideration, the arbitrators issued their ruling on January 26, 2006, generally reaffirming the original order, with a limited exception with respect to affiliate trades that is not expected to have a significant impact on the case. The panel also dismissed one of Duke Energy’s counterclaims. In response to a request from Exxon Mobil, the arbitration panel has postponed the commencement date of the arbitration hearing from January 2006 to October 2006 in Houston, Texas. On February 28, 2006, Duke Energy filed an expert report in support of its claims. On the same date, Exxon Mobil also filed a Second Amended Statement of Claim and various expert reports in support of its claims. Duke Energy is evaluating Exxon Mobil’s filings and expects to respond by August 2006. In August 2004, DEMLP initiated arbitration proceedings in Canada against certain Exxon Mobil entities asserting that those entities wrongfully terminated two gas supply agreements with the Ventures and wrongfully failed to assume certain related gas supply agreements with other parties. A hearing in the Canadian arbitration, originally scheduled to commence in August 2005 in Calgary, Canada, was held in March 2006. The parties submitted post closing briefs and the arbitrators have scheduled oral arguments on May 16 and 17, 2006. Under the current procedural order governing the Arbitration, a ruling is expected by the third quarter of 2006. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that might be incurred by Duke Energy or any of its affiliates as a result of these matters.

Duke Energy Retirement Cash Balance Plan. A class action lawsuit has been 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. These allegations arise out of the conversion of the Duke Power Company Employees’ Retirement Plan into the

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Duke Power Company Retirement Cash Balance Plan. The case also raises some Plan administration issues, alleging errors in the application of Plan provisions (e.g., 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. 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 was named in the third amended complaint of a purported class action lawsuit filed in the United States District Court for the Southern District of Mississippi. Plaintiffs claim that Duke Energy, along with numerous other utilities, oil companies, coal companies and chemical companies, is liable for damages relating to losses suffered by victims of Hurricane Katrina. Plaintiffs claim that Duke Energy’s, and others, greenhouse gas emissions contributed to the frequency and intensity of storms such as Hurricane Katrina. Duke Energy has not been served with this lawsuit. 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.

Asbestos-related Injuries and Damages Claims. Duke Energy has experienced numerous claims relating to damages for personal injuries alleged to have arisen from the exposure to or use of asbestos in connection with construction and maintenance activities conducted by Duke Power on its electric generation plants during the 1960s and 1970s. Duke Energy has third-party insurance to cover losses related to these asbestos-related injuries and damages above a certain aggregate deductible. The insurance policy, including the policy deductible and reserves, provided for coverage to Duke Energy up to an aggregate of $1.6 billion when purchased in 2000. Probable insurance recoveries related to this policy are classified in the Consolidated Balance Sheets as Other within Investments and Other Assets. Amounts recognized as reserves in the Consolidated Balance Sheets, which are not anticipated to exceed the coverage, are classified in Other Deferred Credits and Other Liabilities and Other Current Liabilities and are based upon Duke Energy’s best estimate of the probable liability for future asbestos claims. These reserves are based upon current estimates and are subject to uncertainty. Factors such as the frequency and magnitude of future claims could change the current estimates of the related reserves and claims for recoveries reflected in the accompanying Consolidated Financial Statements. However, management of Duke Energy does not currently anticipate that any changes to these estimates will have any material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position.

Other Litigation and Legal Proceedings. Duke Energy and its subsidiaries are involved in other legal, tax and regulatory proceedings in various forums regarding performance, contracts, royalty disputes, mismeasurement and mispayment claims (some of which are brought as class actions), and other matters arising in the ordinary course of business, some of which involve substantial amounts. Management believes that the final disposition of these proceedings will have no material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position.

Duke Energy has exposure to certain legal matters that are described herein. As of March 31, 2006, Duke Energy has recorded reserves of approximately $1.3 billion for these proceedings and exposures. Duke Energy has insurance coverage for certain of these losses incurred. As of March 31, 2006, Duke Energy has recognized approximately $1.0 billion of probable insurance recoveries related to these losses. These reserves represent management’s best estimate of probable loss as defined by SFAS No. 5.

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

Other Commitments and Contingencies

Other. 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. These arrangements are largely entered into by Duke Capital LLC (Duke Capital). To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on the Consolidated Balance Sheets. The possibility of Duke Energy or Duke Capital 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 17.)

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 included in Unrealized Gains or Losses on Mark-to-Market and Hedging Transactions.

See Note 17 for discussion of Calpine guarantee obligation.

17. 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 a commercial transaction with a third party by enhancing the value of the transaction to the third party.

Duke Capital 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. The maximum potential amount of future payments Duke Capital could have been required to make under these performance guarantees as of March 31, 2006 was approximately $575 million. Of this amount, approximately $375 million relates to guarantees of the payment and performance of less than wholly owned consolidated entities. Approximately $50 million of the performance guarantees expire between 2006 and 2007, with the remaining performance guarantees expiring after 2007 or having no contractual expiration. Additionally, Duke Capital has issued joint and several guarantees to some of the D/FD project owners, guaranteeing the performance of D/FD under its engineering, procurement and construction contracts and other contractual commitments. These guarantees have no contractual expiration and no stated maximum amount of future payments that Duke Capital could be required to make. Additionally, Fluor Enterprises Inc., as 50% owner in D/FD, has issued similar joint and several guarantees to the same D/FD project owners. In accordance with the D/FD partnership agreement, each of the partners is responsible for 50% of any payments to be made under those guarantees.

Westcoast has issued performance guarantees to third parties guaranteeing the performance of unconsolidated entities, such as equity method investments, and of entities previously sold by Westcoast to third parties. Those guarantees require Westcoast to make payment to the guaranteed third party upon the failure of such unconsolidated or sold entity to make payment under some of its contractual obligations, such as debt, purchase contracts and leases. The maximum potential amount of future payments Westcoast could have been required to make under those performance guarantees as of March 31, 2006 was approximately $15 million. Of those guarantees, approximately $10 million expire in 2006, with the remainder having no contractual expiration.

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Duke Capital 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 Capital 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 Capital could have been required to make under these letters of credit as of March 31, 2006 was approximately $90 million. Substantially all of these letters of credit were issued on behalf of less than wholly owned consolidated entities and expire in 2006 or 2007.

Duke Capital 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 March 31, 2006, Duke Capital had guaranteed approximately $10 million of outstanding surety bonds related to obligations of non-wholly owned entities. The majority of these bonds expire in various amounts in 2006.

Natural Gas Transmission, International Energy, and Crescent have issued guarantees of debt and performance guarantees associated with non-consolidated entities and less than wholly owned consolidated entities. If such entities were to default on payments or performance, Natural Gas Transmission, International Energy, or Crescent would be required under the guarantees to make payment on the obligation of the less than wholly owned entity. As of March 31, 2006, Natural Gas Transmission was the guarantor of approximately $15 million of debt at Westcoast associated with less than wholly owned entities, which expire in 2019. International Energy was the guarantor of approximately $10 million of performance guarantees associated with less than wholly owned entities. Substantially all of these guarantees expire between 2006 and 2008. Crescent was the guarantor of approximately $15 million of debt associated with less than wholly owned entities, which expire in 2006.

        Duke Capital 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 by Duke Capital 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 Capital 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 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 2006 to 2019, with others having no specific term. Duke Energy is unable to estimate the total maximum potential amount of future payments under these guarantees, since some of the underlying agreements have no limits on potential liability.

In connection with Duke Energy’s sale of the Murray merchant generation facility to KGen, in August 2004, Duke Capital guaranteed in favor of a bank the repayment of any draws under a $120 million letter of credit issued by the bank to Georgia Power Company. The letter of credit, which expires in 2006, is related to the obligation of a KGen subsidiary under a seven-year power sales agreement, commencing in May 2005. Duke Capital will be required to ensure reissuance of this letter of credit or issue similar credit support until the power sales agreement expires in 2012. Duke Energy will operate the sold Murray facility under an operation and

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maintenance agreement with the KGen subsidiary. As a result, the guarantee has an immaterial fair value. Further, KGen has agreed to indemnify Duke Energy for any payments Duke Capital makes with respect to the $120 million letter of credit.

In 1999, IDC issued approximately $100 million in bonds to purchase equipment for lease to Hidalgo, a subsidiary of Duke Capital. Duke Capital unconditionally and irrevocably guaranteed the lease payments of Hidalgo to IDC through 2028. In 2000, Hidalgo was sold to Calpine Corporation and Duke Capital remained obligated under the lease guaranty. In January 2006, Hidalgo and its subsidiaries filed for bankruptcy protection in connection with the previous bankruptcy filing by its parent, Calpine Corporation in December 2005. Gross exposure under the guarantee obligation as of March 31, 2006 is approximately $200 million, which includes principal and interest. Duke Energy does not believe a loss under the guarantee obligation is probable as of March 31, 2006, but continues to evaluate the situation. Therefore, no reserves have been recorded for any contingent loss as of March 31, 2006. No demands for payment of principal or interest have been made under the guarantee. If future losses are incurred under the guarantee, Duke Capital has certain rights which should allow it to mitigate such loss.

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.

As of March 31, 2006, the amounts recorded for the guarantees and indemnifications mentioned above are immaterial, both individually and in the aggregate.

18. Related Party Transactions

As discussed in Note 9, in February 2005, DEFS sold its wholly owned subsidiary TEPPCO GP, the general partner of TEPPCO Partners, L.P. (TEPPCO), for approximately $1.1 billion and Duke Energy sold its limited partner interest in TEPPCO for approximately $100 million. Prior to the completion of these sale transactions, Duke Energy accounted for its investment in TEPPCO under the equity method of accounting. For the three months ended March 31, 2005, TEPPCO had operating revenues of approximately $1,524 million, operating expenses of approximately $1,463 million, operating income of approximately $61 million, income from continuing operations of approximately $46 million, and net income of approximately $47 million.

In July 2005, Duke Energy completed the transfer of a 19.7% interest in DEFS to ConocoPhillips, Duke Energy’s co-equity owner in DEFS, which reduced Duke Energy’s ownership interest in DEFS from 69.7% to 50% and resulted in Duke Energy and ConocoPhillips becoming equal 50% owners of DEFS. As a result of this transaction, Duke Energy deconsolidated its investment in DEFS and subsequently has accounted for the investment using the equity method of accounting (see Note 9). Duke Energy’s 50% of equity in earnings of DEFS for the three-months ended March 31, 2006 was approximately $146 million and Duke Energy’s investment in DEFS as of March 31, 2006 was $1,379 million, which is included in Investments in Unconsolidated Affiliates in the accompanying Consolidated Balance Sheets. During the three-months ended March 31, 2006, Duke Energy had gas sales to, purchases from, and other operating expenses from affiliates of

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DEFS of approximately $34 million, $8 million and $4 million, respectively. As of March 31, 2006, Duke Energy had payables to affiliates of DEFS of approximately $83 million. Additionally, Duke Energy received approximately $90 million in distributions of earnings from DEFS in 2006, which are included in Other, assets within Cash Flows from Operating Activities in the accompanying Consolidated Statements of Cash Flows. Duke Energy has recognized an approximate $60 million receivable as of March 31, 2006 due to its share of a distribution declared by DEFS in March 2006 but paid in April 2006. Summary financial information for DEFS, which is accounted for under the equity method, as of and for the three-months ended March 31, 2006 is as follows:

	Three-months Ended March 31, 2006
	(in millions)
Operating revenues	$	3,309
Operating expenses	$	2,994
Operating income	$	315
Net income	$	291
	March 31, 2006
	(in millions)
Current assets	$	1,893
Non-current assets	$	4,876
Current liabilities	$	1,976
Non-current liabilities	$	2,015
Minority interest	$	93

DEFS is a limited liability company which is a pass-through entity for U.S. income tax purposes. DEFS also owns corporations who file their own respective, federal, foreign and state income tax returns and income tax expense related to these corporations is included in the income tax expense of DEFS. Therefore, DEFS’ net income does not include income taxes for earnings which are pass-through to the members based upon their ownership percentage and Duke Energy recognizes the tax impacts of its share of DEFS’ pass-through earnings in its income tax expense from continuing operations in the accompanying Consolidated Statements of Operations.

Also see Notes 9, 11, 13 and 17 for additional related party information.

19. New Accounting Standards

The following new accounting standards were adopted by Duke Energy subsequent to March 31, 2005 and the impact of such adoption, if applicable, has been presented in the accompanying Consolidated Financial Statements:

SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29” (SFAS No. 153). In December 2004, the FASB issued SFAS No. 153 which amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” by eliminating the exception to the fair-value principle for exchanges of similar productive assets, which were accounted for under APB Opinion No. 29 based on the book value of the asset surrendered with no gain or loss recognition. SFAS No. 153 also eliminates APB Opinion No. 29’s concept of culmination of an earnings process. The amendment requires that an exchange of nonmonetary assets be accounted for at fair value if the exchange has commercial substance and fair value is determinable within reasonable limits. Commercial substance is assessed by comparing the entity’s expected cash flows immediately

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before and after the exchange. If the difference is significant, the transaction is considered to have commercial substance and should be recognized at fair value. SFAS No. 153 is effective for nonmonetary transactions occurring on or after July 1, 2005. The adoption of SFAS No. 153 did not have a material impact on Duke Energy’s consolidated results of operations, cash flows or financial position.

FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations” (FIN 47). In March 2005, the FASB issued FIN 47, which clarifies the accounting for conditional asset retirement obligations as used in SFAS No. 143. A conditional asset retirement obligation is an unconditional legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Therefore, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation under SFAS No. 143 if the fair value of the liability can be reasonably estimated. The provisions of FIN 47 were effective for Duke Energy as of December 31, 2005.

FASB Staff Position (FSP) No. APB 18-1, “Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence” (FSP No. APB 18-1). In July of 2005, the FASB staff issued FSP No. APB 18-1 which provides guidance for how an investor should account for its proportionate share of an investee’s equity adjustments for other comprehensive income (OCI) upon a loss of significant influence. APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (APB Opinion No. 18), requires a transaction of an equity method investee of a capital nature be accounted for as if the investee were a consolidated subsidiary, which requires the investor to record its proportionate share of the investee’s adjustments for OCI as increases or decreases to the investment account with corresponding adjustments in equity. FSP No. APB 18-1 requires that an investor’s proportionate share of an investee’s equity adjustments for OCI should be offset against the carrying value of the investment at the time significant influence is lost and equity method accounting is no longer appropriate. However, to the extent that the offset results in a carrying value of the investment that is less than zero, an investor should (a) reduce the carrying value of the investment to zero and (b) record the remaining balance in income. The guidance in FSP No. APB 18-1 was effective for Duke Energy beginning October 1, 2005. The adoption of FSP No. APB 18-1 did not have a material impact on Duke Energy’s consolidated results of operations, cash flows or financial position.

SFAS No. 123(R). In December of 2004, the FASB issued SFAS No. 123(R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. For Duke Energy, timing for implementation of SFAS No. 123(R) was January 1, 2006. The pro forma disclosures previously permitted under SFAS No. 123 are no longer an acceptable alternative. Instead, Duke Energy is required to determine an appropriate expense for stock options and record compensation expense in the Consolidated Statements of Operations for stock options. Duke Energy implemented SFAS No. 123(R) using the modified prospective transition method, which required Duke Energy to record compensation expense for all unvested awards beginning January 1, 2006.

Duke Energy currently also has retirement eligible employees with outstanding share-based payment awards (unvested stock awards, stock based performance awards and phantom stock awards). Compensation cost related to those awards was previously expensed over the stated vesting period or until actual retirement occurred. Effective January 1, 2006, Duke Energy is required to recognize compensation cost for new awards granted to employees over the requisite service period, which generally begins on the date the award is granted through the earlier of the date the award vests or the date the employee becomes retirement eligible. Awards, including stock options, granted to employees that are already retirement eligible will be deemed to have vested immediately upon issuance, and therefore, compensation cost for those awards will be recognized on the date such awards are granted.

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Notes To Consolidated Financial Statements – (Continued)

SFAS No. 123(R), which was adopted by Duke Energy effective January 1, 2006, is not anticipated to have a material impact on its consolidated results of operations, cash flows or financial position in 2006 based on awards outstanding as of the implementation date. However, the impact to Duke Energy in periods subsequent to adoption of SFAS No. 123(R) will be largely dependent upon the nature of any new share-based compensation awards issued to employees. (See Note 4).

Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment” (SAB 107). On March 29, 2005, the Securities and Exchange Commission (SEC) staff issued SAB 107 to express the views of the staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and to provide the staff’s views regarding the valuation of share-based payment arrangements for public companies. Duke Energy adopted SFAS No. 123R and SAB 107 effective January 1, 2006.

FSP No. FAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” The FASB issued FSP No. FAS 115-1 and 124-1 in November 2005 which was effective for Duke Energy beginning January 1, 2006. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The adoption of FSP No. FAS 115-1 and 124-1 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 March 31, 2006:

Statement of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. This Statement is effective January 1, 2007. Duke Energy does not anticipate the adoption of SFAS No. 155 will have any material impact on its consolidated results of operations, cash flows or financial position.

SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140” In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.” This Statement requires recognition of a servicing asset or liability when an entity enters into arrangements to service financial instruments in certain situations. Such servicing assets or servicing liabilities are required to be initially measured at fair value, if practicable. SFAS No. 156 also allows an entity to subsequently measure its servicing assets or servicing liabilities using either an amortization method or a fair value method. This Statement is effective January 1, 2007. Duke Energy does not anticipate the adoption of SFAS No. 156 will have any material impact on its consolidated results of operations, cash flows or financial position.

FASB Staff Position (FSP) No. FIN 46 (R)-6, “Determining the Variability to Be Considered In Applying Interpretation No. 46(R)” In April 2006, the FASB staff issued FSP No. FIN 46 (R)-6 to address how to

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DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements – (Continued)

determine the variability to be considered in applying FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities. The variability that is considered in applying Interpretation 46(R) affects the determination of whether the entity is a variable interest entity, which interests are variable interests in the entity, and which party, if any, is the primary beneficiary of the VIE. The variability affects the calculation of expected losses and expected residual returns. This Statement is effective July 1, 2006. Duke Energy does not anticipate the adoption of FSP No. FIN 46 (R)-6 will have any material impact of its consolidated results of operations, cash flows or financial position.

FSP No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event” In February 2006, the FASB staff issued FSP No. 123(R)-4 to address the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. The guidance amends SFAS 123(R). FSP 123(R)-4 provides that cash settlement features that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not require classifying the option or similar instrument as a liability until it becomes probable that the event will occur. FSP 123(R)-4 applies only to options or similar instruments issued as part of employee compensation arrangements. The guidance in FSP 123(R)-4 is effective for Duke Energy as of April 1, 2006. Duke Energy adopted SFAS 123(R) as of January 1, 2006 (see Footnote 4). The adoption of FSP No. FAS 123(R)-4 did not have a material impact on Duke Energy’s consolidated statement of operations, cash flows or financial position.

20. Income Tax Expense

Although the outcome of tax audits is uncertain, management believes that adequate provisions for income and other taxes have been made for potential liabilities resulting from such matters. As of March 31, 2006, Duke Energy has total provisions of approximately $143 million for uncertain tax positions, as compared to $141 million as of December 31, 2005, including interest. Management is not aware of any issues for open tax years that upon final resolution are expected to have a material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position.

The effective tax rate for the three months ended March 31, 2006 was approximately 34.7% as compared to the effective tax rate of 34.4% for the same period in 2005.

As of March 31, 2006 and December 31, 2005, approximately $283 million and $68 million, respectively, of current deferred tax assets were included in Other within Current Assets on the Consolidated Balance Sheets. At March 31, 2006, this balance exceeded 5% of total current assets.

21. Subsequent Events

On April 3, 2006, Duke Energy consummated the previously announced merger with Cinergy. See Notes 1, 9 and 15 for additional information.

For information on subsequent events related to basis of presentation, earnings per share, common stock, debt and credit facilities, acquisitions and dispositions, discontinued operations and assets held for sale, business segments, regulatory matters, and related party transactions see Notes 1, 2, 3, 6, 9, 12, 13, 15 and 18, respectively.

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

INTRODUCTION

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

Duke Energy Holding Corporation (Duke Energy HC) was incorporated in Delaware on May 3, 2005 as Deer Holding Corp., a wholly-owned subsidiary of Duke Energy Corporation (“Old Duke Energy”). On April 3, 2006, in accordance with their previously announced merger agreement, Old Duke Energy and Cinergy Corp. (Cinergy) merged into wholly-owned subsidiaries of Duke Energy HC, resulting in Duke Energy HC becoming the parent entity. In connection with the closing of the merger transactions, Duke Energy HC changed its name to Duke Energy (“New Duke Energy”) and Old Duke Energy converted into a limited liability company named Duke Power Company LLC. As a result of the merger transactions, each outstanding share of Cinergy common stock was converted into 1.56 shares of common stock of New Duke Energy, which resulted in the issuance of approximately 313 million shares. Additionally, each common share of Old Duke Energy was converted into one share of New Duke Energy. Old Duke Energy is the predecessor of New Duke Energy for purposes of securities regulations governing financial statement filing. Therefore, the accompanying Consolidated Financial Statements, reflect the results of operations and financial position of Old Duke Energy for the periods presented. However, references to amounts for periods after the closing of the mergers relate to New Duke Energy. New Duke Energy had no separate operations for the periods presented. Both Old Duke Energy and New Duke Energy are referred to as Duke Energy herein.

Executive Overview

For the three months ended March 31, 2006, Duke Energy Corporation (collectively with its subsidiaries, Duke Energy) reported net income of $358 million and diluted earnings per share of $0.37 as compared to net income and diluted earnings per share of $868 million and $0.88, respectively, for the three months ended March 31, 2005. The decrease in net income and earnings per share was due primarily to the pre-tax gain of approximately $900 million (net of minority interest of approximately $343 million) recorded in 2005 related to Duke Energy Field Services, LLC’s (DEFS’) sale of Texas Eastern Products Pipeline Company, LLC (TEPPCO GP), which is the general partner of TEPPCO Partners, LP (TEPPCO LP), and Duke Energy’s sale of its limited partner interests in TEPPCO LP and the recognition of prior year hedge losses. Despite historically mild winter weather, Duke Energy’s electric and gas operations delivered solid performance for the three months ended March 31, 2006. Highlights for the quarter include:

• Despite mild weather, Franchised Electric delivered higher results for the three months ended March 31, 2006 due primarily to improved bulk power marketing results, customer growth and lower regulatory amortization;

• Natural Gas Transmission’s earnings increased for the three months ended March 31, 2006 as compared to the same period in the prior year, primarily due to an approximate $24 million gain on the settlement of a customer’s transportation contract. Excluding this gain, earnings growth was primarily the result of U.S. pipeline expansion projects, natural gas processing and favorable foreign exchange rate impacts from the strengthening Canadian currency;

• Field Services results benefited from strong commodity prices and gas marketing results, offset by the reduction in ownership percentage by Duke Energy as a result of the DEFS disposition transaction whereby Duke Energy reduced its ownership interest in DEFS from 69.7% to 50% effective July 1, 2005;

• International Energy experienced improved results over the same period of the prior year primarily due to improved prices and volumes in Latin America, favorable foreign exchange rate impacts in Brazil and increased margins at National Methanol Company;

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• Crescent Resources, LLC (Crescent) had lower earnings for the three months ended March 31, 2006 as compared to the same period of the prior year due to lower legacy land sales;

• Duke Energy North America’s (DENA’s) discontinued operations incurred losses for the three months ended March 31, 2006, compared to gains for the three months ended March 31, 2005, due primarily to certain contract terminations as a result of progress towards completing the exit plan; and

• Additionally, earnings for the three months ended March 31, 2006 as compared to the prior year period were favorably impacted by reduced hedge losses as a result of the prior year charges recognized in connection with the discontinuance of certain cash flow hedges entered into to hedge Field Services’ commodity price risk and lower charges for liabilities associated with mutual insurance companies.

On April 3, 2006, Duke Energy and Cinergy Corp. (Cinergy) consummated the previously announced merger, which combines the Duke Energy and Cinergy regulated franchises as well as deregulated generation in the Midwestern United States. Throughout the remainder of 2006, management will be focused on establishing an industry-leading electric power platform through successful execution of the merger plan, primarily the timely, cost-effective integration of the legacy Duke Energy and Cinergy businesses. As a result of the merger, Duke Energy expects to expense approximately $55 million of voluntary and involuntary severance costs throughout the remainder of 2006.

Duke Energy has made substantial progress in completing the DENA exit plan. Substantially all of DENA’s portfolio of derivative contracts (approximately 95%) has been transferred to Barclays Bank PLC (Barclays), which essentially eliminated Duke Energy’s credit, collateral, market and legal risk associated with DENA’s derivative trading positions. In May 2006, the transaction with LS Power closed and total proceeds from the sale are expected to be approximately $1.56 billion, including certain working capital adjustments. Additional proceeds of up to approximately $40 million are subject to LS Power obtaining certain state regulatory approvals. Subject to the resolution of these contingencies, an additional gain on the disposition of these assets could be recognized in a future period.

RESULTS OF OPERATIONS

Results of Operations and Variances (in millions)

	Three Months Ended March 31,
	2006			2005		Increase (Decrease)
Operating revenues	$	3,201		$	5,328	$	(2,127	)
Operating expenses		2,438			4,662		(2,224	)
Gains on sales of investments in commercial and multi-family real estate		26			42		(16	)
Gains on sales of other assets and other, net		33			9		24
Operating income		822			717		105
Other income and expenses, net		187			1,304		(1,117	)
Interest expense		250			290		(40	)
Minority interest expense		15			420		(405	)
Earnings from continuing operations before income taxes		744			1,311		(567	)
Income tax expense from continuing operations		258			451		(193	)
Income from continuing operations		486			860		(374	)
(Loss) income from discontinued operations, net of tax		(128	)		8		(136	)
Net income		358			868		(510	)
Dividends and premiums on redemption of preferred and preference stock		—			2		(2	)
Earnings available for common stockholders	$	358		$	866	$	(508	)

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Consolidated Operating Revenues

Three Months Ended March 31, 2006 as Compared to March 31, 2005. Consolidated operating revenues for the three months ended March 31, 2006 decreased $2,127 million, compared to the same period in 2005. This change was driven primarily by:

• A $2,658 million decrease due to the deconsolidation of DEFS, effective July 1, 2005

Partially offsetting this decrease in revenues were:

• A $283 million increase at Natural Gas Transmission due to new Canadian assets, primarily the Empress System (approximately $145 million), recovery of higher natural gas commodity costs (approximately $118 million), resulting from higher natural gas prices passed through to customers without a mark-up at Union Gas Limited (Union Gas), and favorable Canadian dollar foreign exchange impacts (approximately $55 million), partially offset by lower gas usage due to unseasonably warmer weather (approximately $85 million)

• An approximate $110 million increase in Other related to the prior year impact of the realized and unrealized mark-to-market losses of Field Services’ hedges that had been recorded in operating revenues prior to the deconsolidation of DEFS, and

• A $63 million increase at International Energy due to higher energy prices in Latin America (approximately $44 million) and increased ownership and resulting consolidation of Aguaytia (approximately $20 million).

For a more detailed discussion of operating revenues, see the segment discussions that follow.

Consolidated Operating Expenses

Three Months Ended March 31, 2006 as Compared to March 31, 2005. Consolidated operating expenses for the three months ended March 31, 2006 decreased $2,224 million, compared to the same period in 2005. This change was driven primarily by:

• A $2,571 million decrease due to the deconsolidation of DEFS, effective July 1, 2005

Partially offsetting this decrease in expenses were:

• A $279 million increase at Natural Gas Transmission due to new Canadian assets, primarily the Empress System (approximately $131 million), recovery of higher natural gas commodity costs (approximately $118 million), resulting from high natural gas prices passed through to customers without a mark-up at Union Gas, Canadian dollar foreign exchange impacts (approximately $44 million), partially offset by lower gas usage due to unseasonably warmer weather (approximately $67 million), and

• A $38 million increase at International Energy primarily due to higher fuel prices and volumes in Latin America (approximately $18 million), and increased ownership and resulting consolidation of Aguaytia (approximately $13 million).

For a more detailed discussion of operating expenses, see the segment discussions that follow.

Consolidated Gains on Sales of Other Assets and Other, Net

Consolidated gains on sales of other assets and other, net for the three months ended March 31, 2006 increased $24 million, compared to the same period in 2005. The increase was due primarily to a $23 million gain on the settlement of a customer’s transportation contract at Natural Gas Transmission.

Consolidated Operating Income

Consolidated operating income for the three months ended March 31, 2006 increased $105 million, compared to the same period in 2005. Increased operating income was primarily driven by an approximate $230 million negative impact to operating income during the three months ended March 31, 2005 related to the

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discontinuance of certain cash flow hedges entered into to hedge Field Services’ commodity price risk. This favorable variance for the three months ended March 31, 2006 as compared to the same period in the prior year was partially offset by impacts of the deconsolidation of DEFS, effective July 1, 2005. Other drivers to operating income are discussed above.

For more detailed discussions, see the segment discussions that follow.

Consolidated Other Income and Expenses, net

Consolidated other income and expenses, net for the three months ended March 31, 2006 decreased $1,117 million, compared to the same period in 2005. The decrease was due primarily to the $1,239 million pre-tax gains recorded in 2005, associated with the sale of TEPPCO GP and Duke Energy’s limited partner interest in TEPPCO LP, as discussed above, partially offset by an increase of approximately $130 million in equity in earnings of unconsolidated affiliates primarily due to the deconsolidation of DEFS starting July 1, 2005.

Consolidated Interest Expense

Consolidated interest expense for the three months ended March 31, 2006 decreased $40 million, compared to the same period in 2005. This decrease was due primarily to the deconsolidation of DEFS.

Consolidated Minority Interest Expense

Consolidated minority interest expense for the three months ended March 31, 2006 decreased $405 million, compared to the same period in 2005. The decrease primarily resulted from the 2005 gain associated with the sale of TEPPCO GP and the impact of deconsolidation of DEFS, as discussed above.

Consolidated Income Tax Expense from Continuing Operations

Consolidated income tax expense from continuing operations for the three months ended March 31, 2006 decreased $193 million, compared to the same period in 2005. The decrease primarily resulted from lower earnings, due primarily to the 2005 gains associated with the sale of TEPPCO GP and Duke Energy’s limited partner interest in TEPPCO LP as discussed above. The effective tax rate was relatively flat for the first quarter 2006 (34.7%) compared to the same period in 2005 (34.4%).

Consolidated (Loss) Income from Discontinued Operations, net of tax

Consolidated (loss) income from discontinued operations, net of tax for the three months ended March 31, 2006 decreased $136 million, compared to the same period in 2005. The decrease primarily resulted from an approximate $100 million after-tax loss associated with certain contract terminations at DENA, an approximate $12 million after-tax loss associated with an allowance recorded against a receivable from Norsk Hydro, and a $21 million pre-tax gain related to DENA’s sale of its Grays Harbor facility in the first three months of 2005.

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.

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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 March 31,
	2006			2005
Franchised Electric	$	359		$	336
Natural Gas Transmission		438			411
Field Services (b)		144			919
International Energy		87			68
Crescent		42			52
Total reportable segment EBIT		1,070			1,786
Other		(85	)		(202	)
Total reportable segment and other EBIT		985			1,584
Interest expense		(250	)		(290	)
Interest income and other (a)		9			17
Consolidated earnings from continuing operations before income taxes	$	744		$	1,311

(a) Includes interest income, foreign currency transaction gains and losses, additional minority interest expense not allocated to the segment results and intersegment eliminations.

(b) In July 2005, Duke Energy completed the previously announced agreement with ConocoPhillips to reduce Duke Energy’s ownership interest in DEFS from 69.7% to 50%. Field Services segment data includes DEFS as a consolidated entity for the three month period ended March 31, 2005 and as an equity method investment for the three months ended March 31, 2006.

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

Franchised Electric

	Three Months Ended March 31,
(in millions, except where noted)	2006		2005		Increase (Decrease)
Operating revenues	$	1,292	$	1,265	$	27
Operating expenses		938		931		7
Gains on sales of other assets and other, net		—		1		(1	)
Operating income		354		335		19
Other income and expenses, net		5		1		4
EBIT	$	359	$	336	$	23
Sales, Gigawatt-hours (GWh)		20,580		21,163		(583	)

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The following table shows the percent changes in GWh sales and average number of customers for Franchised Electric.

Increase (decrease) over prior year	Three Months Ended March 31, 2006
Residential sales a	(4.5	)%
General service sales a	(1.2	)%
Industrial sales a	(3.5	)%
Wholesale sales	(9.8	)%
Total Franchised Electric sales b	(2.8	)%
Average number of customers	1.8	%

^a Major components of Franchised Electric’s retail sales.

^b Consists of all components of Franchised Electric’s sales, including retail sales, and wholesale sales to incorporated municipalities and to public and private utilities and power marketers.

Three Months Ended March 31, 2006 as Compared to March 31, 2005

Operating Revenues. The increase was driven primarily by:

• A $25 million increase in fuel revenues driven by increased fuel rates for retail customers due primarily to increased coal costs. The delivered cost of coal in 2006 is approximately $11 per ton higher than the same period in 2005, representing a 20% increase.

• A $13 million increase in wholesale power revenues, due to higher market prices. Gross margin increased by $9 per MWh, an increase of approximately 60%, due to higher average market rates for power resulting from an increase in natural gas prices in 2006. The higher market prices are offsetting decreased sales volumes of (9.8)% due primarily to mild weather.

• A $12 million increase related to demand from retail customers, due primarily to continued growth in the number of residential and general service customers in Franchised Electric’s service territory. The number of customers in 2006 has increased by approximately 41,000 compared to 2005, partially offset by

• A $24 million decrease in GWh sales to retail customers due to mild winter weather. Weather statistics in 2006 for heating degree days were approximately 8% below normal in first quarter compared to 1% above normal during the same period in 2005.

Operating Expenses. The increase was driven primarily by:

• A $32 million increase in fuel expenses, due primarily to higher coal costs. Generation fueled by coal accounted for at least 45% of total generation during the first quarter for both 2006 and 2005 and the delivered cost of coal in 2006 is approximately $11 per ton higher than the same period in 2005.

• A $7 million increase in operating and maintenance expenses, primarily related to higher non-outage maintenance costs at generating plants and increased storm charges, partially offset by

• A $23 million decrease in regulatory amortization expenses, due primarily to decreased amortization of compliance costs related to clean air legislation passed by the state of North Carolina. The legislation provides for significant flexibility in the amount of annual amortization 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 by December 31, 2007. Franchised Electric’s amortization expense related to this clean air legislation totals approximately $700 million from inception, with approximately $63 million recorded for the first quarter 2006 and $85 million recorded for the first quarter 2005.

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• An $8 million decrease in purchased power expense, due primarily to milder weather, which resulted in lower retail demand, coupled with good generation availability.

EBIT. EBIT for the three months ended March 31, 2006 increased compared to the same period in 2005 primarily due to strong wholesale sales results, customer growth and lower regulatory amortization. This increase in segment EBIT was partially offset by mild winter weather.

Natural Gas Transmission

	Three Months Ended March 31,
(in millions, except where noted)	2006		2005		Increase (Decrease)
Operating revenues	$	1,474	$	1,191	$	283
Operating expenses		1,068		789		279
Gains on sales of other assets and other, net		29		2		27
Operating income		435		404		31
Other income and expenses, net		12		16		(4	)
Minority interest expense		9		9		—
EBIT	$	438	$	411	$	27
Proportional throughput, TBtu a		963		1,056		(93	)

a Trillion British thermal units. Revenues are not significantly impacted by pipeline throughput fluctuations since revenues are primarily composed of demand charges.

Three Months Ended March 31, 2006 as Compared to March 31, 2005

Operating Revenues. The increase was driven primarily by:

• A $166 million increase due to new Canadian assets, primarily the Empress System, U.S. business expansion and higher processing revenues as a result of commodity prices

• A $118 million increase from recovery of higher natural gas commodity costs, resulting from higher natural gas prices passed through to customers without a mark-up at Union Gas. This revenue increase is offset in expenses.

• A $55 million increase due to foreign exchange rates favorably impacting revenues from the Canadian operations as a result of the strengthening Canadian dollar (partially offset by currency impacts to expenses)

• A $4 million increase from completed and operational pipeline expansion projects in the United States, partially offset by

• An $85 million decrease in gas distribution revenues at Union Gas primarily resulting from lower gas usage due to unseasonably warmer weather.

Operating Expenses. The increase was driven primarily by:

• A $159 million increase due to new Canadian assets, primarily gas purchase cost associated with the Empress System, U.S. expansion project provisions in 2006 and increased transmission and storage operation expenses

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• A $118 million increase related to increased natural gas prices at Union Gas. This amount is offset in revenues

• A $44 million increase caused by foreign exchange impacts (offset by currency impacts to revenues, as discussed above), partially offset by

• A $67 million decrease in gas purchase costs, primarily resulting from lower gas usage due to unseasonably warmer weather.

Gain on sale of other assets and other, net. The increase was driven primarily by a $23 million gain on the settlement of a customer’s transportation contract and a $5 million gain on the sale of Stone Mountain assets.

Other Income and expenses, net. The decrease was driven primarily by a $5 million construction fee received from an affiliate as a result of the successful completion of the Gulfstream Natural Gas System LLC (Gulfstream), 50% owned by Duke Energy, Phase II project in 2005.

EBIT. The increase in EBIT was due primarily to the contract termination gain, U.S. business operations and strengthening Canadian currency, partially offset by the 2005 Gulfstream success fee and warmer weather at Union Gas.

Field Services

	Three Months Ended March 31,
(in millions, except where noted)	2006			2005		Increase (Decrease)
Operating revenues	$	—		$	2,658	$	(2,658	)
Operating expenses		2			2,573		(2,571	)
Gains on sales of other assets and other, net		—			2		(2	)
Operating (loss) income		(2	)		87		(89	)
Equity in earnings of unconsolidated affiliates (a)		146			—		146
Other income and expenses, net		—			1,251		(1,251	)
Minority interest expense		—			419		(419	)
EBIT (a)	$	144		$	919	$	(775	)
Natural gas gathered and processed/transported, TBtu/d (b)		6.9			6.7		0.2
NGL production, MBbl/d (c)		357			360		(3	)
Average natural gas price per MMBtu (d),(e)	$	8.98		$	6.27	$	2.71
Average NGL price per gallon (e)	$	0.89		$	0.73	$	0.16

^a Includes Duke Energy’s 50% equity in earnings of DEFS net income subsequent to the deconsolidation of DEFS effective July 1, 2005. Results of DEFS for the three months ended March 31, 2005 are presented on a consolidated basis.

^b Trillion British thermal units per day

^c Thousand barrels per day

^d Million British thermal units. Average price based on NYMEX Henry Hub

^e Does not reflect results of commodity hedges.

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In July 2005, Duke Energy completed the transfer of a 19.7% interest in DEFS to ConocoPhillips, Duke Energy’s co-equity owner in DEFS, which reduced Duke Energy’s ownership interest in DEFS from 69.7% to 50% (the DEFS disposition transaction) and resulted in Duke Energy and ConocoPhillips becoming equal 50% owners in DEFS. As a result of the DEFS disposition transaction, Duke Energy deconsolidated its investment in DEFS and subsequently has accounted for DEFS as an investment utilizing the equity method of accounting.

Three months ended March 31, 2006 as Compared to March 31, 2005

Operating Revenues. The decrease was due to the DEFS disposition transaction and subsequent deconsolidation of DEFS.

Operating Expenses. The decrease was due to the DEFS disposition transaction and subsequent deconsolidation of DEFS. Operating expenses for the three months ended March 31, 2005 were impacted by approximately $120 million of losses recognized due to the reclassification of pre-tax unrealized losses in AOCI as a result of the discontinuance of certain cash flow hedges entered into to hedge Field Services’ commodity price risk, which were previously accounted for as cash flow hedges.

Equity in Earnings of Unconsolidated Affiliates. The increase is due to Duke Energy’s 50% of equity in earnings of DEFS’ net income for the three months ended March 31, 2006. DEFS’ earnings during the three months ended March 31, 2006 have continued to be favorably impacted by increased commodity prices as compared to the prior period as well as a gain on sale of assets to an unrelated third party during the three months ended March 31, 2006 (of which Duke Energy’s 50% share was approximately $14 million). These increases have been partially offset by higher operating costs and pipeline integrity work for the three months ended March 31, 2006.

Other Income, net of expenses. The decrease is due to the DEFS disposition transaction and subsequent deconsolidation of DEFS. During the three months ended March 31, 2005, DEFS had a pre-tax gain on the sale of its wholly-owned subsidiary, TEPPCO GP, the general partner of TEPPCO LP of $1.1 billion, and Duke Energy had a pre-tax gain on the sale of its limited partner interest in TEPPCO LP of approximately $97 million. TEPPCO GP and Duke Energy’s limited partner interest in TEPPCO LP were each sold to Enterprise GP Holdings LP, an unrelated third party.

Minority Interest Expense. The decrease was due to the DEFS disposition transaction and subsequent deconsolidation of DEFS. Minority interest expense for the three months ended March 31, 2005 was due primarily to the gain on the sale of TEPPCO GP to Enterprise GP Holdings LP for approximately $1.1 billion, as discussed above.

EBIT. The decrease in EBIT resulted primarily from the gain on sale of TEPPCO GP and Duke Energy’s limited partner interest in TEPPCO LP during the three months ended March 31, 2005 and the DEFS disposition transaction, which reduced Duke Energy’s ownership interest in DEFS from 69.7% to 50%. These decreases were partially offset by increased commodity prices for the three months ended March 31, 2006 as compared to the prior period, a gain on sale of assets to an unrelated third party, and charges related to Duke Energy’s discontinuance of certain cash flow hedges entered into to hedge Field Services’ commodity price risk during the three months ended March 31, 2005. As a result of the discontinuance of hedge accounting treatment, approximately $120 million of pre-tax unrealized losses in AOCI related to these contracts were recognized by Duke Energy in the first three months of 2005.

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Supplemental Data

Below is supplemental information for DEFS operating results for the three months ended March 31, 2006:

(in millions)	Three Months Ended March 31, 2006
Operating revenues	$	3,309
Operating expenses		2,994
Operating income		315
Other income, net of expenses		8
Interest expense, net		31
Income tax expense		1
Net income	$	291

International Energy

	Three Months Ended March 31,
(in millions, except where noted)	2006		2005		Increase (Decrease)
Operating revenues	$	231	$	168	$	63
Operating expenses		157		119		38
Operating income		74		49		25
Other income and expenses, net		20		21		(1	)
Minority interest expense		7		2		5
EBIT	$	87	$	68	$	19
Sales, GWh		4,998		4,535		463
Proportional megawatt capacity in operation		3,988		4,139		(151	)

Three Months Ended March 31, 2006 as Compared to March 31, 2005

Operating Revenues. The increase was primarily driven by:

• A $21 million increase in El Salvador due to higher energy prices and a favorable change in regulatory price bid methodology

• A $20 million increase in Peru due to increased ownership and resulting consolidation of Aguaytia (See Note 9 to the Consolidated Financial Statements, “Acquisitions and Dispositions”)

• A $14 million increase in Brazil mainly due to favorable exchange rates and higher average energy prices, and

• A $9 million increase in Argentina primarily due to higher energy prices and slightly increased generation.

Operating Expenses. The increase was primarily driven by:

• A $18 million increase in El Salvador due primarily to higher fuel prices and increased fuel volumes as a result of increased generation

• A $13 million increase in Peru due to increased ownership and resulting consolidation of Aguaytia (See Note 9 to the Consolidated Financial Statements, “Acquisitions and Dispositions”), and

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• A $6 million increase in Brazil mainly due to unfavorable exchange rates, partially offset by lower general and administrative expense.

Minority Interest Expense. The increase was primarily driven by increase in Peru due to increased ownership and resulting consolidation of Aguaytia (See Note 9 to the Consolidated Financial Statements, “Acquisitions and Dispositions”).

EBIT. The increase was due primarily to higher energy prices in El Salvador and Argentina and favorable exchange rates in Brazil.

Crescent

	Three Months Ended March 31,
(in millions)	2006		2005		Increase (Decrease)
Operating revenues	$	71	$	64	$	7
Operating expenses		61		51		10
Gains on sales of investments in commercial and multi-family real estate		26		42		(16	)
Operating income		36		55		(19	)
Other income and expenses, net		8		—		8
Minority interest expense		2		3		(1	)
EBIT	$	42	$	52	$	(10	)

Three Months Ended March 31, 2006 as Compared to March 31, 2005

Operating Revenues. The increase was driven primarily by an $8 million increase in residential developed lot sales due to increased sales at the Palmetto Bluff project in Bluffton, South Carolina.

Operating Expenses. The increase was driven primarily by a $4 million increase in the cost of residential developed lot sales associated with the increased developed lot sales noted above along with a $4 million increase in corporate administrative expense due to increased incentive compensation accruals tied to budgeted operating results.

Gains on Sales of Investments in Commercial and Multi-Family Real Estate. The decrease was driven primarily by a $16 million reduction in legacy land sales due to several large tract sales closed in the first quarter of 2005.

Other Income, net of expenses. The increase is primarily due to approximately $5 million of equity earnings from a new residential joint venture in Austin, Texas along with an approximate $2 million gain from the sale of an interest in a portfolio of commercial office buildings.

EBIT. As discussed above, the decrease in EBIT was driven primarily by the decrease in legacy land sales in the first quarter of 2006 as compared to the first quarter of 2005.

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Other

	Three Months Ended March 31,
(in millions)	2006			2005			Increase (Decrease)
Operating revenues	$	162		$	47		$	115
Operating expenses		241			256			(15	)
Gains on sales of other assets and other, net		5			3			2
Operating loss		(74	)		(206	)		132
Other income and expenses, net		(15	)		3			(18	)
Minority interest benefit		(4	)		(1	)		(3	)
EBIT	$	(85	)	$	(202	)	$	117
Actual plant production, GWh a		16			190			(174	)
Net proportional megawatt capacity in operation a		3,600			3,600			—

a DENA continuing operations

During the third quarter of 2005, the Board of Directors of Duke Energy authorized and directed management to execute the sale or disposition of substantially all of DENA’s remaining assets and contracts outside the Midwestern United States and certain contractual positions related to the Midwestern assets. As a result of this exit plan, DENA’s continuing operations (which primarily include the operations of the Midwestern generation assets, DENA’s remaining Southeastern operations related to the assets which were disposed of in 2004, the remaining operations of DETM, and certain general and administrative costs) are classified in Other.

Three Months Ended March 31, 2006 as Compared to March 31, 2005

        Operating Revenues. The increase was driven primarily by an approximate $110 million increase as a result of the prior year impact of realized and unrealized mark-to-market losses on certain discontinued cash flow hedges originally entered into to hedge Field Services’ commodity price risk which were accounted for as Operating Revenues prior to the deconsolidation of DEFS, effective July 1, 2005.

Operating Expenses. The decrease was driven primarily by:

• A $22 million decrease due primarily to lower charges for liabilities associated with mutual insurance companies primarily due to the prior year $28 million mutual insurance liability adjustment, which was a correction of an immaterial accounting error, partially offset by

• A $5 million increase associated with merger costs to achieve in 2006.

Other Income and Expenses, net. The decrease was driven primarily by a $24 million net loss resulting from realized and unrealized mark-to-market impacts in 2006 of certain discontinued cash flow hedges originally entered into to hedge Field Services’ commodity price risk which are recorded in Other income and expenses, net on the Consolidated Statements of Operations subsequent to the deconsolidation of DEFS, effective July 1, 2005.

EBIT. The increase was due primarily to the realized and unrealized mark-to-market impact of certain discontinued cash flow hedges originally entered into to hedge Field Services’ commodity price risk and lower charges for liabilities associated with mutual insurance companies. Additionally, EBIT was favorably impacted by approximately $10 million due to stronger period over period results at DENA’s continuing operations.

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LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows

Net cash provided by operating activities decreased $157 million for the three months ended March 31, 2006 compared to the same period in 2005. This change was driven primarily by:

• The settlement of the payable to Barclays (approximately $600 million) in 2006, offset by

• Collateral received by Duke Energy (approximately $540 million) during 2006 from Barclays

(For additional information on the above, see Note 12 to the Consolidated Financial Statements, “Discontinued Operations and Assets Held for Sale”)

Investing Cash Flows

Cash flows from investing activities decreased $1,039 million to net cash used in investing activities of $127 million for the three months ended March 31, 2006 from net cash provided by investing activities of $912 million for the same period in 2005. This change was driven primarily by:

• Approximately $1.2 billion in proceeds received in 2005 from the sale of TEPPCO GP and Duke Energy’s interest in TEPPCO LP

• An approximate $200 million increase in 2006 capital and investment expenditures, primarily due to an increase in investments in real estate at Crescent of approximately $120 million and a $71 million purchase of the remaining interest in the Bridgeport facility at DENA, partially offset by

• Approximately $370 million in net purchases (net of sales and maturities) of marketable securities at DEFS in 2005, which was deconsolidated effective July 1, 2005.

Financing Cash Flows and Liquidity

Net cash used in financing activities decreased $1,001 million for the three months ended March 31, 2006, compared to the same period in 2005. This change was driven primarily by:

• A $765 million decrease in share repurchases under the accelerated share repurchase plan due to the repurchase of 30 million shares of common stock for approximately $834 million, including approximately $10 million in commissions and other fees during the three months ended March 31, 2005, compared to the repurchase of 2.4 million shares for approximately $69 million during the three months ended March 31, 2006.

• An approximate $380 million decrease in redemptions of Long-term debt in 2006, primarily at Franchised Electric and DENA, partially offset by

• A $116 million decrease in net proceeds from the issuance of notes payable and commercial paper in 2006

Duke Energy previously announced plans to execute up to approximately $2.5 billion in common stock repurchases over a three year period. On May 9, 2005, in connection with the announcement of the merger with Cinergy, Duke Energy suspended additional repurchases, pending further assessment. At the time of suspension, Duke Energy had repurchased approximately $933 million of common stock. In the first quarter of 2006, as a result of the March 10, 2006 shareholder approval of the merger, Duke Energy’s Board of Directors authorized the repurchase of up to an additional $1 billion of common stock under the previously announced share repurchase plan. During the quarter ended March 31, 2006, Duke Energy repurchased 2.4 million shares for total

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consideration of approximately $69 million. The repurchases and corresponding commissions and other fees were recorded in Common Stockholder’s Equity as a reduction in common stock. Through March 31, 2006, Duke Energy has repurchased 35 million shares of common stock for approximately $1 billion.

In April 2006, Duke Energy repurchased approximately 4 million shares of common stock for total consideration of approximately $118 million.

Significant Financing Activities. During the three months ended March 31, 2006, Duke Energy’s consolidated credit capacity decreased by $200 million due to the termination of a $100 million one-year bi-lateral credit facility and a $100 million 364-day bi-lateral credit facility.

In December 2004, Duke Energy reached an agreement to sell its partially completed Grays Harbor power generation facility to an affiliate of Invenergy LLC. In 2004, Duke Energy terminated its capital lease with the dedicated pipeline which would have transported natural gas to Grays Harbor. As a result of this termination, approximately $94 million was paid by Duke Energy in January 2005.

On March 1, 2005, redemption notices were sent to the bondholders of the $100 million PanEnergy 8.625% bonds due in 2025. These bonds were redeemed on April 15, 2005 at a redemption price of 104.03 or approximately $104 million.

During the three-month period ended March 31, 2005, Duke Energy increased the portion of outstanding commercial paper balances classified as long-term debt from $150 million to $300 million. This non-current classification is due to the existence of long-term credit facilities which back-stop these commercial paper balances along with Duke Energy’s intent to refinance such balances on a long-term basis.

Available Credit Facilities and 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 March 31, 2006, Duke Energy was in compliance with those covenants. 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.

Credit Ratings. The credit ratings of Duke Energy, Duke Capital LLC (Duke Capital) and its subsidiaries were unchanged through March 31, 2006 as disclosed in “Management’s Discussion and Analysis of Results of Operations and Financial Condition – Liquidity and Capital Resources” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2005.

During March 2006, Moody’s Investor’s Service (Moody’s) placed the ratings of Duke Energy and Duke Capital under review for possible upgrade. During April 2006, Moody’s concluded their review and upgraded the credit ratings of Duke Energy (now Duke Power Company LLC), Duke Capital and Texas Eastern Transmission, LP one ratings level each to their respective ratings disclosed in the table below. Moody’s also assigned an issuer rating to the new Duke Energy holding company as shown in the table below. Moody’s concluded their ratings action with a positive ratings outlook at Duke Energy and Duke Power Company LLC and a stable outlook for Duke Capital and Texas Eastern Transmission, LP.

During April 2006, S&P also made ratings changes subsequent to the consummation of Duke Energy’s previously announced merger with Cinergy. S&P assigned new credit ratings to Duke Power and changed the credit rating for Duke Capital up one ratings level as disclosed in the table below. S&P concluded its actions placing Duke Energy and all of its subsidiaries on stable outlook.

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The following table summarizes the May 1, 2006 credit ratings from the agencies retained by Duke Energy to rate its securities, its principal funding subsidiaries and its trading and marketing subsidiary DETM, excluding Cinergy and its principal subsidiaries.

Credit Ratings Summary as of May 1, 2006

	Standard and Poor’s	Moody’s Investor Service	Dominion Bond Rating Service
Duke Energy (a)	BBB	Baa2	Not applicable
Duke Power Company LLC (b)	BBB	A3	Not applicable
Duke Capital LLC (b)	BBB	Baa2	Not applicable
Texas Eastern Transmission, LP (b)	BBB	Baa1	Not applicable
Westcoast Energy Inc. (b)	BBB	Not applicable	A(low)
Union Gas (b)	BBB	Not applicable	A
Maritimes & Northeast Pipeline, LLC (c)	A	A2	A
Maritimes & Northeast Pipeline, LP (c)	A	A2	A
Duke Energy Trading and Marketing, LLC (d)	BBB-	Not applicable	Not applicable

^(a) Represents corporate credit rating and issuer rating for S&P and Moody’s respectively

^(b) Represents senior unsecured credit rating

^(c) Represents senior secured credit rating

^(d) Represents corporate credit rating

Duke Energy’s credit ratings are dependent on, among other factors, the ability to generate sufficient cash to fund capital and investment expenditures and dividends, and a disciplined execution of the share repurchase program, 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 impacted.

Duke Energy and its subsidiaries are required to post collateral under derivatives and other marketing contracts. Typically, the amount of the collateral is dependent upon Duke Energy’s economic position at points in time during the life of a contract and the credit rating of the subsidiary (or its guarantor, if applicable) obligated under the collateral agreement. Business activity by DENA generates the majority of Duke Energy’s collateral requirements. DENA conducts business throughout the United States and Canada through Duke Energy North America LLC and its 100% owned affiliates Duke Energy Marketing America, LLC (DEMA) and Duke Energy Marketing Canada Corp (DEMC). DENA also participates in DETM. During the third quarter of 2005, the Board of Directors of Duke Energy authorized and directed management to execute the sale or disposition of substantially all of DENA’s remaining assets and contracts outside the Midwestern United States.

On November 18, 2005, Duke Energy announced it signed an agreement to transfer substantially all of the DENA portfolio of derivatives contracts to Barclays. Under the agreement, Barclays acquired substantially all of DENA’s outstanding gas and power derivatives contracts which essentially eliminated Duke Energy’s credit, collateral, market and legal risk associated with DENA’s derivative trading positions effective on the date of signing. Substantially all of the underlying contracts have either already transferred (approximately 95% of portfolio) or will transfer to Barclays over a period of months.

A reduction in DETM’s credit rating to below investment grade as of March 31, 2006 would have resulted in Duke Capital posting additional collateral of up to approximately $90 million. Additionally, in the event of a reduction in DETM’s credit rating to below investment grade, collateral agreements may require the segregation

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of cash held as collateral to be placed in escrow. As of March 31, 2006, Duke Capital would have been required to escrow approximately $130 million of such cash collateral held if DETM’s credit rating had been reduced to below investment grade. Amounts above reflect Duke Energy’s 60% ownership of DETM and the allocation of collateral to DENA for contracts executed by DETM on its behalf.

A reduction in the credit rating of Duke Capital to below investment grade as of March 31, 2006 would have resulted in Duke Capital posting additional collateral of up to approximately $330 million. Additionally, in the event of a reduction in Duke Capital’s credit rating to below investment grade, certain interest rate and foreign exchange swap agreements may require settlement payments due to termination of the agreements. As of March 31, 2006, Duke Capital could have been required to pay an immaterial amount in such settlement payments if Duke Capital’s credit rating had been reduced to below investment grade. Duke Capital would fund any additional collateral requirements through a combination of cash on hand and the use of credit facilities.

A majority of the additional collateral requirements stated above relate to the contracts that are in process of being transferred to Barclays. Any additional posting requirements, for these contracts, as a result of downgrade of DETM or Duke Capital rating below investment grade would be reimbursed by Barclays.

If credit ratings for Duke Energy or its affiliates fall below investment grade there is likely to be a negative impact on its working capital and terms of trade that is not possible to quantify fully in addition to the posting of additional collateral and segregation of cash described above.

Other Financing Matters. As of March 31, 2006, Duke Energy and its subsidiaries had effective SEC shelf registrations for up to $1,542 million in gross proceeds from debt and other securities. Additionally, as of March 31, 2006, Duke Energy had access to 200 million Canadian dollars (approximately U.S. $172 million) available under the Canadian shelf registrations for issuances in the Canadian market. In April 2006, an additional 500 million Canadian dollars (approximately U.S. $430 million) was added to the amount available under Canadian shelf registrations. A shelf registration is effective in Canada for a 25-month period. The 200 million and 500 million Canadian dollars available under Canadian shelf registrations expire in July 2006 and May 2008, respectively.

Off-Balance Sheet Arrangements

During the first quarter of 2006, 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 Duke Energy’s Annual Report on Form 10-K for the year-ended December 31, 2005.

Contractual Obligations

Duke Energy enters into contracts that require cash payment at specified periods, based on specified minimum quantities and prices. During the first quarter of 2006, there were no material changes in Duke Energy’s contractual obligations. For an 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 Results of Operations and Financial Condition” in Duke Energy’s Annual Report on Form 10-K for the year-ended December 31, 2005.

OTHER ISSUES

Merger with Cinergy. On April 3, 2006, the previously announced merger between Duke Energy and Cinergy was consummated. In accordance with the terms of the merger, each outstanding share of Cinergy common stock was converted into 1.56 shares of common stock of newly created holding company (which was

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renamed Duke Energy Corporation), which resulted in the issuance of approximately 313 million shares. Additionally, each common share of Old Duke Energy was converted into one share of the holding company. The merger will be accounted for under the purchase method of accounting with Duke Energy treated as the acquirer for accounting purposes. (For additional information on the merger, see Note 1 to the Consolidated Financial Statements, “Basis of Presentation.”)

(For additional information on other issues related to Duke Energy, see Note 15 to the Consolidated Financial Statements, “Regulatory Matters.”)

New Accounting Standards

The following new accounting standards have been issued, but have not yet been adopted by Duke Energy as of March 31, 2006:

        Statement of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. This Statement is effective January 1, 2007. Duke Energy does not anticipate the adoption of SFAS No. 155 will have any material impact on its consolidated results of operations, cash flows or financial position.

SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140” In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.” This Statement requires recognition of a servicing asset or liability when an entity enters into arrangements to service financial instruments in certain situations. Such servicing assets or servicing liabilities are required to be initially measured at fair value, if practicable. SFAS No. 156 also allows an entity to subsequently measure its servicing assets or servicing liabilities using either an amortization method or a fair value method. This Statement is effective January 1, 2007. Duke Energy does not anticipate the adoption of SFAS No. 156 will have any material impact on its consolidated results of operations, cash flows or financial position.

FASB Staff Position (FSP) No. FIN 46 (R)-6, “Determining the Variability to Be Considered In Applying Interpretation No. 46(R)” In April 2006, the FASB staff issued FSP No. FIN 46 (R)-6 to address how to determine the variability to be considered in applying FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities. The variability that is considered in applying Interpretation 46(R) affects the determination of whether the entity is a variable interest entity, which interests are variable interests in the entity, and which party, if any, is the primary beneficiary of the VIE. The variability affects the calculation of

expected losses and expected residual returns. This Statement is effective July 1, 2006. Duke Energy does not anticipate the adoption of FSP No. FIN 46 (R)-6 will have any material impact of its consolidated results of operations, cash flows or financial position.

FSP No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event” In February 2006, the FASB staff issued FSP No. 123(R)-4 to address the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. The guidance amends SFAS 123(R). FSP 123(R)-4 provides that cash settlement features that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not require classifying the option or similar instrument as a liability until it becomes probable that the event will occur. FSP 123(R)-4 applies only to

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options or similar instruments issued as part of employee compensation arrangements. The guidance in FSP 123(R)-4 is effective for Duke Energy as of April 1, 2006. Duke Energy adopted SFAS 123(R) as of January 1, 2006 (see Footnote 4). The adoption of FSP No. FAS 123(R)-4 did not have a material impact on its consolidated statement of operations, cash flows or financial position.

Subsequent Events

On April 3, 2006, Duke Energy consummated the previously announced merger with Cinergy. See Note 1 to the Consolidated Financial Statements, “Basis of Presentation,” Note 9 to the Consolidated Financial Statements, “Acquisitions and Dispositions,” and Note 15 to the Consolidated Financial Statements, “Regulatory Matters,” for additional information.

For information on subsequent events related to basis of presentation, earnings per share, common stock, debt and credit facilities, acquisitions and dispositions, discontinued operations and assets held for sale, business segments, regulatory matters, and related party transactions see Notes 1, 2, 3, 6, 9, 12, 13, 15 and 18 to the Consolidated Financial Statements, respectively.

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, 2005.

Commodity Price Risk

Duke Energy is exposed to the impact of market fluctuations in the prices of natural gas, electricity, NGLs and other energy-related products marketed and purchased as a result of its ownership of energy related assets, remaining proprietary trading contracts, and interests in structured contracts classified as undesignated. Duke Energy employs established policies and procedures to manage its risks associated with these market fluctuations using various commodity derivatives, including forward contracts, futures, swaps and options.

Duke Energy’s largest commodity exposure is due to market price fluctuations of NGLs primarily in the Field Services segment and, to a lesser extent, in the Natural Gas Transmission segment. Based on a sensitivity analysis as of March 31, 2006, it was estimated that price changes of fifteen cents per gallon and sixteen cents per gallon in the price of NGLs (net of related hedges and an equivalent price change in crude oil) would have a corresponding effect on pre-tax income of approximately $120 million and $130 million, respectively, over the next 12 months. Comparatively, a fifteen cent price change sensitivity analysis as of December 31, 2005 would have impacted pre-tax income by approximately $105 million over the next 12 months. The increase is due primarily to the NGL production after December 31, 2005 being included in the March 31, 2006 sensitivity which is currently not hedged.

Normal Purchases and Normal Sales. During 2005, the Board of Directors of Duke Energy authorized and directed management to execute the sale or disposition of substantially all of DENA’s remaining physical and commercial assets outside the Midwestern United States and certain contractual positions related to the Midwestern assets. As a result, Duke Energy recognized a pre-tax loss of approximately $1.9 billion in 2005 for the disqualification of its power and gas forward sales contracts previously designated under the normal purchases normal sales exception. This loss is partially offset by the recognition of a pre-tax gain of approximately $1.2 billion for the discontinuance of hedge accounting for natural gas and power cash flow hedges. Duke Energy plans to retain the Midwestern generation assets of DENA, representing approximately 3,600 megawatts of power generation, and combined with Cinergy’s commercial operations, upon completion of the merger with Cinergy in the second quarter 2006, will provide a sustainable business model for these assets in the region (see Note 9 to the Consolidated Financial Statements, “Acquisitions and Dispositions,” for further details on the anticipated Cinergy merger).

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Trading and Undesignated Contracts. The risk in the mark-to-market portfolio is measured and monitored on a daily basis utilizing a Value-at-Risk model to determine the potential one-day favorable or unfavorable Daily Earnings at Risk (DER) as described below. DER is monitored daily in comparison to established thresholds. Other measures are also used to limit and monitor risk in the trading portfolio on monthly and annual bases. These measures include limits on the nominal size of positions and periodic loss limits.

DER computations are based on historical simulation, which uses price movements over an eleven day period. The historical simulation emphasizes the most recent market activity, which is considered the most relevant predictor of immediate future market movements for natural gas, electricity and other energy-related products. DER computations use several key assumptions, including a 95% confidence level for the resultant price movement and the holding period specified for the calculation. Duke Energy’s DER amounts for commodity derivatives recorded using the mark-to-market model of accounting are shown in the following table.

Daily Earnings at Risk

	March 31, 2006 One-Day Impact on Pre-tax Income from Continuing and Discontinued Operations for 2006(a)		Estimated Average One- Day Impact on Pre-tax Income from Continuing and Discontinued Operations for First Quarter 2006(a)		Estimated Average One- Day Impact on Pre-tax Income from Continuing and Discontinued Operations for 2005(a)		High One-Day Impact on Pre-tax Income from Continuing and Discontinued Operations for First Quarter 2006(a)		Low One-Day Impact on Pre-tax Income from Continuing and Discontinued Operations for First Quarter 2006(a)
	(in millions)
Calculated DER	$	1	$	6	$	10	$	13	$	1

(a) DER measures the mark-to-market portfolio’s impact on earnings. While this calculation includes both trading and undesignated contracts, the trading portion, as defined by EITF Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and for Contracts Involved in Energy Trading and Risk Management Activities,” is not material.

The DER figures above do not include the hedges which were de-designated as a result of the transfer of 19.7% of Duke Energy’s interest in DEFS to ConocoPhillips (see Note 14 to the Consolidated Financial Statements, “Risk Management Instruments”). The calculated consolidated DER at March 31, 2006 consists of approximately $1 million related to discontinued operations and less than a million related to continuing operations. DER has decreased since December 31, 2005 due to the continued wind down of DENA. For the second quarter 2006, Duke Energy’s commodity price risk disclosures will include Cinergy.

Credit Risk

Credit risk represents the loss that Duke Energy would incur if a counterparty fails to perform under its contractual obligations. To reduce credit exposure, Duke Energy seeks to enter into payment netting agreements with counterparties that permit Duke Energy to offset receivables and payables with such counterparties. Duke Energy attempts to further reduce credit risk with certain counterparties by entering into agreements that enable Duke Energy to obtain collateral or to terminate or reset the terms of transactions after specified time periods or upon the occurrence of credit-related events. Duke Energy may, at times, use credit derivatives or other structures and techniques to provide for third-party credit enhancement of Duke Energy’s counterparties’ obligations.

Duke Energy’s principal customers for power and natural gas marketing and transportation services are industrial end-users, marketers, local distribution companies and utilities located throughout the U.S., Canada and Latin America. Duke Energy has concentrations of receivables from natural gas and electric utilities and

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their affiliates, as well as industrial customers and marketers throughout these regions. These concentrations of customers may affect Duke Energy’s overall credit risk in that risk factors can negatively impact the credit quality of the entire sector. Where exposed to credit risk, Duke Energy analyzes the counterparties’ financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of those limits on an ongoing basis.

In 1999, the Industrial Development Corp of the City of Edinburg, Texas (IDC) issued approximately $100 million in bonds to purchase equipment for lease to Duke Hidalgo (Hidalgo), a subsidiary of Duke Capital. Duke Capital unconditionally and irrevocably guaranteed the lease payments of Hidalgo to IDC through 2028. In 2000, Hidalgo was sold to Calpine Corporation and Duke Capital remained obligated under the lease guaranty. In January 2006, Hidalgo and its subsidiaries filed for bankruptcy protection in connection with the previous bankruptcy filing by its parent, Calpine Corporation in December 2005. Gross exposure under the guarantee obligation as of March 31, 2006 is approximately $200 million, which includes principal and interest. Duke Energy does not believe a loss under the guarantee obligation is probable as of March 31, 2006, but continues to evaluate the situation. Therefore, no reserves have been recorded for any contingent loss as of March 31, 2006. No demands for payment of principal or interest have been made under the guarantee. If future losses are incurred under the guarantee, Duke Capital has certain rights which should allow it to mitigate such loss.

The following table represents Duke Energy’s distribution of unsecured credit exposure with the largest 30 enterprise credit exposures at March 31, 2006. These credit exposures are aggregated by ultimate parent company, include on and off balance sheet exposures, are presented net of collateral, and take into account contractual netting rights.

Distribution of Largest 30 Enterprise Credit Exposures

As of March 31, 2006

	% of Total
Investment Grade—Externally Rated	75	%
Non-Investment Grade—Externally Rated	5	%
Investment Grade—Internally Rated	15	%
Non-Investment Grade—Internally Rated	5	%
Total	100	%

“Externally Rated” represents enterprise relationships that have published ratings from at least one major credit rating agency. “Internally Rated” represents those relationships which have no rating by a major credit rating agency. For those relationships, Duke Energy utilizes appropriate rating methodologies and credit scoring models to develop a public rating equivalent. The total of the unsecured credit exposure included in the table above represents approximately 56% of the gross fair value of Duke Energy’s Receivables and Unrealized Gains on Mark-to-Market and Hedging Transactions on the Consolidated Balance Sheet at March 31, 2006.

Duke Energy had no net exposure to any one customer that represented greater than 10% of the gross fair value of trade accounts receivable, energy trading assets and derivative assets at March 31, 2006. Based on Duke Energy’s policies for managing credit risk, its exposures and its credit and other reserves, Duke Energy does not anticipate a materially adverse effect on its financial position or results of operations as a result of non-performance by any counterparty.

Item 4. Controls and Procedures.

Duke Energy’s management, including the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of Duke Energy’s disclosure controls and procedures (as defined in Exchange Act

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Rules 13a-15(e) and 15d-15(e)) and concluded that, as of the end of the period covered by this report, the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. The required information was effectively recorded, processed, summarized and reported within the time period necessary to prepare this quarterly report. Duke Energy’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in Duke Energy’s reports under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Duke Energy continuously evaluates its internal control over financial reporting and implements or modifies procedures and controls as necessary or desirable to enhance the reliability of Duke Energy’s internal control. However, there have been no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, Duke Energy’s internal control over financial reporting.

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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 first quarter of 2006, see Note 15 to the Consolidated Financial Statements, “Regulatory Matters” and Note 16 to the Consolidated Financial Statements, “Commitments and Contingencies.”

Item 1A. Risk Factors.

The following risk factors are in addition to those presented in the Duke Energy Form 10-K for the year ended December 31, 2005.

The integration of Old Duke Energy and Cinergy may present significant challenges that may result in a decline in the anticipated potential benefits of the merger.

Duke Energy will face significant challenges in consolidating functions, organizations, procedures and operations of Old Duke Energy and Cinergy in a timely and efficient manner, as well as retaining key personnel. The integration of Old Duke Energy and Cinergy will be complex and time-consuming, due to the size and complexity of each organization and their many business units. The principal challenges will be integrating the combined regulated electric utility operations, and combining each of the unregulated wholesale power generation businesses. All of these businesses are complex, and some of the business units are dispersed. Such efforts could also divert management’s focus and resources from other strategic opportunities during the integration process. There can be no assurance that the integration will be completed in a timely manner.

The anticipated benefits of combining the companies may not be realized.

Old Duke Energy and Cinergy entered into the merger agreement and consummated the merger with the expectation that the merger would result in various benefits, including, among other things, synergies, cost savings and operating efficiencies. Although Duke Energy expects to achieve the anticipated benefits of the merger, achieving them, including the synergies, cannot be assured.

Duke Energy will incur significant transaction and merger-related integration costs in connection with the merger of Old Duke Energy and Cinergy.

Duke Energy expects to incur significant costs associated with consummating the merger transactions and integrating the operations of the two companies. Under certain state merger approvals, Duke Energy is required to provide a rate credit based on expected cost savings, regardless of whether the savings are actually realized. Although Duke Energy believes that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will, over time, more than offset the transaction and merger-related costs, Duke Energy makes no assurance that this net benefit will be achieved in the near term, or at all.

Under Duke Energy’s holding company structure, the payment of dividends to shareholders is subject to the ability of Duke Energy’s subsidiaries to pay dividends to Duke Energy.

Duke Energy is a holding company with no material assets other than the stock of its subsidiaries. Accordingly, all of Duke Energy’s operations are conducted by its subsidiaries. Duke Energy’s ability to pay dividends on its common stock depends on the payment of dividends by its operating subsidiaries. These subsidiaries’ payments of dividends in turn depend on their results of operations, cash flows and federal and state regulatory constraints.

Duke Energy could incur a significant tax liability and its results of operations and cash flows may be negatively affected if the Internal Revenue Service denies or otherwise makes unusable certain tax credits related to its coal and synthetic fuel business or if such credits are phased out based on crude oil prices.

The sale by Cinergy, Duke Energy’s subsidiary, of synthetic fuel intended to qualify for tax credits in accordance with Section 29/45K of the Internal Revenue Code has generated $339 million in tax credits through

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December 31, 2005 and an additional $18 million, after reducing for phase-out, through March 31, 2006. The phase-out is based on a prescribed calculation and definition of crude oil prices. Based on current crude oil prices, Duke Energy believes that for 2006 and 2007 the amount of the tax credits will be reduced, perhaps significantly. If oil prices are high enough, Duke Energy may idle the plants, as the value of the credits would not exceed the net costs to produce the synthetic fuel. During the first quarter of 2006, an agreement was in place with the plant operator which would indemnify Cinergy in the event that tax credits are insufficient to support operating expenses.

Duke Energy is currently involved in litigation with the United States and several states and environmental groups regarding certain environmental matters.

Duke Energy’s subsidiary, Cinergy, is currently involved in litigation in which the EPA is alleging various violations of the Clean Air Act (CAA). Specifically, the lawsuit against Cinergy alleges that Cinergy violated the CAA by not obtaining permits for various projects at its owned and co-owned generating stations. Additionally, the Cinergy suit claims that Cinergy violated an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged violations of Ohio’s state implementation plan provisions governing particulate matter at one of its generating stations. Three northeast states and two environmental groups have intervened in the Cinergy case. In August 2005, the district court ruled that in determining whether a project was projected to increase annual emissions, it would not hold hours of operation constant. However, the district court subsequently certified the matter for interlocutory appeal to the Seventh Circuit Court of Appeals, which has the discretion to accept or not accept the appeal at this time. There are a number of other legal issues currently before the district court judge, and the case is currently in discovery. A second lawsuit being defended by one of Cinergy’s co-owners involves similar allegations and is also pending. Duke Energy is a defendant in similar litigation brought by the EPA in which the presiding court has entered judgment in favor of Duke Energy, which was subsequently affirmed on appeal by the 4th Circuit Court of Appeals. The government’s request for a rehearing before the Fourth Circuit to review its decision was denied and the government has decided not to appeal. Some intervenor groups have filed a petition for appeal to the U.S. Supreme Court.

In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, and Wisconsin and the City of New York brought a lawsuit against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc.; on the same day, a second, similar lawsuit was filed against the same companies. These lawsuits allege that the defendants’ emissions of CO₂ 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 CO₂. In September 2005, the district court granted the defendants’ motion to dismiss the lawsuit. The plaintiffs have appealed that decision to the Second Circuit Court of Appeals.

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

Issuer Purchases of Equity Securities for First Quarter of 2006

Period	Total Number of Shares (or Units) Purchased a	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs a	Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under Plans or Programs a (in billions)
January 1 to January 31	—		—	—		—
February 1 to February 28	—		—	—		—
March 1 to March 31	2,400,000	$	29.05	2,400,000	$	1.5

^a Duke Energy previously announced plans to execute up to approximately $2.5 billion in common stock repurchases over a three year period. On May 9, 2005, Duke Energy announced plans to suspend additional repurchases under the open-market purchase plan, pending further assessment, primarily due to the merger with Cinergy. At the time of suspension, Duke Energy had repurchased 32.6 million shares of common stock for approximately $0.9 billion. During the first quarter of 2006, Duke Energy announced the commencement of up to $1 billion of additional share repurchases under the previously announced plan. During the three month period ended March 31, 2006, Duke Energy repurchased approximately 2.4 million shares for approximately $0.1 billion (see Note 3 to the Consolidated Financial Statements, “Common Stock”). Through March 31, 2006, Duke Energy has repurchased approximately 35 million shares of common stock for approximately $1 billion under this repurchase plan.

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

On March 10, 2006, a special meeting of the security holders of Duke Energy was held and the merger with Cinergy Corporation was approved. Of the total votes cast, approximately 663 million voted for the merger, approximately 21 million voted against the merger and approximately 12 million abstained. There were no other matters submitted to a vote of the security holders of Duke Energy during the three months ended March 31, 2006.

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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
2.1	Agreement and Plan of Merger, dated as of May 8, 2005, as amended as of July 11, 2005, as of October 3, 2005 and as of March 30, 2006, by and among the registrant, Duke Energy Corporation (now known as Duke Power Company, LLC), Cinergy Corp., Deer Acquisition Corp., and Cougar Acquisition Corp. (filed with Form 8-K of the registrant, File No. 1-32853, April 4, 2006, as Exhibit 2.1)
3.1	Amended and Restated Certificate of Incorporation (filed with Form 8-K of registrant, File No. 1-32853, April 4, 2006, as exhibit 3.1)
3.2	Amended and Restated By-Laws (filed with Form 8-K of registrant, File No. 1-32853, April 4, 2006, as exhibit 3.2)
10.1	Amendment No. 1 to Credit Agreement (“Amendment”) dated as of February 28, 2006, by and among Duke Power Company, LLC (formerly known as Duke Energy Corporation), the banks listed therein, Citibank N.A., as Administrative Agent, and Bank of America, N.A., as Syndication Agent (filed with Form 8-K of Duke Power Company, LLC, File No. 1-4928, March 30, 2006, as exhibit 10.1)
*10.2	Purchase and Sale Agreement dated as of January 8, 2006, by and among Duke Energy Americas, LLC, and LSP Bay II Harbor Holding, LLC
*10.2.1	Amendment to Purchase and Sale Agreement, dated as of May 4, 2006, by and among Duke Energy Americas, LLC, LS Power Generation, LLC (formerly known as LSP Bay II Harbor Holdings, LLC), LSP Gen Finance Co., LLC, LSP South Bay Holdings, LLC, LSP Oakland Holdings, LLC, and LSP Morro Bay Holdings, LLC
10.3**	Certification of Chairman and Chief Executive Officer 2005 Performance Goals (filed with Form 8-K of Duke Power Company, LLC (formerly known as Duke Energy Corporation), File No. 1-4928, March 3, 2006, as item 1 of Item 1.01).
10.4**	Approval of Payment of 2005 Executive Officer Short-Term Incentives (filed with Form 8-K of Duke Power Company, LLC (formerly known as Duke Energy Corporation), File No. 1-4928, March 3, 2006, as item 2 of Item 1.01).
10.5**	Final Approval of 2006 Executive Officer Financial Performance Target for Short-Term Incentive Opportunity (filed with Form 8-K of Duke Power Company, LLC (formerly known as Duke Energy Corporation), File No. 1-4928, March 3, 2006, as item 3 of Item 1.01).
*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.

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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: May 9, 2006	/s/ DAVID L. HAUSER
	David L. Hauser
	Group Executive and
	Chief Financial Officer
Date: May 9, 2006	/s/ STEVEN K. YOUNG
	Steven K. Young
	Vice President and Controller

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EX-10.2

Exhibit 10.2

EXECUTION COPY

PURCHASE AND SALE AGREEMENT

by and among

DUKE ENERGY AMERICAS, LLC

as Seller,

and

LSP BAY II HARBOR HOLDING, LLC,

as Buyer

dated as of January 8, 2006

TABLE OF CONTENTS

	ARTICLE I DEFINITIONS AND CONSTRUCTION
1.1	Definitions	1
1.2	Rules of Construction	18
	ARTICLE II PURCHASE AND SALE AND CLOSING
2.1	Purchase and Sale	18
2.2	Purchase Price	19
2.3	Closing	19
2.4	Closing Deliveries by Seller to Buyer	19
2.5	Closing Deliveries by Buyer to Seller	20
2.6	Post-Closing Adjustment	21
2.7	Allocation of Purchase Price	21
	ARTICLE III REPRESENTATIONS AND WARRANTIES REGARDING SELLER
3.1	Organization	22
3.2	Authority	22
3.3	No Conflicts; Consents and Approvals	23
3.4	Capitalization	23
3.5	Legal Proceedings	23
3.6	Brokers	24
	ARTICLE IV REPRESENTATIONS AND WARRANTIES REGARDING THE PROJECT COMPANIES
4.1	Organization	24
4.2	No Conflicts; Consents and Approvals	24
4.3	Capitalization	25
4.4	Business	25
4.5	Bank Accounts	25
4.6	Subsidiaries	25
4.7	Legal Proceedings	25
4.8	Compliance with Laws and Orders	25
4.9	Liabilities	25
4.10	Absence of Certain Changes	26
4.11	Taxes	26
4.12	Regulatory Status	26
4.13	Contracts	26
4.14	Real Property	28
4.15	Permits	28
4.16	Environmental Matters	29
4.17	Insurance	29
4.18	Intellectual Property	30
4.19	Brokers	30
4.20	Employees and Labor Matters	30

4.21	Employee Benefits	30
	ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER
5.1	Organization	31
5.2	Authority	31
5.3	No Conflicts	31
5.4	Legal Proceedings	32
5.5	Compliance with Laws and Orders	32
5.6	Brokers	32
5.7	Acquisition as Investment	32
5.8	Financial Resources	32
5.9	No Conflicting Contracts	33
5.10	Opportunity for Independent Investigation	33
5.11	Bridgeport and Griffith Purchase Price	33
	ARTICLE VI COVENANTS
6.1	Regulatory and Other Approvals	33
6.2	Access of Buyer and Seller	34
6.3	Certain Restrictions	35
6.4	Use of Certain Names	37
6.5	Support Obligations	37
6.6	Excluded Items	41
6.7	Employee and Benefit Matters	41
6.8	Termination of Certain Services and Contracts	44
6.9	Indebtedness; Spare Parts; Distributions	45
6.10	Insurance	45
6.11	Casualty	45
6.12	Condemnation	46
6.13	Transfer Taxes	46
6.14	Transition Services Arrangements	47
6.15	Morro Bay Lease Consent	48
6.16	Bridgeport Dispute	49
6.17	Connecticut Transfer Act	49
6.18	Long Term Services Agreements	49
6.19	Tax Matters	50
6.20	Affiliate Contracts	53
6.21	Further Assurances	53
6.22	Moss Landing Toll	54
6.23	Monthly Operating Report	55
6.24	Griffith Tag Along Offer	55
6.25	DEGM Restructuring	55
6.26	DENA Restructuring	55
6.27	Seller Creditworthiness	56
6.28	Letter of Credit	56

	ARTICLE VII BUYER’S CONDITIONS TO CLOSING
7.1	Representations and Warranties	56
7.2	Performance	56
7.3	Officer’s Certificate	56
7.4	Orders and Laws	56
7.5	Consents and Approvals	56
7.6	Resignation of Members, Managers, Officers and Directors	57
7.7	Release of Intercompany Indebtedness; Release of Liens	57
	ARTICLE VIII SELLER’S CONDITIONS TO CLOSING
8.1	Representations and Warranties	57
8.2	Performance	57
8.3	Officer’s Certificate	57
8.4	Orders and Laws	57
8.5	Consents and Approvals	57
	ARTICLE IX TERMINATION
9.1	Termination	58
9.2	Effect of Termination	58
9.3	Break-up Fee	58
	ARTICLE X INDEMNIFICATION, LIMITATIONS OF LIABILITY, WAIVERS AND ARBITRATION
10.1	Indemnification	59
10.2	Limitations of Liability	60
10.3	Indirect Claims	62
10.4	Waiver of Other Representations	62
10.5	Waiver of Remedies	62
10.6	Arbitration	63
10.7	Procedure with Respect to Third-Party Claims	65
10.8	Access to Information	66
	ARTICLE XI MISCELLANEOUS
11.1	Notices	66
11.2	Entire Agreement	67
11.3	Expenses	67
11.4	Disclosure	67
11.5	Waiver	67
11.6	Amendment	67
11.7	No Third Party Beneficiary	68
11.8	Assignment; Binding Effect	68
11.9	Headings	68
11.10	Invalid Provisions	68
11.11	Counterparts; Facsimile	68
11.12	Governing Law; Venue; and Jurisdiction	68
11.13	Attorneys’ Fees	69

EXHIBITS
Exhibit A	-	Form of Company Assignment Instrument
Exhibit B	-	Form of Assignment and Assumption Agreement
SCHEDULES
1.1–A		June 30, 2005 Adjusted Net Working Capital Calculation
1.1–AC		Affiliate Contracts
1.1–K		Knowledge
1.1–MCLSA		Certain Settlement Agreement Obligations
1.1–MLTPPA		Moss Landing Toll Base Purchase Price Adjustment
1.1–PL		Permitted Liens
2.2(c)		Spring 2006 Maintenance Plan
2.7		Purchase Price Allocation
3.3(c)		Seller Approvals
3.4		Capitalization
4.2		Company Consents
4.4		Sufficiency of Assets
4.5		Bank Accounts
4.7		Legal Proceedings
4.9		Liabilities
4.10		Certain Changes
4.11		Taxes
4.13		Material Contracts
4.14		Real Property
4.15		Permits
4.16(b)		Environmental Matters
4.16(c)		Emission Reduction Credits
4.17		Insurance
4.20		Labor Matters
5.3		Buyer Approvals
5.8		Debt and Equity Commitment Letters
5.9		Conflicts
6.3		Exceptions to Conduct of Business
6.5(a)		Support Obligations
6.6		Excluded Items
6.7(a)		Available Employees
6.8		Terminated Contracts
6.14(a)		Transition Services

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement dated as of January 8, 2006 (this “Agreement”) is made and entered into by and between Duke Energy Americas, LLC, a Delaware limited liability company (“Seller”), and LSP Bay II Harbor Holding, LLC, a Delaware limited liability company (“Buyer”).

RECITALS

Seller desires to cause its affiliates to sell to Buyer, and Buyer desires to purchase from Seller’s affiliates, 100% of the membership interests in the owners of eight power plants located in the northeastern and western regions of the United States, all on the terms and subject to the conditions set forth herein.

STATEMENT OF AGREEMENT

Now, therefore, in consideration of the premises and the mutual representations, warranties, covenants and agreements in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE I

DEFINITIONS AND CONSTRUCTION

1.1 Definitions. As used in this Agreement, the following capitalized terms have the meanings set forth below:

“1933 Act” has the meaning given to it in Section 5.7.

“AAA” has the meaning given to it in Section 10.6(a).

“Adjusted Net Working Capital” means (without duplication) the sum of (a) Net Working Capital of the Project Companies (other than the Jointly Owned Project Companies) plus (b) fifty percent (50%) of the Net Working Capital of Southwest Power Partners, Griffith Energy, and ED Services, plus (c) (i) if the Bridgeport Dispute has been resolved such that Duke Bridgeport Energy owns record title to the UBE Interests as of the Closing, one-hundred percent (100%) of the Net Working Capital of Bridgeport Energy and NC Development or (ii) if the Bridgeport Dispute has not been so resolved, sixty-six and two-thirds percent (66 ²/3%) of the Net Working Capital of Bridgeport Energy and NC Development, all as determined in accordance with the methodology used in the preparation of Schedule 1.1-A (a sample of the Adjusted Net Working Capital calculation as of June 30, 2005 without regard to clause (ii) of the definition of Net Working Capital).

“Affiliate” means any Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether through ownership of voting securities or ownership interests, by contract or otherwise, and specifically with respect

1

to a corporation, partnership or limited liability company, means direct or indirect ownership of more than 50% of the voting securities in such corporation or of the voting interest in a partnership or limited liability company; provided however, that, for purposes of this Agreement, the Jointly Owned Project Companies shall be deemed to be Affiliates of Seller.

“Affiliate Contracts” means, collectively, those contracts listed on Schedule 1.1 AC.

“Agreement” has the meaning given to it in the introduction to this Agreement.

“ANWC Estimate” has the meaning given to it in Section 2.5(a)

“Arbitrable Dispute” has the meaning given to it in Section 10.6(b).

“Arlington Valley Project” means the approximately 570 megawatt (nominal) natural gas-fired combined cycle electric generating plant located on a site in Maricopa County, Arizona, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by Duke Arlington Valley) used for the receipt of fuel and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the ownership, operation and maintenance of said generating plant and associated equipment.

“Assets” of any Person means all assets and properties of every kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible and wherever situated), including the goodwill related thereto, operated, owned or leased by such Person.

“Assigned Contracts” means, collectively, each Affiliate Contract, other than a Terminated Contract, the Counterparty to which has consented to (or for which no consent is required for) the assignment thereof by the Assignor to the Assignee as contemplated by Section 2.4(b).

“Assignee” has the meaning given to it in Section 2.4(b).

“Assignment and Assumption Agreement” has the meaning given to it in Section 2.4(b).

“Assignor” has the meaning given to it in Section 2.4(b).

“Available Employees” has the meaning given to it in Section 6.7(a).

“Base Purchase Price” has the meaning given to it in Section 2.2(a).

“Benefit Plan” means (a) each “employee benefit plan,” as such term is defined in Section 3(3) of ERISA, (b) each plan that would be an “employee benefit plan”, as such term is defined in Section 3(3) of ERISA, if it was subject to ERISA, such as foreign plans and plans for directors, (c) each stock bonus, stock ownership, stock option, stock purchase, stock appreciation rights, phantom stock, or other stock plan (whether qualified or nonqualified), and (d) each bonus or incentive compensation plan.

2

“Bridgeport 33 ¹/3% Purchase Price” shall be an amount equal to $60,000,000.

“Bridgeport Dispute” means the appraisal proceedings between Duke Bridgeport Energy and UBE to determine the Fair Market Value (as defined in the Bridgeport LLC Agreement) of the UBE Interests put to Duke Bridgeport Energy by UBE pursuant to Section 8.3(b) of the Bridgeport LLC Agreement.

“Bridgeport Energy” means Bridgeport Energy LLC, a Delaware limited liability company.

“Bridgeport LLC Agreement” means that certain Amended and Restated Limited Liability Company Agreement of Bridgeport Energy LLC, dated as of September 17, 1997 between Duke Bridgeport Energy and UBE as amended prior to the date hereof.

“Bridgeport Project” means the approximately 490 megawatt (nominal) natural gas-fired combined cycle electric generating plant located on a site in the City of Bridgeport, Fairfield County, Connecticut, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by Bridgeport Energy or NC Development) used for the receipt of fuel and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the ownership, operation and maintenance of said generating plant and associated equipment.

“Bridgeport Resolution Amount” has the meaning given to it in Section 6.16.

“Bridgeport RMR Agreement” means the Cost-of-Service Agreement by and between Bridgeport Energy, DEMA and New England ISO, filed with FERC in Docket No. ER05-611.

“Bridgeport RMR Refund Amount” means any amounts received by any party on behalf of Bridgeport Energy pursuant to the Bridgeport RMR Agreement on or prior to the Closing Date that Bridgeport Energy is required by FERC to refund to New England ISO-NE or any participants in the markets administered by New England ISO.

“Business” as to any Project Company, means the ownership and operation of the respective Project, including the generation and sale of electricity and capacity by such Project Company at or from the Project, the receipt by such Project Company of natural gas and the conduct of other activities by such Project Company related or incidental to the foregoing.

“Business Day” means a day other than Saturday, Sunday or any day on which banks located in the State of New York or the State of Texas are authorized or obligated to close.

“Buyer” has the meaning given to it in the introduction to this Agreement.

“Buyer Approvals” has the meaning given to it in Section 5.3(c).

“Buyer Indemnified Parties” has the meaning given to in Section 10.1 (a).

3

“California Litigation” means any proceeding or litigation relating to the sale of electric energy, capacity, and/or ancillary services made by Duke South Bay, Duke Morro Bay, Duke Moss Landing and/or DE Oakland from the period from January 1, 2000 through June 20, 2001.

“Casco Bay” means Casco Bay Energy Company, LLC, a Delaware limited liability company.

“Casco Bay Project” means the approximately 520 megawatt (nominal) natural gas-fired combined cycle electric generating plant located on a site in Penobscot County, Maine, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by Casco Bay) used for the receipt of fuel and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the ownership, operation and maintenance of said generating plant and associated equipment.

“Capital Stock” means capital stock, partnership or membership interests or units (whether general or limited), and any other interest or participation that confers on a person the right to receive a share of the profits and losses of, or distribution of assets of, the issuing entity.

“C.G.S.” means the Connecticut General Statutes, as in effect on the date hereof.

“Charter Documents” means with respect to any Person, the articles of incorporation or organization and by-laws, the limited partnership agreement, the partnership agreement or the limited liability company agreement, or such other organizational documents of such Person, including those that are required to be registered or kept in the place of incorporation, organization or formation of such Person and which establish the legal personality of such Person.

“Claim” means any demand, claim, action, investigation, legal proceeding (whether at law or in equity) or arbitration.

“Claimant” has the meaning given to it in Section 10.6(b).

“Claiming Party” has the meaning given to it in Section 10.7(a).

“Closing” means the closing of the transactions contemplated by this Agreement, as provided for in Section 2.3. For purposes of clarification, the term “Closing” shall, if applicable, be deemed modified as set forth in Section 6.15.

“Closing Date” means the date on which Closing occurs. For purposes of clarification, the term “Closing Date” shall, if applicable, be deemed modified as set forth in Section 6.15.

“Code” means the Internal Revenue Code of 1986.

“Companies” means, collectively, Duke Arlington Valley, Duke Moss Landing, Duke South Bay, Duke Morro Bay, DE Oakland, Casco Bay and (a) prior to the date of the DEGM Restructuring, Duke Bridgeport Energy, DE Mohave and DE Mulberry and (b) from and after the date of the DEGM Restructuring, DEGM Holding Subsidiary. For purposes of clarification,

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Duke Bridgeport Energy, DE Mohave and DE Mulberry shall not be “Companies” from and after the date of the DEGM Restructuring.

“Company Assignment Agreement” has the meaning given to it in Section 2.4(a).

“Company Consents” has the meaning given to it in Section 4.2(b).

“Company Interests” means 100% of the membership interests in each of Duke Arlington Valley, Duke Moss Landing, Duke South Bay, Duke Morro Bay, DE Oakland, Casco Bay, and (a) prior to the date of the DEGM Restructuring, Duke Bridgeport Energy, DE Mohave and DE Mulberry and (b) from and after the date of the DEGM Restructuring, DEGM Holding Subsidiary. For purposes of clarification, Company Interests shall not include the membership interests of Duke Bridgeport Energy, DE Mohave and DE Mulberry from and after the date of the DEGM Restructuring.

“Confidentiality Agreement” means that certain Confidentiality Agreement between Buyer and Duke Capital LLC dated September 20, 2005.

“Connecticut Transfer Act” means C.G.S. § 22a-134 et seq.

“Continued Employee” has the meaning set forth in Section 6.7(b).

“Continuing Support Obligation” has the meaning given to it in Section 6.5(e).

“Contract” means any written contract, lease, license, evidence of Indebtedness, mortgage, indenture, purchase order, binding bid, letter of credit, security agreement or other written and legally binding arrangement.

“Counterparty” has the meaning given to it in Section 6.20.

“Credit Rating” means, with respect to any Person, each rating 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.

“DE Mohave” means Duke Energy Mohave, LLC, a Delaware limited liability company.

“DE Mulberry” means Duke Energy Mulberry LLC, a Delaware limited liability company.

“DE Oakland” means Duke Energy Oakland LLC, a Delaware limited liability company.

“DE Power” means DE Power Generating, LLC, a Delaware limited liability company.

“Deductible Amount” has the meaning given to it in Section 10.2(c).

“DEGM” means Duke Energy Global Markets, Inc., a Nevada corporation.

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“DEGM Holding Subsidiary” means a Delaware limited liability company that, prior to Closing, is a direct wholly-owned subsidiary of DEGM and is formed after the date of this Agreement and on or prior to Closing.

“DEGM Restructuring” means the transfer of the Capital Stock of DE Mulberry, DE Mohave and Duke Energy Bridgeport from DEGM to DEGM Holding Subsidiary.

“DEMA” means Duke Energy Marketing America, LLC, a Delaware limited liability company.

“DENA” means Duke Energy North America, LLC, a Delaware limited liability company.

“DENA Restructuring” means the dissolution or liquidation of certain subsidiaries of Seller (other than any Project Company or any Parent Company) on or prior to Closing. For purposes of clarification, the Project Companies and the Parent Companies shall remain direct or indirect wholly-owned subsidiaries of the Seller after giving effect to the DENA Restructuring.

“DETM Agreement” means that certain Agreement, dated as of November 17, 1997, between Bridgeport Energy and Duke Energy Trading and Marketing, LLC, as amended and restated by that certain First Amended and Restated Agreement, dated as of March 1, 2001, between Bridgeport Energy and Duke Energy Trading and Marketing, LLC, and as further amended, restated, supplemented or otherwise modified from time to time.

“Direct Costs” has the meaning given to it in Section 6.14(b).

“Dispute” has the meaning given to it in Section 10.6(a).

“DTSC” has the meaning given to it in Section 6.10.

“Duke Arlington Valley” means Duke Energy Arlington Valley, LLC, a Delaware limited liability company.

“Duke Bridgeport Energy” means Duke Bridgeport Energy, LLC, a Delaware limited liability company.

“Duke Morro Bay” means Duke Energy Morro Bay LLC, a Delaware limited liability company.

“Duke Moss Landing” means Duke Energy Moss Landing LLC, a Delaware limited liability company.

“Duke South Bay” means Duke Energy South Bay LLC, a Delaware limited liability company.

“ED Services” means ED Services, LLC, a Delaware limited liability company.

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“Environmental Claim” means any Claim or Loss arising out of or related to any violation of Environmental Law.

“Environmental Condition Assessment Form” shall have the meaning provided to it in C.G.S. § 22a-134(17).

“Environmental Law” means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 through 2629; the Oil Pollution Act, 33 U.S.C. § 2701 et seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. § 11001 et seq.; the Safe Drinking Water Act, 42 U.S.C. §§ 300f through 300j; and all similar Laws (including implementing regulations) of any Governmental Authority having jurisdiction over the assets in question addressing pollution or protection of the environment, each as amended on or prior to the Closing Date.

“Equity Securities” means (i) Capital Stock, (ii) subscriptions, calls, warrants, options or commitments of any kind or character relating to, or entitling any person or entity to acquire, any Capital Stock and (iii) securities convertible into or exercisable or exchangeable for shares of Capital Stock.

“ERCs” has the meaning given to it in Section 4.16(c).

“ERISA” means the Employee Retirement Income Security Act of 1974.

“ERISA Affiliate” means any entity, trade or business that is a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 400l(b)(l) of ERISA that includes Seller, or that is a member of the same “controlled group” as Seller pursuant to Section 4001 (a)(14) of ERISA; provided, however, that the Project Companies shall not be considered to be ERISA Affiliates from and after the Closing Date.

“Excluded Items” has the meaning given to it in Section 6.6.

“Excluded Liabilities” shall mean all Claims, Losses, and obligations of each Project Company, the Seller or any of its Affiliates arising out of: (i) all Excluded Items, including any Non-Transferred Excluded Items and any actions taken by or on behalf of Seller, any of its Affiliates or any Project Company in connection therewith, (ii) subject to clause (vi) below, all Terminated Contracts, (iii) the California Litigation, other than those obligations of Duke South Bay, Duke Morro Bay, Duke Moss Landing and/or DE Oakland listed on Schedule 1.1-MCLSA (iv) any Benefit Plan of Seller or any Affiliate and any other matter related to any Available Employee, including, without limitation, any obligations resulting from the transactions contemplated hereby, except to the extent specifically assumed or indemnified by Buyer pursuant to Section 6.7, (v) the Bridgeport RMR Refund Amount, to the extent such amount exceeds $10.0 million, (vi) the GE LTSAs, but only to the extent any such GE LTSA is terminated on or prior to the Closing Date and excluding the costs of any capital spares, inventory or other current assets that are purchased from GE by or on behalf of a Project Company in connection with or after such termination that are not owned by a Project Company

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as of the Closing Date, (vii) the Assigned Contracts, to the extent relating to the periods prior to the Closing Date and not included in the calculation of Adjusted Net Working Capital, (viii) liabilities arising under the Charter Documents of any Project Company in connection with the DEGM Restructuring caused solely by the DEGM Restructuring or the sale of the Company Interests pursuant to Sections 2.1 and 2.4, (ix) liabilities caused solely by the DENA Restructuring, (x) liabilities under Section 12.5 of the Siemens Contract to the extent caused solely by the sale of the Company Interests, and (xi) fees payable to any broker, finder, financial advisor or agent by or on behalf of Seller with respect to the transactions contemplated by this Agreement.

“FERC” means the Federal Energy Regulatory Commission.

“Form III” shall have that meaning provided in C.G.S. § 22a-134(12).

“FPA” means the Federal Power Act.

“Funds” means, collectively, LS Power Equity Partners, L.P. and LS Power Equity Partners PIE I, L.P.

“GAAP” means generally accepted accounting principles in the United States of America, applied on a consistent basis.

“GE LTSA” means each Long Term Service Agreement between General Electric International, Inc. and a Project Company identified on Schedule 4.12.

“Governmental Authority” means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States or any state, county, city or other political subdivision or similar governing entity, and including any governmental, quasigovernmental or non-governmental body administering, regulating or having general oversight over gas, electricity, power or other markets.

“Griffith 50% Purchase Price” shall be an amount equal to $100,000,000.

“Griffith Energy” means Griffith Energy LLC, a Delaware limited liability company.

“Griffith Project” means the approximately 600 megawatt (nominal) natural gas-fired combined cycle electric generating plant located on a site in Mohave County, Arizona, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by Griffith Energy, Southwest Power Partners, or ED Services) used for the receipt of fuel and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the ownership, operation and maintenance of said generating plant and associated equipment.

“Hazardous Material” means and includes each substance designated as a hazardous waste, hazardous substance, hazardous material, pollutant, contaminant or toxic substance under any Environmental Law and any petroleum or petroleum products that have been released into

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the environment in concentrations or locations for which remedial action is required under any applicable Environmental Law.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

“Indebtedness” means any of the following: (a) any indebtedness for borrowed money; (b) any obligations evidenced by bonds, debentures, notes or other similar instruments; (c) any obligations to pay the deferred purchase price of property or services, except trade accounts payable and other current liabilities arising in the ordinary course of business consistent with past practices; (d) any obligations as lessee under capitalized leases; (e) any indebtedness created or arising under any conditional sale or other title retention agreement with respect to acquired property; (f) any obligations, contingent or otherwise, under acceptance, letters of credit or similar facilities; and (g) any guaranty of any of the foregoing; provided that Indebtedness shall not include any claim for subrogation by Seller or any of its Affiliates against a Project Company with respect to any credit support provided on behalf of Seller or such Affiliate for the benefit of such Project Company.

“Indemnified Parties” has the meaning given to it in Section 10.1(b).

“Initial Closing” has the meaning given to it in Section 6.15(a).

“Initial Closing Date” has the meaning given to it in Section 6.15(a).

“Initial Company Interest” has the meaning given to it in Section 6.15(a).

“Intellectual Property” means the following intellectual property rights, both statutory and common law rights, if applicable: (a) copyrights, registrations and applications for registration thereof, (b) trademarks, service marks, trade names, slogans, domain names, logos, trade dress, and registrations and applications for registrations thereof, (c) patents, as well as any reissued and reexamined patents and extensions corresponding to the patents, and any patent applications, as well as any related continuation, continuation in part and divisional applications and patents issuing therefrom and (d) trade secrets and confidential information, including ideas, designs, concepts, compilations of information, methods, techniques, procedures, processes and other know-how, whether or not patentable.

“Interest Rate” means 5% per annum.

“Interim Period” has the meaning given to it in Section 6.1.

“Investment Grade” means a Credit Rating of at least “BBB-” from Standard & Poor’s Ratings Group (a division of McGraw Hill, Inc.) and at least “Baa3” from Moody’s Investors Services, Inc.

“Jointly Owned Project Companies” means, collectively, Southwest Power Partners, Griffith Energy, ED Services, Bridgeport Energy, and NC Development.

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“Knowledge” when used in a particular representation in this Agreement with respect to Seller, means the actual knowledge (as opposed to any constructive or imputed knowledge) of the individuals listed on Schedule 1.1 -K.

“Laws” means all laws, statutes, rules, regulations, ordinances, orders, decrees, court decisions, and other pronouncements having the effect of law of any Governmental Authority.

“Lease Guaranty” means the Lease Guaranty dated April 1, 1999, by Duke Capital Corporation in favor of the San Diego Unified Port District, the California Maritime Infrastructure Authority and BNY Western Trust Company.

“Letter of Credit” means an irrevocable, standby letter of credit issued by a commercial bank with ratings of at least “A-” by Standard & Poor’s Ratings Group (a division of McGraw Hill, Inc.) and at least “A3” by Moody’s Investor Services, Inc., which shall (a) include customary terms and conditions (including terms and conditions substantially similar to or more favorable than those in the Support Obligation which is being replaced or backstopped by such Letter of Credit), (b) contain customary rights permitting the beneficiary of such Letter of Credit to draw upon such Letter of Credit upon any event or omission that would have allowed the Support Obligation being replaced by such Letter of Credit to be drawn or called upon, including upon certification of any breach of the underlying contract if applicable, and (c) contain the right for the beneficiary thereof to draw on such Letter of Credit if such Letter of Credit has not been renewed or replaced at least 30 days prior to the expiration thereof (or such lesser period as may be specified in the underlying contract to which such Letter of Credit relates).

“Lien” means any mortgage, pledge, deed of trust, assessment, security interest, charge, lien, option, warranty, purchase right, lease or other similar property interest or encumbrance.

“Loss” means any and all judgments, losses, liabilities, amounts paid in settlement, damages, fines, penalties, deficiencies, costs, charges, Taxes, obligations, demands, fees, losses and expenses (including interest, court costs, reasonable fees of attorneys, accountants and other experts or other reasonable expenses of investigation, litigation or other proceedings or of any claim, dispute, default or assessment). For all purposes in this Agreement the term “Losses” does not include any Non-reimbursable Damages.

“Major Maintenance Amount” has the meaning given it in Section 2.2(c).

“Material Adverse Effect” means a material adverse effect on the assets, properties, businesses, financial condition or results of operations of the Project Companies, taken as a whole; provided, however, that the following shall not be considered when determining whether a Material Adverse Effect has occurred: any effect resulting from (a) any change in economic conditions generally or in the industry in which a Project Company operates, (b) any change in general regulatory or political conditions, including any acts of war or terrorist activities, (c) any continuation of an adverse trend or condition, (d) any change in any Laws (including Environmental Laws), (e) the implementation or non-implementation of a market based locational capacity mechanism in the New England ISO by FERC, (f) the failure of Seller or any Non-Company Affiliate to effect the assignment of any Contract to Buyer, any Project Company, or any Affiliate of Buyer (g) any increases in the costs of commodities or supplies, including

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fuel, or decreases in the price of electricity, (h) any change in the financial condition or results of operation of a Project Company caused by the pending sale of such Project Company to Buyer, including changes due to the Credit Rating of Buyer, (i) any actions to be taken pursuant to or in accordance with this Agreement, and (j) the announcement or pendency of the transactions contemplated hereby.

“Material Contracts” has the meaning given to it in Section 4.13(a).

“Minimum Net Worth” means, with respect to any Person, the difference between (a) the total assets of such Person and its subsidiaries and (b) the total liabilities of such Person and its subsidiaries, in each case on a consolidated basis in accordance with GAAP.

“ML Fixed Terms” means the following terms from the Moss Landing RFP: (i) Service Level (“Excusable Event”) definition (except that Force Majeure is no longer considered an “Excusable Event” and is or may be treated differently (the lack of availability during a force majeure event is not excused in calculating availability) under the Moss Landing Toll than under the Moss Landing RFP ), (ii) the Dispatch Rights definition, (iii) the Ancillary Services definition, (iv) the Gas Transportation Charge definition, (v) the Guaranteed Availability Factor to the extent that the percentage should not be made any higher in the Moss Landing Toll than is set forth in the Moss Landing RFP, (vi) Scheduled Maintenance, to the extent that the hours should not be made any lower under the Moss Landing Toll than those set forth in the Moss Landing RFP, (vii) Operational and Environmental Limitations (and Attachment A) (except that no scheduled outages shall be permitted in May (in addition to the other months provided for the in the Moss Landing RFP), (viii) Schedule 2 , (ix) the Power delivery point, and (x) the Gas delivery point (except that the gas delivery point may be at the Moss Landing Project as opposed to the PGE City Gate).

“ML Other Terms” has the meaning given to it in the definition of Moss Landing Toll Purchase Price Adjustment.

“MM Estimate” has the meaning given to it in Section 2.5(a).

“Morro Bay Project” means the approximately 1,002 megawatt (nominal) natural gas-fired conventional steam electric generating plant located on a site in San Luis Obispo County, California, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by Duke Morro Bay) used for the receipt of fuel and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the ownership, operation and maintenance of said generating plant and associated equipment.

“Morro Bay Purchase Price” shall be an amount equal to $50,000,000.

“Moss Landing Project” means the approximately 2,529 megawatt (nominal) natural gas-fired combined cycle/conventional steam electric generating plant located on a site in Monterey County, California, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by Duke Moss Landing) used for the receipt of fuel

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and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the ownership, operation and maintenance of said generating plant and associated equipment.

“Moss Landing RFF’ has the meaning given to it in the definition of Moss Landing Toll Purchase Price Adjustment.

“Moss Landing Toll” shall mean one or more agreements between a counterparty and an Affiliate of Seller (or at Seller’s request, Buyer or a Project Company designated by Buyer) for the sale of all or a portion of the capacity, energy, and/or ancillary services with respect to Units 6 and 7 at the Moss Landing Project.

“Moss Landing Toll Purchase Price” shall be an amount equal to $60,000,000 in the aggregate for the Moss Landing Toll.

“Moss Landing Toll Purchase Price Adjustment” means, with respect to a Moss Landing Toll, the MLTPPA for such Moss Landing Toll calculated as of the earlier of (a) the date such Moss Landing Toll is approved by the Counterparty for transfer to Buyer or its designee and (b) November 30, 2006, all in accordance with the following formula:

If CP for such Moss Landing Toll is equal to or greater than $5.25,

MLTPPA = [(MW /1509) * (Term / 60) * ((CP-$3.22)/$2.03) * $72,600,000] -$60,000,000

If CP for such Moss Landing Toll is less than $5.25 and greater than $4.85,

MLTPPA = [(MW / 1509) * (Term / 60) * ((CP-$2.95)/$1.90) * $60,000,000] -$60,000,000

If CP for such Moss Landing Toll is equal to or less than $4.85,

MLTPPA = [(MW /1509) * (Term / 60) * ((CP-$3.25)/$1.60) * $60,000,000] -$60,000,000

Where:

1. MW = the total average megawatts of capacity (net of parasitic load) per month for 100% of the output of Unit 6, Unit 7 or both Units 6 and 7, as set forth in such Moss Landing Toll. The MW shall be deemed to be 0 if such Moss Landing Toll has not been (i) entered into within 90 days following the Closing Date and (ii) approved by the Counterparty for transfer to Buyer or its designee by November 30, 2006;

2. CP = the average Capacity Price in dollars per kilowatt month under such Moss Landing Toll; provided, however, that the CP will be increased by $0.08 if only Unit 6 is covered by the Moss Landing Toll and will be decreased by $0.08 if only Unit 7 is covered by the Moss landing Toll; and provided further, however, that in no event shall the CP be greater than $7.00 or less than $3.25; and

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3. Term = the remaining number of months (from the effective date of the commencement of CP payments of such Moss Landing Toll (which shall be a date in 2006) through the end of the term of such Moss Landing Toll) covered by such Moss Landing Toll (but in no event greater than 60 months or less than 36 months, which, if there are two Moss Landing Tolls with back-to-back terms, shall be measured from the earliest such effective date through the end of the latest term for the two Moss Landing Tolls collectively); provided, however, that the Term (after taking into account all of the foregoing) shall be reduced by the number of months (stated in fractions of months if necessary), if any, by which the Closing is after the effective date of the commencement of CP payments;

provided, however, that (a) the MLTPPA shall be decreased (but not to less than a negative $60,000,000) by the present value cost throughout the term of the Moss Landing Toll (using the lower of actual cost or 3%, a discount rate of 9% on after-tax costs, and a tax rate of 40%) of required Letters of Credit in excess of $50 million and (b) if (i) the terms of such Moss Landing Toll other than the items described above in items 1 through 3 of this definition (“ML Other Terms”} are materially different than the corresponding terms described in the ML Term Sheet attached as Schedule 1.1 - MLTPPA (“Moss Landing RFP”), (ii) the capacity covered by such Moss Landing Toll is less than 100% of the capacity of each of Unit 6 or Unit 7 (or both) of the Moss Landing Project, as applicable, or (iii) the Term is not a multiple of 12 months (unless the Term commences in April, May or June of one year and ends in October, November or December of a succeeding year); then the Parties shall adjust the MLTPPA reasonably and in good faith by the present value effect on such Moss Landing Toll (using a discount rate of 9% on after-tax cash flows and using a tax rate of 40%) of the difference between the ML Other Terms and the corresponding terms described in the ML RFP.

“NC Development” means NC Development & Design Company, LLC, a Delaware limited liability company.

“Net Working Capital” means (without duplication), with respect to each Project Company, the amount (expressed as a positive or negative number) equal to (a) the total current assets of such Project Company, plus (b)(l) the total book value of capital spares of such Project Company that are not included in the current assets of such Project Company and (2) with respect to any capital spares of such Project Company delivered to or being refurbished for the benefit of such Project Company pursuant to a GE LTSA but that are not reflected on the balance sheet of such Project Company, the actual costs of such capital spares (or in the case of refurbished capital spares, the cost based on the remaining useful life of such spares) pursuant to such GE LTSA, minus (c) the total current liabilities of such Project Company, minus (d) any liabilities due (or which in the future could become due) pursuant to the GE LTSA for capital spares described in clause (b)(2) above of such Project Company; and in each case in clauses (a) through (d) above, (i) excluding (A) any Excluded Items, (B) Taxes, (C) the portion of current liabilities of Duke South Bay consisting of principal and interest under the South Bay Lease Facility, (D) the portion of current liabilities of Bridgeport Energy relating to any obligation (or potential obligation) of Bridgeport Energy to refund to New England ISO and/or any participants in the markets administered by New England ISO amounts with respect to the Bridgeport RMR Agreement, (E) prepaid insurance to the extent such insurance is cancelled with respect to

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periods from and after the Closing and prepaid Taxes, (F) mark to market accounting impacts, if any, (G) emission allowances and emission reduction credits and (H) any assets (excluding spare parts removed from a Project and refurbished (at Seller’s or its Affiliate’s expense) for the benefit of a Project pursuant to Schedule 2.2(c)) and/or liabilities relating to the items on Schedule 2.2(c). (ii) measured as of the time immediately prior to the consummation of, and without giving effect to, the transactions contemplated hereby and (iii) determined in accordance with the methodology used in the preparation of Schedule 1.1-A, and otherwise in accordance with GAAP.

“Non-Company Affiliate” means any Affiliate of Seller, except for the Project Companies.

“Non-reimbursable Damages” has the meaning given to it in Section 10.5(b).

“Non-Transferred Excluded Item” has the meaning given to it in Section 6.6.

“Oakland Project” means the approximately 165 megawatt (nominal) light fuel oil-fired simple cycle generating plant located on a site in Alameda County, California, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by DE Oakland) used for the receipt of fuel and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the ownership, operation and maintenance of said generating plant and associated equipment.

“Operating Companies” means, collectively, Duke Moss Landing, Duke South Bay, Duke Morro Bay, Casco Bay, DE Oakland, Duke Arlington Valley, Bridgeport Energy and Griffith Energy.

“Outstanding Consent” has the meaning given to it in Section 6.15(a).

“Parent Companies” means, collectively, DENA, DE Power Generating Holdings, LLC, DEGM and DE Power; provided that from and after the DENA Restructuring, DE Power Generating Holdings, LLC shall not be a Parent Company; and provided further that from and after the DEGM Restructuring, DEGM Holding Subsidiary shall be a Parent Company and DEGM shall cease to be a Parent Company.

“Parties” means each of Buyer and Seller.

“Permits” means all licenses, permits, certificates of authority, authorizations, approvals, registrations, franchises and similar consents and orders issued or granted by a Governmental Authority.

“Permitted Lien” means (a) any Lien for Taxes not yet due or delinquent or being contested in good faith by appropriate proceedings, (b) any Lien arising in the ordinary course of business consistent with past practices by operation of Law with respect to a liability that is not yet due or delinquent or which is being contested in good faith by Seller or a Project Company, (c) all matters that are disclosed (whether or not subsequently deleted or endorsed over) on any survey, in the title policies insuring a Property or any commitments therefor, or in any title

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reports, in each case that have been made available to Buyer, (d) imperfections or irregularities of title and other Liens that would not, in the aggregate, reasonably be expected to materially detract from the value of the affected property, (e) zoning, planning, and other similar limitations and restrictions, and all rights of any Governmental Authority to regulate a Property, (f) all matters of record, that would not, in the aggregate, reasonably be expected to materially detract from the value of the affected property, (g) the terms and conditions of the Material Contracts or the Contracts listed on Schedule 4.13, (h) any Lien that is released on or prior to Closing and (i) the matters identified on Schedule 1.1-PL.

“Person” means any natural person, corporation, general partnership, limited partnership, limited liability company, proprietorship, other business organization, trust, union, association or Governmental Authority.

“PG&E Guaranties” means, collectively, the Guaranty (Oakland), the Guaranty (Morro Bay), and the Guaranty (Moss Landing), each dated November 18, 1997, in favor of Pacific Gas and Electric Company by Duke Capital Corporation.

“PPL” means PPL Southwest Generation Holdings, LLC, a Delaware limited liability company and any successor to or assignee of its membership interest in Southwest Power Partners.

“Pre-Closing Taxable Period” has the meaning given to it in Section 6.19(a).

“Project” or “Projects” means one or more of the Bridgeport Project, the Casco Bay Project, the Arlington Valley Project, the Griffith Project, the South Bay Project, the Morro Bay Project, the Moss Landing Project and the Oakland Project.

“Project Company” means each Company and each Subsidiary.

“Property” means the real property on which a Project is located, including easements and rights-of-way appertaining thereto.

“Property Taxes” has the meaning given to it in Section 6.19(b).

“PUHCA of 1935” means the Public Utility Holding Company Act of 1935.

“Purchase Price” has the meaning given to it in Section 2.2.

“Purchase Price Allocation Schedule” has the meaning given to it in Section 2.7.

“Purchased Assets” means all of the Assets of the Project Companies excluding the Excluded Items and the Excluded Liabilities.

“Release” means any release, spill, emission, migration, leaking, pumping, injection, deposit, disposal or discharge of any Hazardous Materials into the environment, to the extent prohibited under applicable Environmental Laws.

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“Representatives” means, as to any Person, its officers, directors, partners, members, employees, counsel, accountants, financial advisers and consultants.

“Respondent” has the meaning given to it in Section 10.6(b).

“Responding Party” has the meaning given to it in Section 10.7(a).

“Schedules” means the disclosure schedules prepared by Seller and attached to this Agreement.

“SDG&E Guaranty” means that certain Guaranty, dated as of December 11, 1998, in favor of San Diego Gas & Electric Company by Duke Capital Corporation.

“SDUPD Guaranties” means, collectively, the Environmental Remediation Agreement Guaranty and the Guaranty of Contract and Permit Rights Assignment and Property Escrow Agreement, each dated April 22, 1999, in favor of the San Diego Unified Port District by Duke Capital Corporation.

“Seller” has the meaning given to it in the introduction to this Agreement.

“Seller Approvals” has the meaning given to it in Section 3.3(c).

“Seller Marks” has the meaning given to it in Section 6.4.

“Seller Plans” has the meaning given to it in Section 6.7(d).

“Seller Indemnified Parties” has the meaning given to it in Section 10.1 (b).

“Seller’s Determination” has the meaning given to it in Section 2.6(a).

“Severance Plan” means the DENA Asset Partners, L.P. 2005-2008 Severance Benefits Plan as in effect on the date of this Agreement.

“Siemens Contract” means that certain CT Operational Support and Scheduled Maintenance Services Contract dated August 1, 2001 between Bridgeport Energy LLC and Siemens Westinghouse Operating Services Co.

“Siemens Guaranty” means that certain Guaranty dated September 17, 1997, by Duke Capital Corporation in favor of Siemens Power Corporation, as amended pursuant to that certain letter agreement dated October 9, 1998, between Duke Capital Corporation and Siemens Power Corporation.

“South Bay Indenture” means the Indenture of Trust dated March 1, 1999, between the California Maritime Infrastructure Authority and BNY Western Trust Company, as Trustee.

“South Bay Lease Facility” means the lease of the South Bay Project pursuant to the Lease Agreement between San Diego Unified Port District, as Lessor, and Duke Energy South Bay, LLC, as Lessee, dated as of April 1, 1999.

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“South Bay Project” means the approximately 700 megawatt (nominal) natural gas-fired conventional steam electric generating plant located on a site in San Diego County, California, together with all auxiliary equipment, ancillary and associated facilities and equipment, electrical transformers, pipeline and electrical interconnection and metering facilities (whether owned or leased by Duke South Bay) used for the receipt of fuel and water and the delivery of the electrical and potential steam output of said generating plant, and all other improvements related to the lease, operation and maintenance of said generating plant and associated equipment.

“Southwest Power Partners” means Southwest Power Partners, LLC, a Delaware limited liability company.

“Specified Guaranties” has the meaning given to it in Section 6.5(c)(ii).

“Specified Guaranty Amount” ” has the meaning given to it in Section 6.5(e)(iv)(A).

“Straddle Taxable Period” has the meaning given to it in Section 6.19(a).

“Subsequent Closing” has the meaning given to it in Section 6.15(b).

“Subsequent Closing Date” has the meaning given to it in Section 6.15(b).

“Subsidiaries” means, collectively, Southwest Power Partners, Bridgeport Energy, Griffith Energy, ED Services, NC Development and, from and after the DEGM Restructuring, Duke Bridgeport Energy, DE Mohave and DE Mulberry.

“Support Obligations” has the meaning given to it in Section 6.5(a).

“Tax” or “Taxes” means (i) any federal, state, local or foreign income, gross receipts, ad valorem, sales and use, employment, social security, disability, occupation, property, severance, value added, transfer, capital stock, excise, withholding, premium, occupation or other taxes, levies or other like assessments, customs, duties, imposts, charges surcharges or fees imposed by or on behalf of any Governmental Authority, including any interest, penalty or addition thereto and (ii) any liability for amounts described in clause (i) as a result of transferee liability, by Contract or otherwise.

“Taxing Authority” means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision.

“Terminated Contracts” has the meaning given to it in Section 6.8.

“Transfer Taxes” means all transfer, sales, use, goods and services, value added, documentary, stamp duty, gross receipts, excise, transfer and conveyance Taxes and other similar Taxes, duties, fees or charges.

“Transition Services” has the meaning given to it in Section 6.14(a).

“UBE” means United Bridgeport Energy, Inc., a Connecticut corporation.

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“USE Interests” means the membership interests owned by UBE in Bridgeport Energy as of the date hereof.

“Union Employees” has the meaning given to it in Section 6.7(a).

“Welfare Benefits” has the meaning given to it in Section 6.7(f).

1.2 Rules of Construction.

(a) All article, section, subsection, schedules and exhibit references used in this Agreement are to articles, sections, subsections, schedules and exhibits to this Agreement unless otherwise specified. The exhibits and schedules attached to this Agreement constitute a part of this Agreement and are incorporated herein for all purposes.

(b) If a term is defined as one part of speech (such as a noun), it shall have a corresponding meaning when used as another part of speech (such as a verb). Unless the context of this Agreement clearly requires otherwise words importing the masculine gender shall include the feminine and neutral genders and vice versa. The words “includes” or “including” shall mean “including without limitation,” the words “hereof,” “hereby,” “herein,” “hereunder” and similar terms in this Agreement shall refer to this Agreement as a whole and not any particular section or article in which such words appear and any reference to a Law shall include any amendment thereof or any successor thereto and any rules and regulations promulgated thereunder. Currency amounts referenced herein are in U.S. Dollars.

(c) Time is of the essence in this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. Whenever any action must be taken hereunder on or by a day that is not a Business Day, then such action may be validly taken on or by the next day that is a Business Day.

(d) All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP.

(e) Each Party acknowledges that it and its attorneys have been given an equal opportunity to negotiate the terms and conditions of this Agreement and that any rule of construction to the effect that ambiguities are to be resolved against the drafting Party or any similar rule operating against the drafter of an agreement shall not be applicable to the construction or interpretation of this Agreement.

ARTICLE II

PURCHASE AND SALE AND CLOSING

2.1 Purchase and Sale. On the terms and subject to the conditions set forth in this Agreement, at the Closing:

(a) Buyer agrees to purchase from DENA, and Seller agrees to cause DENA to convey to Buyer, 100% of the membership interests in each of (i) Duke Arlington Valley, (ii) Duke Moss Landing, (iii) Duke South Bay, (iv) Duke Morro Bay, and (v) DE Oakland.

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(b) Buyer agrees to purchase from DE Power, and Seller agrees to cause DE Power to convey to Buyer, 100% of the membership interests in Casco Bay.

(c) Buyer agrees to purchase from DEGM, and DEGM agrees to convey to Buyer 100% of the membership interests of the DEGM Holding Subsidiary.

(d) Buyer agrees to assume (or cause one of the Project Companies, as set forth in Schedule 1.1-AC, to assume), at Closing from each of the Non-Company Affiliates who are party to an Assigned Contract, and Seller agrees to cause such Non-Company Affiliates to assign to Buyer (or such Project Company), all of the rights and obligations of such Non- Company Affiliates, as applicable, relating to periods from and after Closing under the Assigned Contracts, provided, however that, for Assigned Contracts relating to natural gas transportation on a pipeline regulated by the FERC, Seller’s obligations under this subsection (d) are conditioned upon the Non-Company Affiliate successfully releasing its capacity permanently to Buyer (or such Project Company) and being relieved of all payment obligations under each such Assigned Contract pursuant to the terms of the applicable FERC Gas Tariff. Both Seller and Buyer shall use commercially reasonable efforts to achieve such permanent releases of capacity.

2.2 Purchase Price. The purchase price (the “Purchase Price”) for the purchase and sale described in Section 2.1 is equal to the sum of:

(a) $1,631,000,000 (the “Base Purchase Price”),

(b) plus, the Adjusted Net Working Capital as of the Closing,

(c) minus, to the extent that any of the matters listed on Schedule 2.2(c) have not been paid for on or prior to the Closing Date by the applicable Project Company or its Affiliates, an amount (the “Major Maintenance Amount”) equal to the difference between the dollar amount set forth for such matter on Schedule 2.2(c) and the amount that has been paid with respect to such matter on or prior to the Closing Date by such Project Company or its Affiliates, and

(d) plus, the amount of the Moss Landing Toll Purchase Price Adjustment (which may positive, negative or zero).

2.3 Closing. The Closing shall take place at the offices of Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas 77002 at 10:00 A.M. local time, on the third Business Day after the conditions to Closing set forth in Articles VII and VIII (other than actions to be taken or items to be delivered at Closing) have been satisfied or waived, or on such other date and at such other time and place as Buyer and Seller mutually agree in writing. All actions listed in Section 2.4 or 2.5 that occur on the Closing Date shall be deemed to occur simultaneously at the Closing.

2.4 Closing Deliveries by Seller to Buyer. At the Closing, Seller shall deliver, or shall cause to be delivered, to Buyer the following:

(a) an executed counterpart by each of the Parent Companies of an assignment of Capital Stock (each a “Company Assignment Agreement”) in the form attached hereto as Exhibit A evidencing the assignment and transfer to Buyer of (i) the Company Interests

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owned by such Parent Company and (ii) all rights of such Parent Company under the Charter Documents of the Companies to which such Parent Company is a party;

(b) an executed counterpart of one or more assignment and assumption agreements each substantially in the form attached as Exhibit B (each an “Assignment and Assumption Agreement”) which shall effect the assignment to Buyer or one of the Project Companies (as applicable, the “Assignee”) of each Assigned Contract by the Non-Company Affiliate that is party thereto (the “Assignor”) subject to the proviso in Section 2.1(d) of this Agreement, and the assumption by the Assignee of all obligations of the Assignor under each Assigned Contract relating to the periods from and after the Closing Date;

(c) a certification of non-foreign status in the form prescribed by Treasury Regulation Section 1.1445-2(c) with respect to each Parent Company (or the owner of each Parent Company that is treated as a disregarded entity for federal income tax purposes) and a clearance certificate or other documents(s) that may be required by any state taxing authority in order to relieve Buyer of any obligation to withhold any portion of the Purchase Price; and

(d) the books and records of each Project Company not present at such Project Company on the Closing Date and in the possession of Seller or a Non-Company Affiliate (it being agreed that Seller may retain a copy thereof).

2.5 Closing Deliveries by Buyer to Seller. At the Closing, Buyer shall deliver to Seller the following:

(a) a wire transfer of immediately available funds (to such account as Seller shall have notified Buyer of at least three Business Days prior to the Closing Date) in an amount equal to the result of (i) the sum of (A) the Base Purchase Price, minus (B) the Bridgeport 33 ¹/3% Purchase Price if the Bridgeport Dispute has not been resolved as of the Closing such that Duke Bridgeport Energy is not the owner of record title to the UBE Interest, minus (C) the Moss Landing Toll Purchase Price if the Moss Landing Toll has not been entered into on or prior to Closing, and plus (D) the amount of the Moss Landing Toll Purchase Price Adjustment (which may be positive, negative or zero), if the Moss Landing Toll has been entered into on or prior to Closing, plus (ii) Seller’s good faith estimate (the “ANWC Estimate”) of the Adjusted Net Working Capital as of the Closing, minus (iii) Seller’s good faith estimate of the Major Maintenance Amounts (the “MM Estimate”) as of Closing, showing in the case of clauses (ii) and (iii) the calculation thereof in reasonable detail and delivered in writing to Buyer at least three Business Days prior to the Closing Date;

(b) an executed counterpart of each Company Assignment Agreement;

(c) an executed counterpart of each Assignment and Assumption Agreement by each Assignee referenced in Section 2.4(b);

(d) the Form III and Environmental Condition Assessment Form as required by Section 6.17; and

(e) any guaranties, cash and/or letters of credit required to be delivered to Seller at the Closing pursuant to Section 6.5(e)(iv).

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2.6 Post-Closing Adjustment. (a) After the Closing Date, Seller and Buyer shall cooperate and provide each other access to their respective books, records and employees (and those of the Project Companies) as are reasonably requested in connection with the matters addressed in this Section 2.6. Within 45 days after the Closing Date, Seller shall determine the Adjusted Net Working Capital and Major Maintenance Amount as of the Closing and shall provide Buyer with written notice of such determination, along with reasonable supporting information and calculations (the “Seller’s Determination”).

(b) If Buyer objects to Seller’s Determination, then it shall provide Seller written notice thereof within 20 days after receiving Seller’s Determination. If the Parties are unable to agree on the Adjusted Net Working Capital or Major Maintenance Amount, in each case as of the Closing, within 90 days after the Closing Date, the Parties shall refer such dispute to Ernst and Young LLP or, if that firm declines to act as provided in this Section 2.6(b), another firm of independent public accountants, mutually acceptable to Buyer and Seller, which firm shall make a final and binding determination as to all matters in dispute (and only such matters) on a timely basis and promptly shall notify the Parties in writing of its resolution. Such firm shall not have the power to modify or amend any term or provision of this Agreement. Each Party shall bear and pay one-half of the fees and other costs charged by such accounting firm. If Buyer does not object to Seller’s Determination within the time period and in the manner set forth in the first sentence of clause (b) or if Buyer accepts Seller’s Determination, the Adjusted Net Working Capital as set forth in Seller’s Determination shall become final and binding upon the Parties for all purposes hereunder.

(c) If the Adjusted Net Working Capital or the Major Maintenance Amount, in each case as of the Closing (as agreed between the Parties or as determined by the above-referenced accounting firm or otherwise) is greater than or less than the ANWC Estimate or the MM Estimate, as applicable, then Buyer shall pay Seller, or Seller shall pay Buyer, respectively, within 10 Business Days after such amounts are agreed or determined, by wire transfer of immediately available funds to an account designated by the payee, the difference between such amounts plus interest thereon at the Interest Rate from the Closing Date through and including the date of such payment.

2.7 Allocation of Purchase Price

(a) Seller and Buyer agree that the Base Purchase Price shall be allocated among the Project Companies for Tax purposes in accordance with the allocation set forth on Schedule 2.7 (the “Base Purchase Price Allocation Schedule”).

(b) Within 30 Business Days after the determination of the Adjusted Net Working Capital and Major Maintenance Amount, in each case as of the Closing, and the determination of the Moss Landing Toll Purchase Price Adjustment, Buyer shall provide to Seller Buyer’s proposal for an allocation (consistent with the Base Purchase Price Allocation Schedule) of the Purchase Price among the Purchased Assets, grouped by the seven asset classes referred to in Treasury Regulation section 1.1060-1(c) and described in Treasury Regulation section 1.338-6(b) (the “Purchase Price Allocation Schedule”). Within 30 Business Days after its receipt of Buyer’s proposed Purchase Price Allocation Schedule, Seller shall propose to Buyer any changes thereto or otherwise shall be deemed to have agreed thereto. In the event that Seller

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proposes changes to Buyer’s proposed Purchase Price Allocation Schedule within the 30 Business Day period described above, Seller and Buyer shall cooperate in good faith to mutually agree upon a Purchase Price Allocation Schedule as soon as practicable.

(c) Seller and Buyer each shall prepare an IRS Form 8594, “Asset Acquisition Statement Under Section 1060”, consistent with the Base Purchase Price Allocation Schedule and any Purchase Price Allocation Schedule mutually agreed upon pursuant to Section 2.7(b), which the Parties shall use to report the transactions contemplated by this Agreement to the applicable Taxing Authorities. Each of Seller and Buyer agrees to provide the other promptly with any other information required to complete Form 8594. The Base Purchase Price Allocation Schedule and any Purchase Price Allocation Schedule shall be revised to take into account subsequent adjustments to the Purchase Price, including any indemnification payments (which shall be treated for Tax purposes as adjustments to the Purchase Price), in accordance with the provisions of section 1060 of the Code and the Treasury Regulations thereunder.

ARTICLE III

REPRESENTATIONS AND WARRANTIES REGARDING SELLER

Seller hereby represents and warrants to Buyer that except as disclosed in the Schedules to the extent provided in Section 11.4:

3.1 Organization. Each of Seller and each Parent Company is a limited liability company or a corporation, as applicable, duly formed, validly existing and in good standing under the Laws of its jurisdiction of formation or incorporation, as applicable. Each of Seller and each Parent Company is duly qualified or licensed to do business in each other jurisdiction where the actions to be performed by it hereunder makes such qualification or licensing necessary, except in those jurisdictions where the failure to be so qualified or licensed would not reasonably be expected to result in a material adverse effect on Seller’s or such Parent Company’s ability to perform such actions hereunder.

3.2 Authority.

(a) Seller has all requisite limited liability company power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by Seller of this Agreement, and the performance by Seller of its obligations hereunder, have been duly and validly authorized by all necessary limited liability company action. This Agreement has been duly and validly executed and delivered by Seller and constitutes the legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, arrangement, moratorium or other similar Laws relating to or affecting the rights of creditors generally, or by general equitable principles.

(b) Each Parent Company has all requisite limited liability company or corporate power and authority, as applicable, to consummate the transactions contemplated hereby to be consummated by it. The performance by each Parent Company of the actions

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contemplated to be performed by it hereunder has been duly and validly authorized by all necessary limited liability company or corporate action.

3.3 No Conflicts; Consents and Approvals. The execution and delivery by Seller of this Agreement do not, and the performance by Seller of its obligations under this Agreement and the taking of any action contemplated to be taken by any Parent Company hereunder will not:

(a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Charter Documents of Seller or such Parent Company;

(b) assuming all of the Company Consents have been obtained, be in violation of or result in a breach of or default (or give rise to any right of termination, cancellation or acceleration) under (with or without the giving of notice, the lapse of time, or both) any material Contract to which Seller, any Non-Company Affiliate or any Parent Company is a party (including, without limitation, the Affiliate Contracts), except for any such violations or defaults (or rights of termination, cancellation or acceleration) which would not, in the aggregate, reasonably be expected to result in a material adverse effect on Seller’s ability to perform its obligations hereunder or on any Parent Company’s ability to take the actions contemplated to be taken by such Parent Company hereunder; and

(c) assuming all required filings, waivers, approvals, consents, authorizations and notices set forth on Schedule 3.3(c) (collectively, the “Seller Approvals”), the Company Consents and other notifications provided in the ordinary course of business consistent with past practice have been made, obtained or given, (i) conflict with, violate or breach any material term or provision of any Law applicable to Seller, the Parent Companies or any of its or their material Assets or (ii) require any material consent or approval of any Governmental Authority, or notice to, or declaration, filing or registration with, any Governmental Authority, under any applicable Law.

3.4 Capitalization. Schedule 3.4 (as the same may be modified pursuant to Section 6.26) accurately sets forth the ownership structure of Seller, the Parent Companies and the Project Companies. Each of Seller, the Parent Companies and the Project Companies owns, holds of record and is the beneficial owner of the ownership interests shown as being owned by it on Schedule 3.4 (as the same may be modified pursuant to Section 6.26) free and clear of all Liens, restrictions on transfer or other encumbrances other than those (a) arising pursuant to this Agreement, the limited liability company agreements of the Project Companies or applicable securities Laws or (b) for Taxes not yet due or delinquent and, without limiting the generality of the foregoing, none of the Company Interests are subject to any voting trust, shareholder agreement or voting agreement or other agreement, right, instrument or understanding with respect to any purchase, sale, issuance, transfer, repurchase, redemption or voting of any Equity Securities of any Project Company, other than the limited liability company agreements of the Companies. Except as set forth on Schedule 3.4 (as the same may be modified pursuant to Section 6.26), there are no outstanding Equity Security of any Project Company.

3.5 Legal Proceedings. None of Seller or any Project Company or Parent Company has been served with notice of any Claim, no Claim is pending and to Seller’s Knowledge none

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is threatened against Seller or any Project Company or Parent Company, which seeks a writ, judgment, order, injunction or decree restraining, enjoining or otherwise prohibiting or making illegal any of the transactions contemplated by this Agreement.

3.6 Brokers. None of Seller or any Project Company or Parent Company has any liability or obligation to pay fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Buyer could become liable or obligated.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES REGARDING

THE PROJECT COMPANIES

Seller hereby represents and warrants to Buyer that except as disclosed in the Schedules to the extent provided in Section 11.4:

4.1 Organization. Each Project Company is a limited liability company duly formed, validly existing and in good standing under the Laws of its jurisdiction of formation, and has all requisite limited liability company power and authority to conduct its business as it is now being conducted and to own, lease and operate its Assets. Each Project Company is duly qualified or licensed to do business in each jurisdiction in which the ownership or operation of its Assets make such qualification or licensing necessary, except in those jurisdictions where the failure to be so duly qualified or licensed would not reasonably be expected to result in a Material Adverse Effect.

4.2 No Conflicts; Consents and Approvals. The execution and delivery by Seller of this Agreement do not, the performance by Seller of its obligations hereunder do not and the consummation of the transactions contemplated hereby and the taking of any action contemplated to be taken by any Parent Company or Project Company hereunder or pursuant to the Company Assignment Agreements or the Assignment and Assumption Agreements, as applicable, will not:

(a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Charter Documents of any Project Company;

(b) assuming all of the consents set forth on Schedule 4.2 (the “Company Consents”) have been obtained, be in material violation of or result in a material breach of or default (or give rise to any material right of termination, cancellation or acceleration) (with or without the giving of notice, lapse of time, or both) under any Material Contract or any Affiliate Contract;

(c) assuming the Seller Approvals, the Company Consents and other notifications provided in the ordinary course of business consistent with past practice have been made, obtained or given, (i) conflict with or result in a violation or breach of any material term or provision of any Law applicable to any Project Company or any of its material Purchased Assets or (ii) require the consent or approval of any Governmental Authority, or notice to, or declaration, filing or registration with, any Governmental Entity, under any applicable Law; or

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(d) result in the imposition or creation of any Lien on any material Purchased Assets, other than Permitted Liens, or on any Company Interests.

4.3 Capitalization. No Project Company is a party to any written or oral agreement, and no Project Company has granted to any Person any option or any right or privilege capable of becoming an agreement or option, for the purchase, subscription, allotment or issue of any unissued interests, units or other securities (including convertible securities, warrants or convertible obligations of any nature) of any Project Company other than those arising pursuant to the Material Contracts (including the limited liability company agreements of the Project Companies).

4.4 Business. The Business of each Project Company is the only business operation carried on by each such Project Company. Except as disclosed in Schedule 4.4. the Purchased Assets owned, leased, licensed or contracted by each Project Company constitute all of the tangible Assets that are sufficient to operate its Business as currently operated, except for (a) the Excluded Items and (b) matters that would not, in the aggregate, reasonably be expected to result in a Material Adverse Effect.

4.5 Bank Accounts. Schedule 4.5 sets forth an accurate and complete list of the names and locations of banks, trust companies and other financial institutions at which each Project Company maintains accounts of any nature or safe deposit boxes and the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access thereto.

4.6 Subsidiaries. None of the Project Companies has subsidiaries or owns Equity Securities in any Person except as disclosed on Schedule 3.4 (as the same may be modified pursuant to Section 6.26).

4.7 Legal Proceedings. Except as set forth on Schedule 4.7. no Project Company has been served with notice of any Claim and no Claim is pending, and to Seller’s Knowledge, none has been threatened against or relating to any Project Company that (a) affects such Project Company or the Purchased Assets and would, in the aggregate, reasonably be expected to result in a Material Adverse Effect or (b) seeks a writ, judgment, order, injunction or decree restraining, enjoining or otherwise prohibiting or making illegal any of the transactions contemplated by this Agreement or any Parent Company from consummating the transactions contemplated by the Company Assignment Agreements or the Assignment and Assumption Agreements.

4.8 Compliance with Laws and Orders. Each Project Company is in compliance with all Laws and orders applicable to it and its operations, properties or Assets except where any such non-compliance would not, in the aggregate, reasonably be expected to result in a Material Adverse Effect; provided, however, that this Section 4.8 does not address Environmental Laws, which are exclusively addressed by Sections 4.15 and 4.16.

4.9 Liabilities. Except for (a) current liabilities, (b) liabilities disclosed in Schedule 4.9. (c) the South Bay Lease Facility, and (d) liabilities in an aggregate amount up to 10% of the Base Purchase Price with respect to which Seller, in its sole discretion, has indemnified Buyer, in form and substance reasonably satisfactory to Buyer, no Project Company has any liability in

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excess of $500,000 individually (or $5,000,000 in the aggregate as to all Project Companies) that would be required to be reflected on an unaudited balance sheet of such Project Company prepared in accordance with GAAP.

4.10 Absence of Certain Changes. Except as set forth on Schedule 4.10. from October 31, 2005 to the date of this Agreement, each Project Company has operated in the ordinary course of business, consistent with past practices. From October 31, 2005 to the date of this Agreement, there has not been any (a) Material Adverse Effect or (b) event or condition that would reasonably be expected to result in a Material Adverse Effect or prevent or delay Seller from consummating the transactions contemplated by this Agreement or any Parent Company from consummating the transactions contemplated by the Company Assignment Agreements.

4.11 Taxes. Except as set forth on Schedule 4.11, (a) all Tax returns that are required to be filed on or before the Closing Date by each Project Company have been or will be duly and timely filed, (b) all material Taxes of each Project Company that are due and payable have been or will be timely paid in full, (c) all material withholding Tax requirements imposed on the Project Companies have been satisfied in full in all respects, except for amounts that are being contested in good faith, (d) no Project Company has in force any waiver of any statute of limitations in respect of Taxes or any extension of time with respect to a Tax assessment or deficiency, (e) there are no pending or active audits or legal proceedings involving Tax matters or, to Seller’s Knowledge, threatened audits or proposed deficiencies or other claims for unpaid Taxes of the Project Companies, (f) each Project Company other than Bridgeport Energy, NC Development and Southwest Power Partners is classified as an entity disregarded as separate from its owner for federal income tax purposes and has been since inception, (g) each of Bridgeport Energy, NC Development and Southwest Power Partners is classified as a partnership for federal income tax purposes and has been since inception, (h) all deficiencies asserted or assessments made as a result of any examination of Tax returns of the Project Companies have been or will be paid in full or are being timely and properly contested in good faith, (i) there are no liens for Taxes (other than Permitted Liens) on any of the Purchased Assets, and (j) none of the Purchased Assets directly or indirectly secures any indebtedness the interest on which is tax exempt under Section 103(a) of the Code, is property required to be treated as being owned by any other person pursuant to the “safe harbor lease” provisions of former Section 168(f)(8) of the Code, or is “tax-exempt use property” within the meaning of Section 168(h) of the Code.

4.12 Regulatory Status. (a) Each Operating Company meets the requirements for, and has been determined by FERC to be, an “Exempt Wholesale Generator” within the meaning of the PUHCA of 1935, as amended; (b) no Project Company other than each Operating Company and DE Mohave is subject to regulation under the FPA as a “public utility”; (c) each Operating Company and DE Mohave has been authorized by FERC to make sales of energy, capacity and ancillary services at market-based rates pursuant to Section 205 of the FPA; (d) each Operating Company and DE Mohave has been granted blanket authorization by FERC to issue securities and assume liabilities pursuant to Section 204 of the FPA; (e) as of the date of this Agreement, no Project Company is a “holding company” or a “public utility company” within the meaning of PUHCA of 1935.

4.13 Contracts. (a) Excluding Contracts for which neither a Project Company nor any of the Purchased Assets will be bound or have liability after Closing and excluding the

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Terminated Contracts and the Excluded Items, Schedule 4.13 (which schedule shall be deemed (i) upon delivery of a copy of the Charter Documents of DEGM Holding Subsidiary to Buyer, to be supplemented to include the Charter Documents of DEGM Holding Subsidiary from and after the date of the DEGM Restructuring and (ii) modified to the extent set forth in Section 6.26) sets forth a list as of the date of this Agreement of the following Contracts to which a Project Company is a party or by which the Purchased Assets may be bound (the Contracts listed on Schedule 4.13 that meet the descriptions in this Section 4.13 being collectively, the “Material Contracts”):

(i) Contracts for the future purchase, exchange or sale of gas;

(ii) Contracts for the future purchase, exchange or sale of electric power in any form, including energy, capacity or any ancillary services;

(iii) Contracts for the future transportation of gas;

(iv) Contracts for the future transmission of electric power;

(v) interconnection Contracts;

(vi) other than Contracts of the nature addressed by Section 4.13(a)(i) - (iii), Contracts (A) for the sale of any Asset or provision of any services or (B) that grant a right or option to purchase any Asset or receive any services, other than in each case Contracts entered into in the ordinary course of business consistent with past practices relating to Assets or services with a value of less than $300,000 individually or $3,000,000 in the aggregate;

(vii) other than Contracts of the nature addressed by Section 4.13(a)(i) - (iii), Contracts for the future receipt of any Assets or services requiring payments in excess of $300,000 for each individual Contract;

(viii) Contracts under which it has created, incurred, assumed or guaranteed any outstanding Indebtedness, or under which it has imposed a security interest on any of its Assets, tangible or intangible, which security interest secures outstanding Indebtedness;

(ix) outstanding agreements of guaranty, surety or indemnification or similar obligation, direct or indirect, by a Project Company;

(x) Contracts with Seller or any Non-Company Affiliate relating to the future provision of goods or services;

(xi) Contracts for consulting services providing annual compensation in excess of $100,000 and which are not cancelable by a Project Company on notice of 90 days or less;

(xii) any collective bargaining Contracts;

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(xiii) outstanding futures, swap, collar, put, call, floor, cap, option or other Contracts that are intended to benefit from or reduce or eliminate the risk of fluctuations in the price of commodities, including electric power, in any form, including energy, capacity or any ancillary services, gas or securities;

(xiv) Contracts that purport to limit a Project Company’s freedom to compete in any line of business or in any geographic area;

(xv) partnership, joint venture, or limited liability company agreements; and

(xvi) Contracts relating to any Equity Securities or other securities of any Project Company or rights in connection therewith.

(b) Seller has provided Buyer with, or access to, copies of all Material Contracts and all Affiliate Contracts, as amended.

(c) Each of the Material Contracts and the Affiliate Contracts is in full force and effect in all material respects and constitutes a legal, valid and binding obligation of the Project Company party thereto (or, as to the Affiliate Contracts, the Non-Company Affiliate that is a party thereto) and, to Seller’s Knowledge, of the other parties thereto except in each case where the failure to be in full force and effect or constitute a binding obligation would not reasonably be expected to result in a Material Adverse Effect.

(d) (i) No Project Company is in breach or default in any material respect under any Material Contract, (ii) none of the Non-Company Affiliates that is a party to an Affiliate Contract is in breach or default in any material respect under such Affiliate Contract, and (iii) to Seller’s Knowledge, no other party to any of the Material Contracts or Affiliate Contracts is in breach or default in any material respect thereunder.

4.14 Real Property. Each Project Company owns or leases (and with respect to each such (i) owned Property that is material to the Project Companies, has good, valid and marketable fee simple title to, or (ii) lease that is material to the Project Companies, has good and valid leasehold title to, and enjoys peaceful and undisturbed possession of) all Property described in Schedule 4.14 as being owned or leased by such Project Company, in each case, free and clear of all Liens (except for Permitted Liens), except pursuant to this Agreement and the Contracts listed, and as otherwise noted, on Schedule 4.14.

4.15 Permits. (a) Schedule 4.15 sets forth all material Permits held by any of the Project Companies that are required for the ownership and operation of the Projects by the Project Companies in the manner in which they are currently owned and operated, except any such Permits relating exclusively to the construction (and not operation) of a Project and any such Permits, the absence of which would not, in the aggregate, reasonably be expected to result in a Material Adverse Effect. All such Permits are in full force and effect.

(b) Each Project Company is in compliance with all Permits set forth on Schedule 4.15 as being held by such Project Company, except where any such non-compliance would not, in the aggregate, reasonably be expected to result in a Material Adverse Effect, and

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no Project Company has received any written notification from any Governmental Authority alleging that it is in material violation of any such Permits and, to Seller’s Knowledge, there is no such material violation.

4.16 Environmental Matters. (a) Seller has made available to Buyer copies of all material environmental site assessment reports in the possession of Seller or a Project Company that are not subject to a claim of legal privilege by Seller or a Project Company and that relate to environmental matters in connection with operation of a Project or Property.

(b) Except as set forth on Schedule 4.16(b):

(i) the Project Companies have operated the Projects in material compliance with all applicable Environmental Laws;

(ii) no Project Company has been served with notice of any material Environmental Claims, actions, proceedings or investigations that are currently outstanding, and no Environmental Claims are pending or, to Seller’s Knowledge, threatened, against any Project Company by any Governmental Authority under any Environmental Laws, except, with respect to any such notices received or Claims, actions, proceedings or investigations arising after the date hereof but on or prior to the Closing Date, as would not reasonably be expected to result in a Material Adverse Effect;

(iii) there is no site to which Seller has transported or arranged for the transport of Hazardous Materials associated with any Project Company which, to Seller’s Knowledge, is the subject of any environmental action or that would result in a material Environmental Claim, except, with respect to any such actions or Claims arising after the date hereof but on or prior to the Closing Date, as would not reasonably be expected to result in Material Adverse Effect; and

(iv) since the initial ownership date of each Project by Seller or its Affiliates, there has been no Release of any Hazardous Material at or from a Project in connection with a Project Company’s operations at such Project that would result in a material Environmental Claim.

(c) Schedule 4.16(c) sets forth as of the date of this Agreement all emission reduction credits (“ERCs”) and emissions allowances, including without limitation VOC, NOx, PM10, SOx and CO ERCs and SO2 allowances, held or owned by each of the Project Companies.

4.17 Insurance. Schedule 4.17 sets forth a list of all insurance policies and fidelity bonds covering the Project Companies, the tangible Assets, the Business of each Project Company and the Available Employees, other than any such insurance policies and fidelity bonds related to Benefit Plans. Schedule 4.17 sets forth a list of all pending claims of $100,000 or more under any such policies, and, with respect to such pending claims, coverage has not been denied by the underwriters of such policies and bonds. All premiums due and payable under such policies and bonds have been paid, and each Project Company is otherwise in material compliance with the terms and conditions of all such policies and bonds. To the Knowledge of Seller, there is no threatened termination of such policies and bonds.

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4.18 Intellectual Property.

(a) The Project Companies own, or have the licenses or rights to use for their respective Businesses, all material Intellectual Property (other than the Excluded Items) currently used in their respective Businesses.

(b) To Seller’s Knowledge, no Project Company has received from any third party a claim in writing that any Project Company is infringing in any material respect the Intellectual Property of such third party.

4.19 Brokers. The Project Companies have no liability or obligation to pay fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement.

4.20 Employees and Labor Matters. The Project Companies do not have and have never had any employees. With respect to Available Employees and except as described on Schedule 4.20:

(a) no Available Employees are represented by a union or other collective bargaining entity;

(b) there has not occurred, nor, to Seller’s Knowledge has there been threatened, a labor strike, request for representation, organizing campaign, work stoppage, slowdown, or lockout or other labor dispute by or involving Available Employees in the past two years, except, with respect to any such events or occurrences arising after the date hereof but on or prior to the Closing Date, as would not reasonably be expected to result in Material Adverse Effect;

(c) Neither Seller nor any of its Affiliates has received notice of any charges before any Governmental Authority responsible for the prevention of unlawful employment practices and Seller and its Affiliates are in material compliance with all applicable Laws respecting employment practices, labor relations, terms and conditions of employment and similar Laws, except, with respect to any such notice received or non-compliance occurring after the date hereof but on or prior to the Closing Date, as would not reasonably be expected to result in Material Adverse Effect; and

(d) Neither Seller nor any of its Affiliates have received notice of any investigation by a Governmental Authority responsible for the enforcement of labor or employment Laws and regulations and, to the Knowledge of Seller, no such investigation is threatened, except, with respect to any such notices received or investigation threatened after the date hereof but on or prior to the Closing Date, as would not reasonably be expected to result in Material Adverse Effect.

4.21 Employee Benefits. The Project Companies do not sponsor, maintain or contribute to any Benefit Plan. With respect to any “employee benefit plan,” within the meaning of Section 3(3) of ERISA, that is sponsored, maintained or contributed to, or has been sponsored, maintained or contributed to within six years prior to the date of this Agreement, by any Project Company, Seller or any ERISA Affiliate, (a) no withdrawal liability, within the meaning of

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Section 4201 of ERISA, has been incurred, which withdrawal liability has not been satisfied, (b) no liability to the Pension Benefit Guaranty Corporation has been incurred by any such entity, which liability has not been satisfied, (c) no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred, (d) all contributions (including installments) to such plan required by Section 302 of ERISA and Section 412 of the Code have been timely made and (e) no condition exists or event or transaction has occurred with respect to any such plan which would reasonably be expected to result in any Project Company incurring any material liability, fine or penalty. Seller has provided Buyer with, or access to, a copy of the Severance Plan.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer hereby represents and warrants to Seller that:

5. 1 Organization. Buyer is a limited liability company duly formed, validly existing and in good standing under the Laws of Delaware. Buyer is duly qualified or licensed to do business in each other jurisdiction where the actions to be performed by it hereunder makes such qualification or licensing necessary, except in those jurisdictions where the failure to be so qualified or licensed would not reasonably be expected to result in a material adverse effect on its ability to perform such actions hereunder.

5.2 Authority. Buyer has all requisite company power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by Buyer of this Agreement and the performance by Buyer of its obligations hereunder have been duly and validly authorized by all necessary limited liability company action on behalf of Buyer. This Agreement has been duly and validly executed and delivered by Buyer and constitutes the legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms except as the same may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, arrangement, moratorium or other similar Laws relating to or affecting the rights of creditors generally or by general equitable principles.

5.3 No Conflicts. The execution and delivery by Buyer of this Agreement do not, and the performance by Buyer of its obligations hereunder and the consummation of the transactions contemplated hereby will not:

(a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of its Charter Documents;

(b) be in violation of or result in a breach of or default (or give rise to any right of termination, cancellation or acceleration) under (with or without the giving of notice, lapse of time, or both) any material Contract to which Buyer is a party, except for any such violations or defaults (or rights of termination, cancellation or acceleration) which would not, in the aggregate, reasonably be expected to result in a material adverse effect on Buyer’s ability to perform its obligations hereunder; or

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(c) assuming all required filings, waivers, approvals, consents, authorizations and notices set forth in Schedule 5.3 (collectively, the “Buyer Approvals”) have been made, obtained or given, (i) conflict with, violate or breach any material term or provision of any Law applicable to Buyer or any of its material Assets or (ii) require any material consent or approval of any Governmental Authority or notice to, or declaration, filing or registration with, any Governmental Authority, under any applicable Law.

5.4 Legal Proceedings. Buyer has not been served with notice of any Claim, and to Buyer’s knowledge, none is threatened, against Buyer which seeks a writ, judgment, order or decree restraining, enjoining or otherwise prohibiting or making illegal any of the transactions contemplated by this Agreement.

5.5 Compliance with Laws and Orders. Buyer is not in violation of or in default under any Law or order applicable to Buyer or its Assets the effect of which, in the aggregate, would reasonably be expected to hinder, prevent or delay Buyer from performing its obligations hereunder.

5.6 Brokers. Buyer does not have any liability or obligation to pay fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Seller or any of the Parent Companies could become liable or obligated.

5.7 Acquisition as Investment. Buyer is acquiring the Company Interests for its own account as an investment without the present intent to sell, transfer or otherwise distribute the same to any other Person. Buyer has made, independently and without reliance on Seller (except to the extent that Buyer has relied on the representation and warranties of Seller in this Agreement), its own analysis of the Company Interests, the Project Companies, the Assigned Contracts and the Purchased Assets for the purpose of acquiring the Company Interests, and Buyer has had reasonable and sufficient access to documents, other information and materials as it considers appropriate to make its evaluations. Buyer acknowledges that the Company Interests are not registered pursuant to the Securities Act of 1933 (the “1933 Act”) and that none of the Company Interests may be transferred, except pursuant to an applicable exception under the 1933 Act. Buyer is an “accredited investor” as defined under Rule 501 promulgated under the 1933 Act.

5.8 Financial Resources. Buyer will have cash on hand or cash available pursuant to the debt commitment letter and the equity commitment letter set forth on Schedule 5.8, and will have cash available at the Closing, to enable it to purchase the Company Interests on the terms hereof; provided that Buyer may amend, modify, supplement or replace such debt commitment letter to the extent that such actions could not reasonably be expected to in any way materially delay or adversely affect the Closing or the transactions contemplated by this Agreement (including by (a) adding any conditions to, or modifying any term that results in the conditions being more onerous than, the conditions to closing and/or funding set forth in such debt commitment letter or (b) decreasing the amount of net proceeds available to be paid to Seller from the proceeds of loans relating to such debt commitment letter (after giving effect to other incremental funds available to the Buyer on similar or more favorable terms), or (c) other actions that could reasonably be expected to adversely affect or materially delay the Closing).

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5.9 No Conflicting Contracts. Except as set forth in Schedule 5.9. neither Buyer nor any of its Affiliates is a party to any Contract to build, develop, acquire or operate any power facility that would reasonably be expected to cause a delay in any Governmental Authority’s granting of a Buyer Approval or a Seller Approval, and neither Buyer nor any of its Affiliates has any plans to enter into any such Contract prior to the Closing Date.

5.10 Opportunity for Independent Investigation.

Prior to its execution of this Agreement, Buyer has conducted to its satisfaction an independent investigation and verification of the current condition and affairs of the Project Companies, the Assigned Contracts, the Purchased Assets and the Projects. In making its decision to execute this Agreement and to purchase the Company Interests and assume the Assigned Contracts, Buyer has relied and will rely solely upon the results of such independent investigation and verification and the terms and conditions of this Agreement.

5.11 Bridgeport and Griffith Purchase Price.

The Bridgeport 33 ¹/3% Purchase Price and the Griffith 50% Purchase Price reflect the Buyer’s good faith, reasonable allocation of the Base Purchase Price with respect to Company Interests relating thereto and the assets and liabilities associated therewith.

ARTICLE VI

COVENANTS

The Parties hereby covenant and agree as follows:

6.1 Regulatory and Other Approvals. From the date of this Agreement until Closing (the “Interim Period”):

(a) The Parties will, in order to consummate the transactions contemplated hereby, (i) take all commercially reasonable steps necessary, and proceed diligently and in good faith and use all commercially reasonable efforts, as promptly as practicable, to obtain the Seller Approvals, Company Consents and Buyer Approvals in form and substance reasonably satisfactory to Seller and Buyer, and to make all required filings with, and to give all required notices to, Governmental Authorities (provided that HSR Act filings and attachments need not be exchanged or preapproved by the other party and provided that any exchange of information between Seller and Buyer in connection with any filings shall be done in a manner that complies with applicable antitrust laws) and (ii) provide such other information and communications to such Governmental Authorities or other Persons as such Governmental Authorities or other Persons may reasonably request in connection therewith.

(b) The Parties will provide prompt notification to each other when any such approval referred to in Section 6.1(a) is obtained, taken, made, given or denied, as applicable, and will advise each other of any material communications with any Governmental Authority or other Person regarding any of the transactions contemplated by this Agreement.

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(c) In furtherance of the foregoing covenants:

(i) Each Party shall prepare, as soon as is practical following the execution of this Agreement, all necessary filings in connection with the transactions contemplated by this Agreement that may be required by FERC or under the HSR Act or any other federal, state or local Laws. Each Party shall submit such filings as soon as practicable, but in no event later than 14 days (subject to extension by mutual agreement) after the execution hereof for filings with the FERC, and 14 days after the execution hereof for filings under the HSR Act. The Parties shall request expedited treatment of any such filings, shall promptly furnish each other with copies of any notices, correspondence or other written communication from the relevant Governmental Authority, shall promptly make any appropriate or necessary subsequent or supplemental filings and shall cooperate in the preparation of such filings as is reasonably necessary and appropriate.

(ii) Buyer shall not, and shall cause its Affiliates not to, take any action that could reasonably be expected to adversely affect the approval of any Governmental Authority of any of the aforementioned filings.

(iii) Buyer shall cooperate in good faith with the Governmental Authorities and undertake promptly any and all action required to complete lawfully the transactions contemplated by this Agreement, including proffering and consenting to a governmental order providing for the sale or other disposition, or the holding separate, of particular Assets, categories of Assets or lines of business, of either assets or lines of business of any of the Project Companies or of any other assets or lines of business of Buyer or its Affiliates in order to remedy any material competition concerns that any Governmental Authority may have. The entry by any Governmental Authority in any legal proceeding of a governmental order permitting the consummation of the transactions contemplated hereby but requiring any of the Assets or lines of business of Buyer or its Affiliates to be held separate or sold or disposed of thereafter (including the business and Assets of the Project Companies) shall not be deemed a failure to satisfy the conditions specified in Sections 7.2, 7.4, 7.5, 8.2, 8.4 or 8.5.

6.2 Access of Buyer and Seller. (a) During the Interim Period, Seller will provide Buyer and its Representatives with reasonable access, upon reasonable prior notice and during normal business hours, to the Projects and the officers and employees of Seller and its Affiliates who have significant responsibility for one or more Project Companies, but only to the extent that such access does not unreasonably interfere with the Business of Seller or the Project Companies and that such access is reasonably related to the requesting Party’s obligations and rights hereunder, and subject to compliance with applicable Laws; provided, however, that Seller shall have the right to (i) have a Representative present for any communication with employees or officers of Seller or its Affiliates and (ii) impose reasonable restrictions and requirements for safety purposes. Buyer shall be entitled, at its sole cost and expense, to have the Property surveyed and to conduct non-invasive physical inspections (including a Phase I environmental site assessment conforming generally with ASTM Standard E1527-00) of the Property; provided, however, that Buyer shall not be entitled to collect any air, soil, surface water or ground water samples nor to perform any invasive or destructive sampling on the Property. Any such right of access and right to survey and conduct physical inspections described in this Section 6.2 shall be subject to the rights, if any, of any other owner of a Project Company or a Project to approve such access. Buyer shall provide Seller with not less than five Business Days prior written

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notice of the date and time on which any such entry upon the Property shall occur. Promptly upon completion of any such entry, Buyer shall repair any damage caused by such entry.

(b) Buyer agrees to indemnify and hold harmless Seller, its Affiliates and their Representatives for any and all liabilities, losses, costs or expenses incurred by Seller, its Affiliates or their Representatives arising out of the access rights under this Section 6.2, including any Claims by any of Buyer’s Representatives for any injuries or property damage while present on the Property.

(c) From and after Closing, Buyer agrees, upon reasonable prior notice from Seller, to provide to Seller and its Representatives access to or copies of books and records of the Project Companies and Continued Employees to the extent relating to events that occurred prior to Closing and to the extent needed for a legitimate business purpose.

6.3 Certain Restrictions. Except as required or expressly permitted hereby, or as otherwise set forth in Schedule 6.3, during the Interim Period, Seller will (i) cause the Project Companies to operate in the ordinary course of business consistent with past practices, and (ii) use commercially reasonable efforts to preserve, maintain and protect in all material respects consistent with past practices the Assets, rights, Properties and goodwill of each Project Company (including by (A) taking the actions set forth on Schedule 2.2(c) to the extent such actions were scheduled by such Project Company to be taken on or prior to the Closing Date (subject to any delays or events beyond the control of such Project Company), (B) pursuing the demolition of former units 1 through 5 and the tank farm at the Moss Landing Project, including any remediation work in connection therewith to the extent such actions were scheduled by such Project Company to be taken on or prior to the Closing Date (subject to any delays or events beyond the control of such Project Company) and (C) maintaining in all material respects the Project Companies’ relationships with customers, suppliers and Governmental Authorities). Without limiting the foregoing, except as otherwise required or expressly permitted hereby or required by the terms of any Permit identified on Schedule 4.15 or any Material Contract, as set forth in Schedule 6.3 or as consented to by Buyer, which consent shall not be unreasonably withheld, conditioned or delayed (except that this Section 6.3 shall not apply to Excluded Items, Terminated Contracts or services terminated pursuant to Section 6.8), during the Interim Period, Seller shall not, and shall cause the Project Companies and, where applicable, any Parent Company and any Non-Company Affiliate, not to:

(b) create, permit or allow to exist any Lien (other than a Permitted Lien or any Lien the release of which Seller is pursuing by commercially reasonable efforts) against any of the Purchased Assets;

(c) grant any waiver of any material term under, or give any material consent with respect to, any Material Contract or any Affiliate Contract;

(d) sell, transfer, remove, assign, convey, distribute or otherwise dispose of, or use, other than in the ordinary course of business consistent with past practices, any material Purchased Assets, including (i) any emissions allowances, emission reduction credits, capital spares or inventory and (ii) any transfer of capital spares other than transfers of such capital

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spares to another Project Company to the extent the failure to maintain such capital spares would reasonably be expected to materially and adversely affect a Project;

(e) other than accounts payable incurred in the ordinary course of business consistent with past practices, or otherwise incurred pursuant to the Material Contracts, Terminated Contracts, or Excluded Items incur, create, assume or otherwise become liable for any Indebtedness or issue any debt securities or assume or guarantee the obligations of any other Person;

(f) except as may be required to meet the requirements of applicable Law or GAAP, change any accounting method or practice in a manner that is inconsistent with past practice in a way that would materially and adversely affect the Business or a Project Company;

(g) fail to maintain its limited liability company existence, merge or consolidate with any other Person or acquire all or substantially all of the Assets of any other Person;

(h) issue, reserve for issuance, pledge or otherwise encumber, sell or redeem or enter into any Contract with respect to any limited liability company interests or Equity Securities of any Project Company;

(i) liquidate, dissolve, recapitalize, reorganize or otherwise wind up its business or operations;

(j) purchase any securities of any Person, except for short-term investments made in the ordinary course of business consistent with past practices;

(k) enter into, terminate or amend any Material Contract or Affiliate Contract (other than any Material Contract or Affiliate Contract entered into in the ordinary course of business consistent with past practices which will be fully performed prior to Closing);

(l) cancel any debts or waive any claims or rights having a value in excess of $1,000,000;

(m) make any new, or change any existing, material election with respect to Taxes;

(n) amend or modify its Charter Documents;

(o) purchase any individual item of equipment involving total consideration in excess of $5,000,000;

(p) settle any dispute or Claim or compromise or settle any material liability which results in a material non-current liability becoming due from a Project Company after Closing or restrictions or limitations that materially and adversely affect a Project Company’s ability to conduct business after Closing;

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(q) except in the ordinary course of business consistent with past practices or as otherwise required by the terms of any collective bargaining agreement, increase salaries or aggregate benefits payable to Available Employees;

(r) fail to discharge any material liability or make any material payment as it comes due except in connection with a good faith dispute; or

(s) agree or commit to do any of the foregoing.

Notwithstanding the foregoing, Seller may permit the Project Companies to take commercially reasonable actions with respect to emergency situations so long as Seller shall, upon receipt of notice of any such actions, promptly inform Buyer of any such actions taken outside the ordinary course of business consistent with past practices.

6.4 Use of Certain Names. Within forty-five (45) days following Closing, Buyer shall cause the Project Companies to cease using the words “DENA,” “DEGM”, “Duke”, “DE”, “Duke Energy”, “Duke Energy Americas”, “Duke Energy North America”, or “Duke Energy Global Markets” and any word or expression similar thereto or constituting an abbreviation or extension thereof (the “Seller Marks”), including eliminating the Seller Marks from the Property and Purchased Assets and disposing of any unused stationery and literature of the Project Companies bearing the Seller Marks, and thereafter, Buyer shall not, and shall cause the Project Companies and their Affiliates not to, use the Seller Marks or any logos, trademarks, trade names, patents or other Intellectual Property rights belonging to Seller or any Affiliate thereof, and Buyer acknowledges that it, its Affiliates and the Project Companies have no rights whatsoever to use such Intellectual Property. Without limiting the foregoing:

(a) Within three Business Days after the Closing Date, Buyer shall cause each Project Company whose name contains any of the Seller Marks to change its name to a name that does not contain any of the Seller Marks.

(b) Within 30 days after the Closing Date, Buyer shall provide evidence to Seller, in a format that is reasonably acceptable to Seller, that Buyer has made all governmental filings required pursuant to clause (a) above and has provided notice to all applicable Governmental Authorities and all counterparties to the Material Contracts regarding the sale of the Project Companies and the Purchased Assets to Buyer and the new addresses for notice purposes.

6.5 Support Obligations. (a) Buyer recognizes that certain of the Non-Company Affiliates have provided credit support to certain of the Project Companies with respect to the Projects pursuant to certain credit support obligations, all of which that are outstanding as of the date hereof are set forth on Schedule 6.5(a) (the “Support Obligations”).

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(b) Prior to Closing, Buyer shall use commercially reasonable efforts to effect the full and unconditional release, effective as of the Closing Date, of the Non-Company Affiliates from all Support Obligations (provided, that with respect to any Support Obligations posted or maintained in connection with an Affiliate Contract, the terms of this Section 6.5 shall apply only to such Support Obligations posted or maintained in connection with those Affiliate Contracts that become Assigned Contracts), including by:

(i) subject to Section 6.5(c) with respect to the Lease Guaranty and the Specified Guaranties, providing a Buyer guaranty to replace each existing guaranty that is a Support Obligation containing terms equal to or more favorable to the beneficiary thereof than the terms of such existing guaranty (other than with respect to the credit rating of the guarantor); provided, that if the beneficiary of any existing guaranty does not accept such a replacement guaranty by the date that is 45 days after the date hereof (A) and the terms of such existing guaranty or of any Contract or Law requiring such existing guaranty to be maintained permit the replacement of such existing guaranty with another form of credit support, Buyer will offer the beneficiary of such existing guaranty such other form of credit support in order to obtain the release of such existing guaranty or (B) if the terms of such existing guaranty or of any such Contract or Law requiring such existing guaranty to be maintained do not so permit the replacement of such existing guaranty, Buyer will offer to replace such existing guaranty with a Letter of Credit or cash in the amount of such existing guaranty in substitution therefor;

(ii) furnishing a Letter of Credit to replace each existing letter of credit that is a Support Obligation containing terms and conditions that are substantially identical to the terms and conditions of such existing letter of credit;

(iii) instituting an escrow arrangement to replace each existing escrow arrangement that is a Support Obligation with terms equal to or more favorable to the counterparty thereunder than the terms of such existing escrow arrangement;

(iv) posting a surety or performance bond to replace each existing surety or performance bond that is a Support Obligation issued by a Person having a net worth and Credit Rating at least equal to those of the issuer of such existing surety or performance bond, and containing terms and conditions that are substantially identical to the terms and conditions of such existing surety or performance bond; and

(v) replacing any other security agreement or arrangement on substantially identical terms and conditions to the existing security agreement or arrangement that is a Support Obligation.

(c) Effective on or prior to Closing:

(i) With respect to the Lease Guaranty, Buyer shall cause the full defeasance of the Outstanding Bonds (as defined in the South Bay Indenture) in accordance with Article X of the South Bay Indenture or, if such Outstanding Bonds cannot be defeased on the Closing Date, shall have deposited into an escrow account satisfactory to Seller an amount of cash necessary to effect the defeasance described above in this clause (i);

(ii) With respect to the PG&E Guaranties, the SDUPD Guaranties, and the SDG&E Guaranty (collectively, the “Specified Guaranties”) and the Lease Guaranty (other than the obligations thereunder that are satisfied by the defeasance of the Outstanding Bonds (as defined in the South Bay Indenture) in accordance with Section 6.5(c)(i)), Buyer shall use commercially reasonable efforts to effect the full and unconditional release of Duke Capital LLC from all obligations thereunder in accordance

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with the requirements of Section 6.5(b)(i) and by offering to the applicable beneficiaries of such guaranties both (A) an unlimited guaranty from Buyer to cover any obligations thereunder and (B)(1) with respect to the Lease Guaranty, a Letter of Credit in an amount equal to $34 million,, (2) with respect to the PG&E Guaranties, one or more Letters of Credit in an amount equal to $15 million in the aggregate for all such PG&E Guaranties; (3) with respect to the SDUPD Guaranties, one or more Letters of Credit in an amount equal to $5 million in the aggregate for all of the SDUPD Guaranties, and (4) with respect to the SDG&E Guaranty, a Letter of Credit in an amount equal to $1 million.

(d) Buyer shall use commercially reasonable efforts to cause the beneficiary or beneficiaries of the Support Obligations to (i) remit any cash to Seller or one of its Affiliates, as applicable, held under any escrow arrangement that is a Support Obligation promptly following the replacement of such escrow arrangement pursuant to Section 6.5(b)(iii) and (ii) terminate and redeliver to Seller or one of its Affiliates each original copy of each original guaranty, letter of credit or other instrument constituting or evidencing such Support Obligations.

(e) If Buyer is not successful, following the use of commercially reasonable efforts, in obtaining the complete and unconditional release of the Non-Company Affiliates from any Support Obligations prior to Closing (each such Support Obligation, until such time as such Support Obligation is released in accordance with Section 6.5(e)(i), a “Continuing Support Obligation”), then:

(i) from and after the Closing, Buyer shall continue to use commercially reasonable efforts to obtain promptly the full and unconditional release of the Non-Company Affiliates from each Continuing Support Obligation;

(ii) Buyer shall indemnify Seller and the Non-Company Affiliates for any liabilities, losses, costs or expenses incurred by it or the Non-Company Affiliates in connection with each Continuing Support Obligation;

(iii) Buyer shall not, and shall cause the Project Companies not to, effect any amendments or modifications or any other changes to the contracts or obligations to which any of the Continuing Support Obligations relate, or to otherwise take any action, in each case that increases, extends or accelerates the liability of the Non-Company Affiliates under any Continuing Support Obligation, without Seller’s prior written consent;

(iv) Buyer shall deliver to Seller (for the benefit of Duke Capital LLC) at the Closing and maintain at all times until the full and unconditional release of each Continuing Support Obligation in accordance with Section 6.5(e)(i) either:

(A) a Letter of Credit in an amount equal to maximum amount as set forth under “Subject Amount” on Schedule 6.5(a) for all Continuing Support Obligations in the aggregate (and the full amount of such Letter of Credit shall be available for drawing with respect to any one or more of the Continuing Support Obligations), which shall include, as applicable, (1) until such time as the San Diego Unified Port District (or another Person mutually agreed by the Parties) provides an acknowledgement to Seller and Buyer that the demolition and

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remediation under the South Bay Lease Facility have been completed in accordance with the terms of the South Bay Lease Facility, an amount equal to $34 million with respect to the obligations under the Lease Guaranty, (other than the obligations thereunder that are satisfied by the defeasance of the Outstanding Bonds (as defined in the South Bay Indenture) in accordance with Section 6.5(c)(i)),(2) $21.0 million in the aggregate for the PG&E Guaranties, the SDUPD Guaranties and the SDG&E Guaranty collectively (the “Specified Guaranty Amount”), which Specified Guaranty Amount shall decrease upon the full and unconditional release of (x) the PG&E Guaranties by $15 million, (y) the SDUPD Guaranties by $5 million, and (z) the SDG&E Guaranty by $1 million; provided that if Buyer elects to fulfill its obligations under this Section 6.5(e)(iv) through the provision of a Letter of Credit under this clause (A) then, on the last Business Day of each three month period after the later of the Closing Date or the effective date of such guaranty through the ten year anniversary of the Closing Date, Buyer shall pay Seller or Seller’s designee a fee of 1.0% (on a per annum basis) on the amount under the heading “Subject Amount” on Schedule 6.5(a) with respect to each Specified Guaranty, which fee shall increase by an additional 0.5% (on a per annum basis) on each six month anniversary of the Closing Date (or such effective date, as applicable) with respect to any such Specified Guaranty that remains outstanding, up to a maximum fee of 3.0% (on a per annum basis); or

(B) an unlimited guaranty of the Buyer’s obligations hereunder with respect to the Continuing Support Obligations from a Person with a Credit Rating of Investment Grade, which guarantee shall be in form and substance satisfactory to Seller in its sole discretion, provided that if Buyer elects to fulfill its obligations under this Section 6.5(e)(iv) through the provision of a guaranty pursuant to this clause (B), then on the last Business Day of each three month period after the later of the Closing Date or the effective date of such guaranty, Buyer shall pay Seller or Seller’s designee a fee of 1.0% (on a per annum basis) on the amount under the heading “Subject Amount” on Schedule 6.5(a) with respect to each Continuing Support Obligation, which fee shall increase by an additional 0.5% (on a per annum basis) on each six month anniversary of the Closing Date (or such effective date, as applicable) with respect to any such Continuing Support Obligation that remains outstanding, up to a maximum fee of 3.0% (on a per annum basis);

(f) Notwithstanding anything in this Agreement to the contrary, Seller and the Non-Company Affiliates may not terminate any Continuing Support Obligations at any time after the Closing Date until such Continuing Support Obligations terminate or expire by their terms or by consent of the applicable beneficiary or are replaced pursuant to this Section 6.5.

(g) During the Interim Period, Buyer shall have the right to contact and have discussions with each beneficiary of a Support Obligation in order to satisfy its obligations under this Section 6.5; provided, however, that Buyer shall give Seller prior notice before making any such contact.

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(h) From and after the Closing, Buyer shall indemnify Duke Capital LLC for any liabilities, losses, costs or expenses incurred by it under (i) any guaranty issued by it pursuant to (A) the requirements of Section 2.4(m) of the Cooperation Agreement in respect of the Port Leases and Permits (as defined in the Cooperation Agreement) or (B) the requirements of Section 13.14 of the Cooperation Agreement, in either case where such liabilities, losses, costs or expenses are incurred due to a breach of the Cooperation Agreement by Duke South Bay or a breach of such Port Leases and Permits and (ii) the Siemens Guaranty, except to the extent any such liabilities, losses, costs or expenses with respect to the Siemens Guaranty constitute an Excluded Liability described as the second item under the heading “Bridgeport” on Schedule 6.6.

6.6 Excluded Items. Notwithstanding anything in this Agreement to the contrary, Buyer and Seller agree that the Purchased Assets shall exclude those items listed on Schedule 6.6 (collectively, the “Excluded Items”), Seller shall retain all benefits and liabilities with respect to the Excluded Items, and Seller shall, prior to the Closing Date, use commercially reasonable efforts to cause the Project Companies to distribute, transfer or assign each Excluded Item to Seller or a Non-Company Affiliate. Buyer acknowledges that the inability of Seller to have any Excluded Item distributed, transferred or assigned from any Project Company for any reason shall not delay Closing and any Excluded Item that Seller is unable to so distribute, transfer or assign by the Closing shall be referred to as a “Non-Transferred Excluded Item.” After the Closing Date with respect to each Non-Transferred Excluded Item, Buyer shall permit Seller to exclusively direct and manage each Project Company’s participation in all negotiations, arbitrations, litigation, claims, and/or bankruptcy or other proceedings involving such Non-Transferred Excluded Item, whether existing on the Closing Date or arising thereafter. Buyer shall also permit Seller to settle or compromise on behalf of any Project Company any Non-Transferred Excluded Item in Seller’s sole discretion, and shall promptly pay Seller any proceeds or recoveries received in connection with any Non-Transferred Excluded Item. Buyer shall, at Seller’s expense: (a) cause any Person under its control with knowledge of relevant facts pertaining to any Non-Transferred Excluded Item to provide assistance to Seller as reasonably requested by Seller; and (b) provide any relevant books, records, or other information of any Project Company to Seller and access to each Project site, as reasonably requested by Seller, in connection with any Non-Transferred Excluded Item.

6.7 Employee and Benefit Matters. (a) Schedule 6.7(a) sets forth a list of certain employees of Seller or its Affiliates (the “Available Employees”) who have provided services relating to the Projects and that Seller and such Affiliates will make available to Buyer to discuss potential employment with Buyer (which discussions the Parties agree shall not violate Section 6.7(c)). The list of Available Employees set forth on Schedule 6.7(a) identifies which Available Employees are covered by a collective bargaining agreement or other agreement with any labor representative of the Available Employees (the “Union Employees”). Within five Business Days following the execution of this Agreement, Seller has provided to Buyer (i) certain aggregated employee information (with ranges and averages) relating to employee compensation and benefits of the Available Employees and (ii) specific information relating to each Available Employee (including salary) and as of a specified date regarding such employee’s name (to the extent permitted by any applicable Contract and Laws), job title and work location. As soon as administratively practicable after Buyer provides Seller with a list of the Available Employees who have accepted an employment offer from Buyer in accordance with Section 6.7(b), Seller shall provide to Buyer, with respect to each Available Employee on such list and

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subject to the consent of any such employee that Seller determines is required by Law, information as of a specified date regarding such employee’s current base salary or wages, hire date, vacation and sick leave accrual rates and severance benefits.

(b) Within forty-five (45) days after the execution of this Agreement, Buyer shall make offers of employment to each of the Available Employees that Buyer desires to employ after Closing and such offer shall include terms and provisions determined by Buyer that are consistent with the provisions of this Section 6.7; provided, however, that (i) the base salary/wage rate that Buyer extends to an Available Employee for the initial 12 consecutive month period of employment with Buyer or an Affiliate of Buyer shall not be less than the Available Employee’s base salary/wage rate that was in effect for the Available Employee immediately prior to the Closing Date for employment with Seller or an Affiliate of Seller and (ii) each offer that Buyer extends to a Union Employee shall permit such Union Employee to maintain his or her work location (as of the Closing Date) for the 12 month period after the Closing Date. Within forty-five (45) days after the execution of this Agreement, Buyer shall provide Seller with a list of the Available Employees to whom it has made offers of employment. Within sixty (60) days after the execution of this Agreement, Buyer shall notify Seller as to each Available Employee who has accepted employment with Buyer or any of its Affiliates (each, a “Continued Employee”), which acceptance may be conditioned upon the occurrence of the Closing and other typical hiring policies, and each Available Employee who has rejected Buyer’s offer of employment. Buyer shall indemnify and hold harmless Seller and its Affiliates with respect to all claims and liabilities directly relating to or arising out of Buyer’s employee selection and employment offer process described in this Section 6.7(b) (including any claim of discrimination or other illegality in such selection and offer process). The employment with Buyer or an Affiliate of Buyer of each Available Employee who accepts such employment shall be effective as of the Closing Date; provided, however, that on such date such Available Employee is actively at work or is on a previously scheduled and approved (by Seller or an Affiliate of Seller) paid time-off or other paid leave of absence (other than a military leave of absence or a leave pursuant to which the individual is eligible to receive long-term disability benefits under a Seller Plan). Notwithstanding the foregoing, with respect to each Available Employee who fails to become a Continued Employee as of the Closing Date because he or she did not satisfy the requirements of the preceding sentence as of the Closing Date, Buyer shall, or shall cause an Affiliate of Buyer to, at the time such Available Employee is ready and available to return to active employment status, provide such Available Employee with employment in a position comparable to that which the individual had prior to the commencement of his or her absence from active employment. Each Available Employee who becomes employed by Buyer or an Affiliate of Buyer pursuant to the preceding sentence shall be considered a Continued Employee for purposes of this Agreement, except that transitional matters addressed in this Section 6.7 shall apply with respect to such employee as of the date of his or her commencement of employment with Buyer or an Affiliate of Buyer (rather than as of the Closing Date). Nothing in the foregoing shall affect the right of Seller, or any Affiliate of Seller, to terminate the employment of an Available Employee for any reason or at any time.

(c) Buyer agrees, if the Closing has not occurred, until the date that is two years from and after the date of termination of this Agreement pursuant to Section 9.1, not to employ, and to cause its Affiliates not to employ, any Available Employees without Seller’s prior written consent. Buyer agrees that neither it nor any of its Affiliates will, directly or

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indirectly, in any manner whatsoever, solicit for hire or employment any officer or employee of the Seller or any of its Affiliates which Buyer or its Affiliates learned of in connection with the acquisition contemplated hereby for a period of two years after the date of this Agreement; provided, however, that this sentence shall not apply to any solicitation (or any hiring as a result of any solicitation) that consists of advertising in a newspaper or periodical of general circulation or through the Internet.

(d) Effective as of the Closing Date, the Continued Employees shall cease to participate in all “employee benefit plans” within the meaning of Section 3(3) of ERISA of Seller or its Affiliates providing benefits to any Continued Employees (the “Seller Plans”). Buyer shall not assume any of the Seller Plans.

(e) From and after the Closing Date and subject to the provisions set forth in the proviso to the first sentence of Section 6.7(b), Buyer shall cause each Continued Employee to be provided with compensation and benefits on a basis substantially similar to those provided to similarly situated employees of Buyer and its Affiliates; provided, however, that if the employment of any Continued Employee is terminated by Buyer or an Affiliate of Buyer for a reason other than cause within one year after the commencement of such employment, then Buyer shall provide such Continued Employee with severance benefits equal to the greater of (i) the severance benefits described in the Severance Plan that would have been provided to such employee if his or her employment had been terminated under circumstances entitling such employee to benefits under the Severance Plan or (ii) the severance benefits described in the severance plan that Buyer and its Affiliates make available to their similarly situated employees and that would have been provided to such employee if his or her employment had been terminated under circumstances entitling such employee to benefits under such severance plan. Notwithstanding the foregoing, Buyer shall cause each Continued Employee and his or her eligible dependents (including all such Continued Employee’s dependents covered immediately prior to the Closing Date by a group health plan maintained by Seller or an Affiliate of Seller) to be covered under a group health plan maintained by Buyer or an Affiliate of Buyer that (1) provides major medical and dental benefits coverages to the Continued Employee and such eligible dependents effective immediately upon the Closing Date and (2) credits such Continued Employee, for the year during which such coverage under such group health plan begins, with any deductibles and co-payments already incurred during such year under a group health plan maintained by Seller or an Affiliate of Seller; provided, however, that for purposes of applying this clause (3) with respect to any Continued Employee, the Continued Employee shall be responsible for providing the necessary information to Buyer based on explanation of benefit forms received by the Continued Employee from the group health plan maintained by Seller or an Affiliate of Seller. From and after the Closing Date, Buyer shall (and shall cause the Project Companies and their respective Affiliates, as the case may be to) recognize each Continued Employee’s years of company service prior to the Closing Date with Seller and its Affiliates and any other Person that was acquired by Seller or an Affiliate of Seller (whether through purchase, merger or other combination) for purposes of terms of employment, compensation and eligibility, vesting or other benefit/coverage eligibility (including eligibility for retiree benefits/coverages), benefit accrual and benefit determination under all employee benefit and compensation plans and programs maintained after the Closing by Buyer, the Project Companies, and their respective Affiliates in which such Continued Employee is permitted to participate (other than for benefit accrual purposes under any defined benefit pension plan), including paid

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vacation, paid sick time and severance benefits. Buyer shall cause each employee welfare benefit plan or program sponsored by Buyer or an Affiliate of Buyer that the Continued Employees may be eligible to participate in on or after the Closing Date to waive any preexisting condition exclusion or restriction with respect to participation and coverage requirements applicable to Continued Employees. From and after the Closing Date, Buyer shall (and shall cause the Project Companies and their respective Affiliates, as the case may be to) recognize and give each Continued Employee credit for his or her accumulated sick leave balance as of the Closing Date under the sick leave program maintained by Seller and its Affiliates.

(f) Claims of Continued Employees and their eligible beneficiaries and dependents for medical, dental, prescription drug, life insurance or other welfare benefits (“Welfare Benefits”) (other than disability benefits) that are incurred before the Closing Date shall be the sole responsibility of Seller and the Seller Plans. Claims of Continued Employees and their eligible beneficiaries and dependents for Welfare Benefits (other than disability benefits) that are incurred from and after the Closing Date shall be the sole responsibility of Buyer and its Affiliates. For purposes of this paragraph, a medical/dental claim shall be considered incurred on the date when the medical/dental services are rendered or medical/dental supplies are provided, and not when the condition arose or when the course of treatment began. Claims of individuals receiving long-term disability benefits under a Seller Plan as of the Closing Date shall be the sole responsibility of Seller and the Seller Plans. Except as provided in the preceding sentence, claims of Continued Employees and their eligible beneficiaries and dependents for short-term or long-term disability benefits from and after the Closing Date shall be the sole responsibility of Buyer and its Affiliates (without regard to whether the circumstances giving rise to such claim occurred before, on or after the Closing Date).

(g) All claims for health care and dependent care flexible spending account benefits submitted after the Closing Date for expenses incurred prior to the Closing Date by Continued Employees shall be paid by Seller’s or its Affiliates’ health care and dependent care flexible spending account plan to the extent permitted in accordance with the terms of such plan.

(h) Claims for workers’ compensation benefits arising out of occurrences prior to the Closing Date shall be the responsibility of Seller. Claims for workers’ compensation benefits for Continued Employees arising out of occurrences on or after the Closing Date shall be the responsibility of Buyer.

(i) Notwithstanding anything to the contrary in Section 6.7, Buyer shall have the right to use a third party or an Affiliate of Buyer operator to hire Available Employees and to perform certain actions on behalf of Buyer under Section 6.7, provided that in no event will such use of or performance by a third party operator release Buyer from any of its obligations under Section 6.7.

6.8 Termination of Certain Services and Contracts. Notwithstanding anything in this Agreement to the contrary, prior to the Closing, Seller shall (i) terminate, sever, or assign to Seller or a Non-Company Affiliate effective upon or before the Closing any services provided to any of the Project Companies by Seller or a Non-Company Affiliate, including the termination or severance of insurance policies (including those policies referred to in Section 6.10), Tax services, legal services and banking services (to include the severance of any centralized

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clearance accounts), (ii) use commercially reasonable efforts to terminate or assign to Seller or a Non-Company Affiliate each Contract listed on Schedule 6.8 , and (iii) cause all Claims or obligations (contingent or otherwise) between any Project Company, on one hand, and Seller or any Non-Company Affiliate, on the other, to be released effective immediately prior to Closing (collectively such Contracts listed, the “Terminated Contracts”).

6.9 Indebtedness; Spare Parts; Distributions. Notwithstanding anything in this Agreement to the contrary:

(a) Except for the South Bay Lease Facility, prior to or at the Closing, Seller shall cause any and all Indebtedness of the Project Companies to be paid in full and any and all Liens securing any such Indebtedness to be released such that Buyer shall take title to the Project Companies free of any such Indebtedness or any such Liens.

(b) Seller shall have the right to cause the Project Companies to pay cash dividends, make cash distributions and assign accounts receivable to Seller or its Affiliates at any time prior to the Closing. After the Closing, Buyer shall promptly remit to Seller any amounts received by Buyer or the Project Companies as payment on accounts receivable of any Project Company that such Project Company assigned to Seller or a Non-Company Affiliate and that was not reflected in the Adjusted Net Working Capital of the Project Companies as of the Closing Date.

6.10 Insurance. Seller shall maintain or cause to be maintained in full force and effect the insurance policies described on Schedule 4.17 until the Closing. All such insurance coverage shall be terminated as of the Closing, except any insurance described on Schedule 4.17 that relates to the Griffith Project and that is not maintained by Seller or a Non-Company Affiliate. Buyer shall be solely responsible for providing insurance to the Project Companies for any event or occurrence after the Closing. Within 30 days after the execution of this Agreement, Buyer shall prepare and file with the California Department of Toxic Substances Control (“DTSC”) all documentation necessary to achieve compliance by Buyer, effective as of Closing, with the financial responsibility requirements of Division 4.5, Title 22 of the California Code of Regulations applicable to the Morro Bay, Moss Landing, South Bay and Oakland Projects. Buyer shall use its commercially reasonable efforts to expedite DTSC review and approval of such documentation and DTSC release of Seller and any Non-Company Affiliates from such financial responsibility.

6.11 Casualty. If any of the Purchased Assets is damaged or destroyed by casualty loss after the date hereof and prior to the Closing, and (x) the cost of restoring such damaged or destroyed Purchased Assets to a condition reasonably comparable to their prior condition and (y) the amount of any lost profits reasonably expected to accrue after Closing as a result of such damage or destruction to such Purchased Assets (net of and after giving effect to any insurance proceeds available to the Project Companies for such restoration and lost profits and any tax benefits related thereto) (such costs and lost profits with respect to any Purchased Assets, the “Restoration Cost”, provided, that with respect to the Purchased Assets of Southwest Power Partners, ED Services, or Griffith Energy, “Restoration Cost” shall include only one-half (1/2) of such costs) is greater than $2,500,000 but does not exceed 10% of the Base Purchase Price, Seller may elect to reduce the amount of the Purchase Price by the estimated Restoration Cost (as

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estimated by a qualified firm reasonably acceptable to Buyer and Seller), by notice to Buyer, and such casualty loss shall not affect the Closing. If Seller does not make such an election within 45 days after the date of such casualty loss, Buyer may elect to terminate this Agreement within 10 Business Days after the end of such 45 day period by written notice to Seller. If the Restoration Cost is in excess of 10% of the Base Purchase Price, Seller may, by notice to Buyer within 45 days after the date of such casualty loss, elect to (a) reduce the Purchase Price by the estimated Restoration Cost (as estimated by a qualified firm reasonably acceptable to Buyer and Seller) or (b) terminate this Agreement, in each case by providing written notice to Buyer; provided, however, that if Seller does not elect to terminate this Agreement as provided in this sentence, then Buyer may, by written notice to Seller, terminate this Agreement within ten Business Days of receipt by Buyer of Seller’s notice regarding its election. If the Restoration Cost is $2,500,000 or less, (i) neither Buyer nor Seller shall have the right or option to terminate this Agreement and (ii) there shall be no reduction in the amount of the Purchase Price.

6.12 Condemnation. If any of the Purchased Assets is taken by condemnation after the date hereof and prior to the Closing and such Purchased Assets have the sum of (x) a condemnation value and (y) to the extent not included in preceding clause (x), the amount of any lost profits reasonably expected to accrue after Closing as a result of such condemnation of such Purchased Assets (net of and after giving effect to any condemnation award any tax benefits related thereto) (such sum with respect to any Purchased Assets, the “Condemnation Value”, provided, that with respect to the Purchased Assets of Southwest Power Partners, ED Services, or Griffith Energy, “Condemnation Value” shall include only one-half (1/2) of such value)) greater than $2,500,000 but do not have a Condemnation Value (as determined by a qualified firm reasonably acceptable to Buyer and Seller) in excess of 10% of the Base Purchase Price, Seller may elect to reduce the Purchase Price by such Condemnation Value (less the amount of any condemnation award and tax benefits related thereto) by notice to Buyer, and such condemnation shall not affect the Closing. If Seller does not make such an election within 45 days after the date of such condemnation, Buyer may elect to terminate this Agreement within 10 Business Days after such 45 day period by written notice to Seller. If the Condemnation Value is in excess of 10% of the Base Purchase Price, Seller may, by notice to Buyer within 45 days after the award of condemnation proceeds, elect to (a) reduce the Purchase Price by such Condemnation Value (after giving effect to any condemnation award available and tax benefits related thereto) or (b) terminate this Agreement, in each case by providing written notice to Buyer; provided, however, that if Seller does not elect to terminate this Agreement as provided in this sentence, then Buyer may, by written notice to Seller, terminate this Agreement within 10 Business Days of receipt by Buyer of Seller’s notice regarding its election. If the Condemnation Value is $2,500,000 or less, (A) neither Buyer nor Seller shall have the right or option to terminate this Agreement and (B) there shall be no reduction in the amount of the Purchase Price.

6.13 Transfer Taxes. Notwithstanding anything in this Agreement to the contrary, Seller and Buyer shall each pay any Transfer Taxes imposed on it by Law as a result of the sale of the Company Interests, but, notwithstanding such requirement at Law, each of Seller and Buyer shall bear half of the total of all such Transfer Taxes. Accordingly, if either Party is required at Law to pay more than its half of any such Transfer Taxes, the other Party shall promptly reimburse such first Party for amounts in excess of such half. Seller and Buyer shall timely file their own Transfer Tax returns as required by Law and shall notify the other Party

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when such filings have been made. Seller and Buyer shall cooperate and consult with each other prior to filing such Transfer Tax returns to ensure that all such returns are filed in a consistent manner. Seller’s Transfer Tax obligation under this Section 6.13 is limited to those Transfer Taxes arising from Buyer’s purchase of the Company Interests and the Purchased Assets and any actions occurring prior to the Closing, and Buyer is solely responsible for any Transfer Taxes arising from any action to dissolve, terminate or restructure any Project Company or to convey, distribute or transfer any assets, properties or other rights by deed, bill of sale or otherwise to or from any Project Company after the Closing.

6.14 Transition Services Arrangements.

(a) For a period of three months following the Closing Date, upon the request from time to time from Buyer, Seller shall provide or cause to be provided to the Project Companies or Buyer those services listed on Schedule 6.14(a) as are requested by Buyer (but Seller shall have no obligation to provide any such services that were provided by any employee of Seller that is hired by Buyer, its Affiliates or the Project Companies on or after the Closing) (the services listed thereon, collectively, the “Transition Services”). Seller shall and shall cause its Affiliates to perform any Transition Services provided hereunder in good faith, on a commercially reasonable basis, (i) in all material respects in compliance with all Laws and (ii) to the extent not inconsistent therewith, in substantially the same quality and manner as the same or comparable services were provided by Seller or its Affiliates to the Project Companies during the one year preceding the Closing Date; provided, however, that (x) Seller shall have no liability to Buyer or its affiliates for any acts or omissions of it or of any Non-Company Affiliate in connection with this Section 6.14 and the Transition Services (and Buyer shall indemnify and hold harmless Seller and the Non-Company Affiliates from and against any and all losses, liabilities and expenses relating to the Transition Services) except to the extent of the gross negligence or willful misconduct of Seller or such Non-Company Affiliate and (y) the exclusive remedies of Buyer and its Affiliates against Seller and the Non-Company Affiliates for any breach of this Section 6.14 shall be limited to termination (effective upon notice) of the affected Transition Service and monetary damages, which in no event shall exceed the amount paid to Seller and the Non-Company Affiliates pursuant to Section 6.14(b). Buyer also acknowledges that certain personnel of Seller and/or the Non-Company Affiliates may leave the employment of such Persons or terminate their employment or contract with such Persons during the period during which Seller shall provide Transition Services hereunder, and that the loss of such personnel may materially impede Seller’s ability to perform its obligations hereunder; Seller makes no representation or warranty regarding the ability of Seller and/or the Non-Company Affiliates to retain any such employees or subcontractors and neither Seller nor any of its Affiliates shall have any liability as to the result of the loss of any such employees.

(b) Buyer, upon not less than 30 days’ written notice, at any time and from time to time may, as of the date set forth in such notice (which may not precede the end of such 30-day period without Seller’s approval), reduce or terminate its right to receive (and Seller’s associated obligations to provide or cause the provision of) any or all of the applicable Transition Services. Buyer shall reimburse Seller for the reasonable costs or expenses actually incurred by Seller or any Non-Company Affiliate attributable to the provision of Transition Services, including any allocations of overhead expenses of Seller or any Non-Company Affiliate and any retention payments required to retain employees who provide Transition Services (such costs and

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expenses, the “Direct Costs”). No later than the 15^th Business Day after each calendar month during which Seller provided Transition Services, beginning with the calendar month immediately following the Closing, Seller shall submit an invoice to the Buyer for the Direct Costs incurred during such calendar month. If the Closing occurs on a day other than the last day of a month, the invoice shall be only for those Transition Services provided from such date until the end of the month in which the Closing took place. Buyer shall pay or cause to be paid the undisputed portion of each such invoice it receives within 15 days after its receipt.

6.15 Morro Bay Lease Consent. Notwithstanding anything to the contrary in this Agreement:

(a) If each condition to Closing set forth in Articles VII and VIII has been fulfilled other than the Company Consents with respect to the Morro Bay Project identified with an asterisk on Schedule 4.2 (any such Company Consents, the “Outstanding Consent”), Seller may, at its election, require Buyer to proceed with the Closing with respect to the Company Interests other than the Morro Bay Company Interest (the “Initial Company Interests”). If Seller so elects to proceed with Closing with respect to the Initial Company Interests, it shall provide Buyer with written notice of such election, and the Closing with respect to the Company Interests other than the Morro Bay Company Interest (the “Initial Closing”) shall occur on the third Business Day after delivery of such notice to Buyer (such date, the “Initial Closing Date”). The terms and procedures for the Initial Closing shall be the same as for the Closing provided for herein, except that (i) Seller shall not be obligated to convey, and Buyer shall not be obligated to accept, the Morro Bay Company Interest, (ii) the portion of the Purchase Price payable at the Initial Closing shall be equal to the amount set forth in Section 2.2(a) less the Morro Bay Purchase Price plus or minus the amounts calculated pursuant to Sections 2.2(b) and (c) (but excluding from such calculation any amounts attributable to the Morro Bay Project) and (iii) the Morro Bay Project and the Morro Bay Company Interest shall be deemed to be excluded from each representation and warranty made by Seller at the Initial Closing. Each reference to “the Closing” or “the Closing Date” in a provision hereof as such provision relates to any of the Initial Company Interests (and the Projects associated therewith) shall be deemed to be a reference to “the Initial Closing” or “the Initial Closing Date,” respectively. If the Initial Closing has occurred, no Party may terminate this Agreement pursuant to Article IX except with respect to the Morro Bay Company Interest and the Morro Bay Project and the obligation to close with respect thereto.

(b) If the Parties have consummated the Initial Closing and the Outstanding Consent is subsequently obtained, the closing with respect to the Morro Bay Company Interest (the “Subsequent Closing”) shall take place on the date and in the manner required for the Closing under Section 2.3 (the date of such Subsequent Closing, the “Subsequent Closing Date”), except that (i) the portion of the Purchase Price payable at the Subsequent Closing shall be equal to the Morro Bay Purchase Price plus or minus the amounts calculated pursuant to Sections 2.2(b) and (c) (calculated using the Subsequent Closing Date in place of the Closing Date, but including in such calculations only amounts attributable to the Morro Bay Project) and (ii) all representations and warranties made by Seller at the Subsequent Closing shall be deemed to be made solely with respect to the Morro Bay Project and the Morro Bay Company Interest. For purposes of the Subsequent Closing, each reference to “the Closing” or “the Closing Date” in a provision hereof as such provision relates to the Morro Bay Company Interest (and the Morro

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Bay Project) shall be deemed to be a reference to “the Subsequent Closing” or “the Subsequent Closing Date” respectively.

6.16 Bridgeport Dispute. It is recognized that as of the date hereof UBE has put the UBE Interests to Duke Bridgeport Energy pursuant to Section 8.3(b) of the Bridgeport LLC Agreement, that Duke Bridgeport Energy owes to UBE the purchase price therefor when such price is determined in connection with the settlement or resolution of the Bridgeport Dispute, that Duke Bridgeport Energy has the obligation to purchase the UBE Interests from UBE, and that the Purchase Price to be paid on the Closing Date reflects whether the Bridgeport Dispute is resolved prior to the Closing Date. If the Bridgeport Dispute is not resolved prior to the Closing Date, then from and after the Closing Date Seller shall have the exclusive right, at its expense, to direct, control, settle and resolve the Bridgeport Dispute (including the right to agree with UBE upon a value of the UBE Interest). Buyer shall be liable for, and shall pay or cause Duke Bridgeport Energy to pay to UBE any amount agreed upon by Seller and UBE for the value of the UBE Interest in connection with the settlement or resolution of the Bridgeport Dispute (such amount, the “Bridgeport Resolution Amount”), provided, however, that (concurrently with such payment to UBE) Seller shall pay to Buyer, or Buyer shall pay to Seller, the amount by which the Bridgeport Resolution Amount is greater or lesser than, respectively, the sum of (a) the Bridgeport 33 ¹/33% Purchase Price plus (b) one third (1/3) of the Adjusted Net Working Capital with respect to Bridgeport Energy and NC Development as of Closing.

6.17 Connecticut Transfer Act. Buyer shall, at its sole cost and expense, (a) prepare the Form III and Environmental Condition Assessment Form required by the Connecticut Transfer Act for the purchase and sale of the Company Interests in Duke Bridgeport Energy to occur at the Closing; (b) provide the completed Form III and Environmental Condition Assessment Form to Seller not less than 10 days prior to the Closing for Seller’s review and approval; (c) execute said Form III as the “Transferee” and as the “Certifying Party” thereon on or before the Closing Date; (d) execute the Environmental Condition Assessment Form as the party submitting same; (e) provide a bank check made payable to the Connecticut Department of Environmental Protection in the amount required for a Form III filing at the Closing; and (f) perform the obligations imposed upon it as the “Certifying Party” on said Form III and by this Section 6.17. Seller shall, at its sole cost and expense (i) execute said Form III as the “Transferor” thereon; and (ii) file the duly executed and delivered Form III and duly executed and delivered Environmental Condition Assessment Form with the Connecticut Department of Environmental Protection together with the appropriate filing fee and fee form within 10 days after the Closing.

6.18 Long Term Services Agreements. Seller may cause each Project Company party to a GE LTSA to terminate such GE LTSA effective as of the Closing Date unless (a) Buyer provides written notice at least 10 Business Days prior to the Closing Date to Seller requesting that such Project Company not terminate such GE LTSA and (b) Buyer delivers to Seller, contemporaneous with the notice described in the preceding clause (a), a written release with an effective date on or before the Closing Date fully discharging and releasing the guarantor under each Support Obligation issued with respect to such GE LTSA on behalf of such Project Company and executed by the beneficiary of such Support Obligation. During the Interim Period, Buyer shall have the right to contact and have discussions with General Electric International, Inc. to discuss the GE LTSAs.

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6.19 Tax Matters. Except as provided in Section 6.13 relating to Transfer Taxes:

(a) With respect to any Tax return covering a taxable period ending on or before the Closing Date (a “Pre-Closing Taxable Period”) that is required to be filed after the Closing Date with respect to a Project Company, (i) Seller shall cause such Tax return to be prepared in a manner consistent with practices followed in prior taxable periods and in compliance with applicable Law except as required by change in Law or fact and shall deliver such Tax return as so prepared to Buyer not later than 15 days (30 days with respect to the partnership returns for Bridgeport Energy and NC Development and 3 days with respect to any Property Tax return) prior to the due date (including extensions) for filing such Tax return for Buyer’s review and comments, (ii) with respect to any issue that could materially and adversely affect Buyer or the applicable Project Company in a taxable period (or portion thereof) beginning after the Closing Date, Seller shall cooperate and consult with Buyer to finalize such Tax return, and (iii) thereafter, subject to Seller’s payment to Buyer of such Tax in compliance with Section 6.19(b), Buyer shall cause such Tax return to be executed and duly and timely filed with the appropriate Taxing Authority and shall pay all Taxes shown as due and payable on such Tax return. With respect to any Tax return covering a taxable period beginning on or before the Closing Date and ending after the Closing Date (a “Straddle Taxable Period”) that is required to be filed after the Closing Date with respect to a Project Company, (i) Buyer shall cause such Tax return to be prepared (in a manner consistent with practices followed in prior taxable periods except as required by a change in Law or fact) and shall deliver a draft of such Tax return to Seller for Seller’s review and approval at least 15 days prior to the due date (including extensions) for filing such Tax return, (ii) Seller and Buyer shall cooperate and consult with each other in order to finalize such Tax return, and (iii) thereafter, subject to Seller’s payment to Buyer of any portion of such Tax in compliance with Section 6.19(b), Buyer shall cause such Tax return to be executed and duly and timely filed with the appropriate Taxing Authority and shall pay all Taxes shown as due and payable on such Tax return. Notwithstanding the foregoing, with respect to Southwest Power Partners, ED Services and Griffith Energy, neither Seller nor Buyer shall be required by reason of this Section 6.19(a) to prepare any Tax return which for the prior taxable period was prepared by a Person other than Seller.

(b) Subject to Section 10.1(b), Seller shall be responsible for and indemnify the Buyer Indemnified Parties against, and Seller shall be entitled to all refunds or credits of, any Tax with respect to a Project Company that is attributable to a Pre-Closing Taxable Period or to that portion of a Straddle Taxable Period that ends on the Closing Date. Within 5 days prior to the due date for the payment of any such Tax, Seller shall pay to Buyer the amount of such Taxes, less any prepaid Taxes. With respect to a Straddle Taxable Period, Seller and Buyer shall determine the Tax attributable to the portion of the Straddle Taxable Period that ends on the Closing Date by an interim closing of the books of the Project Company as of the Closing Date, except for ad valorem or property Taxes (“Property Taxes”) and franchise Taxes based solely on capital which shall be prorated on a daily basis to the Closing Date. For this purpose, any franchise Tax paid or payable with respect to the Project Company shall be allocated to the taxable period for which payment of the Tax provides the right to engage in business, regardless of the taxable period during which the income, operations, assets or capital comprising the base of such Tax is measured. In determining whether a Property Tax is attributable to a Pre-Closing Taxable Period or a Straddle Taxable Period, any Property Tax that is based on the assessed value of any assets, property or other rights as of any lien date or other specified valuation date

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shall be deemed a Property Tax attributable to the taxable period (whether a fiscal year or other tax year) specified on the relevant Property Tax bill that is issued with respect to that lien date or other valuation date. Notwithstanding the foregoing, with respect to any Project Company in which Seller does not directly or indirectly own 100% of the Company Interests, the calculation of the amount of Tax of such Project Company for which Seller is responsible or entitled to refunds or credits under this Section 6.19(b) shall be made by reference to Seller’s direct and indirect percentage ownership of such Project Company.

(c) Subject to Section 10.1 (a), Buyer shall be responsible for and indemnify Seller against, and Buyer shall be entitled to all refunds and credits of, all Taxes of the Project Companies that are attributable to a taxable period (or portion thereof) beginning after the Closing Date.

(d) With respect to any Tax for which Seller is responsible, Seller shall have the right, at its sole cost and expense, to initiate any claim for refund and to control (in the case of a Pre-Closing Taxable Period) or participate in (in the case of a Straddle Taxable Period) the prosecution, settlement or compromise of any proceeding involving such Tax, including the determination of the value of property for purposes of real and personal property ad valorem Taxes. Buyer shall (and shall cause the relevant Project Company to) take such action in connection with any such proceeding as Seller shall reasonably request from time to time to implement the preceding sentence, including the selection of counsel and experts and the execution of powers of attorney. Notwithstanding the foregoing, Seller shall not settle any proceeding with respect to any issue that could materially and adversely affect Buyer or the applicable Project Company in a taxable period (or portion thereof) beginning after the Closing Date without Buyer’s prior written consent, not to be unreasonably withheld. Buyer shall (and shall cause the relevant Project Company to) give written notice to Seller of its receipt of any notice of any audit, examination, claim or assessment for any Tax for which Seller is responsible within 20 days after its receipt of such notice; failure to give any such written notice within such 20-day period shall limit Seller’s indemnification obligation pursuant to this Agreement to the extent Seller is actually prejudiced by such failure.

(e) Seller shall grant to Buyer (or its designees) access at all reasonable times to all of the information, books and records relating to the Project Companies within the possession of Seller (including workpapers and correspondence with Taxing Authorities), and shall afford Buyer (or its designees) the right (at Buyer’s expense) to take extracts therefrom and to make copies thereof, to the extent reasonably necessary to permit Buyer (or its designees) to prepare Tax returns, respond to Tax audits and investigations, prosecute Tax protests, appeals and refund claims and to conduct negotiations with Taxing Authorities. Buyer shall grant or cause the Project Companies to grant to Seller (or its designees) access at all reasonable times to all of the information, books and records relating to the Project Companies for Pre-Closing Taxable Periods or Straddle Taxable Periods within the possession of Buyer (including workpapers and correspondence with Taxing Authorities) and to the employees of the Project Companies, and shall afford Seller (or its designees) the right (at Seller’s expense) to take extracts therefrom and to make copies thereof, in each case to the extent reasonably necessary to permit Seller (or its designees) to prepare Tax returns, respond to Tax audits and investigations, prosecute Tax protests, appeals and refund claims and to conduct negotiations with Taxing Authorities. After the Closing Date, Seller and Buyer will preserve all information, records or

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documents in their respective possessions relating to liabilities for Taxes of the Project Companies for Pre-Closing Taxable Periods or Straddle Taxable Periods until six months after the expiration of any applicable statute of limitations (including extensions thereof) with respect to the assessment of such Taxes; provided, that neither Party shall dispose of any of the foregoing items without first offering such items to the other Party.

(f) If after the Closing Buyer or a Project Company receives a refund or utilizes a credit of any Tax of a Project Company attributable to a Pre-Closing Taxable Period or that portion of a Straddle Taxable Period ending on the Closing Date, Buyer shall pay to Seller within ten Business Days after such receipt or utilization an amount equal to such refund received or credit utilized, together with any interest received or credited thereon. Buyer shall, and shall cause the Project Company to, use commercially reasonable efforts to obtain a refund or credit of any Tax of the Project Company attributable to a Pre-Closing Taxable Period or that portion of a Straddle Taxable Period ending on the Closing Date or to mitigate, reduce or eliminate any such Tax that could be imposed for a Pre-Closing Taxable Period or that portion of a Straddle Taxable Period ending on the Closing Date (including with respect to the transactions contemplated hereby).

(g) In the event that Seller initiates a claim for refund from a Taxing Authority with regard to any Tax of a Project Company attributable to a Pre-Closing Taxable Period or that portion of a Straddle Taxable Period ending on the Closing Date, whether the initiation of such claim begins prior to or after the Closing, Seller shall have all rights to and interest in such refund. Buyer shall, upon request, provide Seller a limited power of attorney allowing Seller to pursue such claim for refund with and collect such refund from such Taxing Authority. Notwithstanding the foregoing, Buyer shall have the right to participate at its own expense in any action with respect to such claim for refund, and Seller shall not settle any such claim in a manner that could materially and adversely affect Buyer or the applicable Project Company in a taxable period (or portion thereof) beginning after the Closing Date without Buyer’s prior written consent, not to be unreasonably withheld. If after the Closing Buyer or the Project Company receives a refund or utilizes a credit of any such Tax with regard to a claim so initiated by Seller, Buyer shall pay to Seller within ten Business Days after such receipt or utilization an amount equal to such refund received or credit utilized, together with any interest received or credited thereon.

(h) In the event that Seller initiates a claim for refund from a third party who improperly withheld sales and use Tax, or withheld excessive sales and use Tax, with regard to a Project Company attributable to a Pre-Closing Taxable Period or that portion of a Straddle Taxable Period ending on the Closing Date, whether the initiation of such claim begins prior to or after the Closing, Seller shall have all rights to and interest in such refund. Buyer shall, upon request, provide Seller a limited power of attorney allowing Seller to pursue such claim for refund with and collect such refund from such third party. Notwithstanding the foregoing, (A) Seller shall not initiate any such claim for refund from a third party without Buyer’s prior written consents, not to be unreasonably withheld, (B) Buyer shall be entitled to participate with Seller in any discussions with such third party and (C) Seller shall not settle any such claim in a manner that could materially and adversely affect Buyer or the applicable Project Company in a taxable period (or portion thereof) beginning after the Closing Date without Buyer’s prior written consent, not to be unreasonably withheld. If after the Closing Buyer or the Project Company

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receives a refund of any such Tax with regard to a claim so initiated by Seller, Buyer shall pay to Seller within ten Business Days after such receipt an amount equal to such refund received, together with any interest received or credited thereon.

(i) To the extent that the provisions of Article X are inconsistent with or conflict with the provisions of this Section 6.19, the provisions of this Section 6.19 shall control.

(j) Seller will use commercially reasonable efforts to cause each of Bridgeport Energy, NC Development and Southwest Power Partners to have in effect for its taxable year in which the Closing Date occurs an election under section 754 of the Code.

6.20 Affiliate Contracts. From and after the date hereof, Buyer and Seller shall use commercially reasonable efforts to obtain the written consent from each party (other than Seller and its Affiliates) (each a “Counterparty”) to each Affiliate Contract that is not a Terminated Contract to the assignment and assumption or novation of such Affiliate Contract by each Assignor to each Assignee identified on Schedule 1.1-AC as contemplated by Section 2.4(b) to occur at Closing, provided, however, that with respect to those Affiliate Contracts not marked with an asterisk on Schedule 1.1-AC, the failure to obtain such consent shall not delay or prevent Closing, and any obligation to seek such consent by Buyer or Seller shall (except with respect to any of the Affiliate Contracts listed as items 4, 5 and 7 on Schedule 1.1-AC) terminate as of the Closing. Without limiting the foregoing, Buyer’s efforts shall include offering to replace any credit support posted or maintained by Seller or a Non-Company Affiliate in favor of any Counterparty to any Affiliate Contract in accordance with the requirements of Section 6.5, and in the case of Affiliate Contracts with respect to which none of Seller or any Non-Company Affiliate has posted or maintains any credit support, Buyer shall comply with all commercially reasonable requests from any Counterparty under such Affiliate Contracts to post or maintain credit support as security for the performance of the obligations of the Assignee thereof. With respect to any of the Affiliate Contracts listed as items 4, 5 and 7 on Schedule 1.1-AC which cannot be assigned and assumed or novated at the Closing because of the failure to obtain such consent of the Counterparty, (a) Seller and Buyer shall, to the extent permissible under applicable Laws and under the terms of such Affiliate Contract, cause the respective Assignor and Assignee identified on Schedule 1.1-AC to enter into arrangements intended to put such Assignor and Assignee in substantially the same economic position as if such Affiliate Contract were assigned and assumed or novated from the Closing until such Affiliate Contract expires by its terms and (b) if such arrangements are not entered into, Seller shall indemnify Buyer against all losses and liabilities (including Non-reimbursable Damages) arising out of the failure of any such Affiliate Contract to be assigned and assumed or of such arrangements to be entered into; provided, however, that Seller’s liability under this clause (b) with respect to the Affiliate Contract listed as item 7 on Schedule 1.1-AC shall not exceed $10 million.

6.21 Further Assurances. Subject to the terms and conditions of this Agreement, at any time or from time to time after the Closing, at any Party’s request and without further consideration, the other Party shall execute and deliver to such Party such other instruments of sale, transfer, conveyance, assignment and confirmation, provide such materials and information and take such other actions as such Party may reasonably request in order to consummate the transactions contemplated by this Agreement.

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6.22 Moss Landing Toll. (a) If (i) an Affiliate of Seller (or, at the Seller’s request, Buyer or a Project Company designated by Buyer) enters into the Moss Landing Toll on or prior to the 90th day following the Closing Date and (ii) the Counterparty to such Moss Landing Toll has approved on or prior to November 30, 2006 the transfer thereof to Buyer or a Project Company designated by Buyer (or if no such approval is required), then Seller shall promptly provide notice to Buyer which shall (A) state that the items set forth in Section 6.22(a)(i)and (ii) have been satisfied, (B) attach a copy of the Moss Landing Toll, and (C) set forth the amount of the Moss Landing Toll Purchase Price Adjustment (which may be positive, negative or zero). Seller shall use commercially reasonable efforts to cause the Moss Landing Toll to be transferred, if applicable, to Buyer or such Project Company within 5 Business Days following such notice. Concurrently with such transfer (or, if requested by Seller, concurrently with the entry by Buyer or a Project Company designated by Buyer into the Moss Landing Toll directly), Buyer shall pay to Seller or its designee (by wire transfer of immediately available funds to an account designated by Seller) an amount equal to the sum of the Moss Landing Toll Purchase Price and the Moss Landing Toll Purchase Price Adjustment (which may be positive, negative or zero).

(b) If Buyer fails to maintain a Minimum Net Worth of at least $440 million at all times during the period from the Closing through December 15, 2006 (or, if earlier, the date on which the Moss Landing Toll Purchase Price (as adjusted by the Moss Landing Toll Purchase Price Adjustment) has been paid by Buyer to Seller pursuant to Section 6.22(a)), then Buyer shall pay to an escrow agent designated by Seller an amount equal to the Moss Landing Toll Purchase Price. The monies held by such escrow agent shall be applied to the payment of the Moss Landing Toll Purchase Price (as adjusted by the Moss Landing Toll Purchase Price Adjustment) at the times set forth in Section 6.22(a) for the payment of such amounts by Buyer. If the conditions set forth in Section 6.22(a)(i) and (ii) above have not been satisfied on or before November 30, 2006, then such funds on deposit with the escrow agent shall be returned to Buyer.

(c) During the period from the date of this Agreement through the earlier to occur of (i) the assignment of the Moss Landing Toll to Buyer or a Project Company designated by Buyer and (ii) November 30, 2006, Buyer and Seller agree to use commercially reasonable efforts to enter into additional agreements or to take such further actions as may be reasonably necessary to implement the items set forth in Section 6.22, including (A) Buyer or such Project Company posting (effective as of the transfer of the Moss Landing Toll to Buyer or such Project Company) a guaranty, letter of credit or other credit support in accordance with the terms of the Moss Landing Toll to the Counterparty under the Moss Landing Toll, (B) Buyer effecting the full and unconditional release of Seller or its Affiliates from any credit support provided by or on behalf of Seller and its Affiliates with respect to the Moss Landing Toll, and (C) Buyer cooperating with Seller, its Affiliates and the Counterparty to the Moss Landing Toll to cause the assignment of such Toll to Buyer or such Project Company.

(d) In connection with the Moss Landing Toll, Seller agrees (a) to use commercially reasonably efforts to include in the Moss Landing Toll (i) ML Other Terms that are consistent with the corresponding terms described in the Moss Landing RFP; provided that the ML Fixed Terms shall not be changed in any material adverse respect from those corresponding terms set forth in the Moss Landing RFP without the prior written consent of Buyer, which consent shall

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not be unreasonably withheld, conditioned or delayed and (ii) gas and power scheduling procedures that are commercially reasonable in light of the operating characteristics for the Moss Landing Project, (b) to use commercially reasonable efforts to minimize the amount of credit support that Buyer will have to provide in support of its obligations under the Moss Landing Toll and (c) not to agree to any requirement that Buyer provide a Letter of Credit in excess of $100 million without Buyer’s consent, which may be withheld in its sole, reasonable discretion. If Buyer withholds its consent with respect to any changes to the ML Fixed Terms, Buyer shall not enter into a transaction with respect to the Moss Landing Project on terms that are similar to the Moss Landing Toll proposed by Seller for a period of eighteen months following the date on which Buyer withheld such consent.

(e) During the period from the date of this Agreement through November 30, 2006, neither Buyer nor any of its Affiliates shall enter into any agreements or negotiations with any potential Counterparty to the Moss Landing Toll that is engaged in discussions with respect to the Moss Landing Toll with Seller or its Affiliates to the extent such agreements or negotiations relate to sales of all or any portion of the energy, capacity or other ancillary services with respect to Unit 6 and/or Unit 7 of the Moss Landing Project.

6.23 Monthly Operating Report. During the Interim Period, on or prior to 30 Business Days following the end of each calendar month, Seller shall cause each Project Company to provide Buyer with a monthly operating report with respect to such Project Company prepared in the ordinary course of business consistent with past practice.

6.24 Griffith Tag Along Offer. Within 5 Business Days after the date of this Agreement, Buyer shall deliver to PPL a written offer to be held open for at least 10 Business Days to purchase from PPL all the membership interests owned by PPL in Southwest Power Partners for a purchase price equal to the Griffith 50% Purchase Price, plus fifty percent (50%) of the Net Working Capital (as of the closing of the transactions contemplated by such offer) of Southwest Power Partners, Griffith Energy and ED Services and upon substantially similar terms and conditions as those set forth in this Agreement. Buyer shall promptly provide Seller with updates on its discussions with PPL regarding such purchase.

6.25 DEGM Restructuring. Notwithstanding anything to the contrary in this Agreement, and assuming any necessary Seller Approval relating to the FERC 203 filing has been obtained, Seller will prior to Closing effect the DEGM Restructuring by causing DEGM to transfer the Company Interests of DE Mulberry, DE Mohave and Duke Bridgeport Energy to DEGM Holding Subsidiary.

6.26 DENA Restructuring. Notwithstanding anything to the contrary in this Agreement, Seller may at any time prior to Closing at its option effect the DENA Restructuring and, promptly following the DENA Restructuring, Seller, shall deliver to Buyer a new Schedule 3.4 reflecting the DENA Restructuring and a supplement to Schedule 4.13 reflecting any changes to the Charter Documents of the Parent Companies and/or the Project Companies resulting from the DENA Restructuring. From and after the date of the delivery of such revised or replacement Schedules, all references in this Agreement to Schedule 3.4 or Schedule 4.13 shall be deemed to be references to such replacement Schedule 3.4 and revised Schedule 4.13, as applicable.

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6.27 Seller Creditworthiness. If Seller fails to maintain a Minimum Net Worth of at least $700 million at any time from the Closing until the five year anniversary of the Closing or at least $100 million thereafter, then Seller shall cause one of its Affiliates with a Minimum Net Worth of at least such amount during such relevant time period to guarantee to Buyer, in a form and substance reasonably satisfactory to Buyer, the obligations of Seller under Section 10.1 of this Agreement (it being agreed that Seller may, from time to time, substitute a different Affiliate with such applicable Minimum Net Worth for the Affiliate then guaranteeing such obligations and Buyer shall promptly release such Affiliate then guaranteeing such obligations).

6.28 Letter of Credit. On or prior to January 11, 2006, Buyer shall provide to Seller (i) $75,000,000 of cash to be held by Seller as collateral to secure Buyer’s obligations under Section 9.3 or (ii) an irrevocable, standby letter of credit with a face amount equal to $75,000,000 from a commercial bank with ratings of at least “A-” by Standard & Poor’s Ratings Group ( a division of McGraw Hill, Inc.) and at least “A3” by Moody’s Investor Services, Inc. which shall be in form and substance reasonably satisfactory to Seller and which shall permit Seller to draw upon such letter of credit upon a certification by Seller to such bank that the amount of the requested draw is the amount due from Buyer to Seller pursuant to Section 9.3.

ARTICLE VII

BUYER’S CONDITIONS TO CLOSING

The obligation of Buyer to consummate the Closing is subject to the fulfillment of each of the following conditions (except to the extent waived in writing by Buyer in its sole discretion):

7.1 Representations and Warranties. The representations and warranties made by Seller in Articles III and IV shall be true and accurate in all material respects on and as of the Closing Date as though made on and as of the Closing Date or, in the case of representations and warranties that speak as to an earlier date, such representations and warranties shall be true and accurate in all material respects as of such earlier date.

7.2 Performance. Seller shall have performed and complied, in all material respects, with the agreements, covenants and obligations required by this Agreement to be performed or complied with by Seller at or before the Closing.

7.3 Officer’s Certificate. Seller shall have delivered to Buyer at the Closing a certificate of an officer of Seller, dated as of the Closing Date, as to the matters set forth in Sections 7.1 and 7.2.

7.4 Orders and Laws. There shall not be any litigation or proceedings (filed by a Person other than Buyer or its Affiliates) or Law or order restraining, enjoining or otherwise prohibiting or making illegal or threatening to restrain, enjoin or otherwise prohibit or make illegal the consummation of the transactions contemplated by this Agreement.

7.5 Consents and Approvals. Subject to Section 6.15, the Buyer Approvals and those Company Consents marked with an asterisk on Schedule 4.2 shall have been duly obtained, made or given and shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental Authority shall have occurred; provided, however, that

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the absence of any appeals and the expiration of any appeal period with respect to any of the foregoing shall not constitute a condition to Closing hereunder.

7.6 Resignation of Members, Managers, Officers and Directors. Seller shall have caused the resignation or removal of all members, managers, officers and directors, as applicable, nominated or appointed by Seller or its Affiliates to any board or operating, management or other committee relating to the Projects or established under the Project Companies’ Charter Documents, and shall have delivered to Buyer at the Closing evidence of such resignations or removals.

7.7 Release of Intercompany Indebtedness; Release of Liens.

Seller shall have delivered to Buyer evidence, if any, of (i) cancellation of any intercompany Indebtedness between any Project Company, on the one hand, and Seller or any Non-Company Affiliate, on the other hand; and (ii) release of all Liens on the Purchased Assets (other than Permitted Liens or Liens created by or at the behest of Buyer) and the Company Interests (other than Liens described in Section 3.4 and Liens created by or at the behest of Buyer).

ARTICLE VIII

SELLER’S CONDITIONS TO CLOSING

The obligation of Seller to consummate the Closing is subject to the fulfillment of each of the following conditions (except to the extent waived in writing by Seller in its sole discretion):

8.1 Representations and Warranties. The representations and warranties made by Buyer in Article V shall be true and accurate in all material respects on and as of the Closing Date as though made on and as of the Closing Date.

8.2 Performance. Buyer shall have performed and complied, in all material respects, with the agreements, covenants and obligations required by this Agreement to be so performed or complied with by Buyer at or before the Closing.

8.3 Officer’s Certificate. Buyer shall have delivered to Seller at the Closing a certificate of an officer of Buyer, dated as of the Closing Date, as to the matters set forth in Sections 8.1 and 8.2.

8.4 Orders and Laws. There shall not be any litigation or proceedings (filed by a Person other than Seller or its Affiliates) or Law or order restraining, enjoining or otherwise prohibiting or making illegal or threatening to restrain, enjoin or otherwise prohibit or make illegal the consummation of the transactions contemplated by this Agreement.

8.5 Consents and Approvals. The Seller Approvals shall have been duly obtained, made or given and shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental Authority shall have occurred; provided, however, that the absence of any appeals and the expiration of any appeal period with respect to any of the foregoing shall not constitute a condition to Closing hereunder.

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ARTICLE IX

TERMINATION

9.1 Termination. This Agreement may be terminated, and the transactions contemplated hereby may be abandoned, as follows:

(a) at any time before the Closing, by Seller or Buyer, by written notice to the other, in the event that any Law or final order restrains, enjoins or otherwise prohibits or makes illegal the transactions contemplated pursuant to this Agreement;

(b) at any time before the Closing, by Seller or Buyer, by notice to the other, if the other has materially breached its obligations hereunder and such breach (other than a breach of Buyer’s obligation to pay the Purchase Price in accordance with the terms of Article II) has not been cured within 30 days following written notification thereof; provided, however, that if, at the end of such 30 day period, the breaching Party is endeavoring in good faith, and proceeding diligently, to cure such breach, the breaching Party shall have an additional 30 days in which to effect such cure;

(c) at any time before the Closing, by Buyer or Seller, by notice to the other, on or after May 31, 2006;

(d) by Buyer or Seller pursuant to Section 6.11 or 6.12, by notice to the other party in accordance with such Sections;

(e) by Seller, by written notice to the other, if Buyer has breached its obligation under Section 6.28 and such breach has not been cured within one Business Day; or

(f) by mutual written consent of Buyer and Seller.

9.2 Effect of Termination. If this Agreement is validly terminated pursuant to Section 9.1, there will be no liability or obligation on the part of Seller or Buyer (or any of their respective Representatives or Affiliates), provided that (a) Sections 6.2(b), 9.2, 10.5(a), 10.5(b), 11.3, 11.4, 11.12 and 11.3 will survive any such termination and (b) each Party shall continue to be liable for any willful breach of this Agreement by it occurring prior to such termination.

9.3 Break-up Fee. (a) If this Agreement is terminated pursuant to Section 9.1(b), then, in lieu of all other Claims and remedies that might otherwise be available with respect thereto, including elsewhere hereunder and notwithstanding any other provision of this Agreement:

(i) if Buyer has breached its obligation to pay the Purchase Price pursuant to Sections 2.2 and 2.5 or its obligations under Section 6.1(a), 6.1(c) or 6.28 and, in the case of Section 6.28, such breach has not been cured within one Business Day, then Buyer shall pay to Seller, by wire transfer of immediately available funds within three Business Days following the date of termination, as liquidated damages, 10% of the Base Purchase Price;

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(ii) if Seller has breached its obligations to sell the Company Interests to Buyer pursuant to Sections 2.1 and 2.4 or its obligations under Section 6.1(a) or 6.1(c), then Seller shall pay Buyer, by wire transfer of immediately available funds within three Business Days following the date of termination, as liquidated damages, 10% of the Base Purchase Price; or

(iii) if either Buyer or Seller has materially breached any representation, warranty, covenant, agreement or obligation hereunder (other than those referred to in Sections 9.3(a)(i) and 9.3(a)(ii)), then the breaching Party shall pay to the other, by wire transfer of immediately available funds within three Business Days following the date of termination, as liquidated damages, the terminating Party’s actual and reasonable out-of-pocket fees (including reasonable attorney’s fees and regulatory filing fees) and expenses incurred in connection with this Agreement, subject to a maximum of $4,000,000.

(b) The provision for payment of liquidated damages in this Section 9.3 has been included because, in the event of a breach by Buyer or Seller, as the case may be, the actual damages to be incurred by any Party can reasonably be expected to approximate the amount of liquidated damages called for herein and because the actual amount of such damages would be difficult if not impossible to measure accurately.

ARTICLE X

INDEMNIFICATION, LIMITATIONS OF LIABILITY, WAIVERS AND

ARBITRATION

10.1 Indemnification. (a) Subject to Section 10.2, from and after Closing, Seller shall indemnify, defend and hold harmless Buyer, each of the Project Companies, and their respective partners, members, officers, employees, Affiliates and Representatives (collectively, the “Buyer Indemnified Parties”) from and against all Losses incurred or suffered by any Buyer Indemnified Party resulting from:

(i) any breach or inaccuracy as of the Closing Date (as though made on and as of the Closing Date except to the extent otherwise provided in this Agreement) of any representation or warranty of Seller contained in this Agreement or any certificate delivered pursuant to Section 7.3;

(ii) any breach of any covenant or agreement of Seller contained in this Agreement; and

(iii) the Excluded Liabilities.

(b) Subject to Section 10.2, from and after Closing, Buyer shall indemnify, defend and hold Seller and its partners, members, officers, employees, Affiliates and Representatives (collectively, the “Seller Indemnified Parties” and, together with Buyer Indemnified Parties, the “Indemnified Parties”) harmless from and against all Losses incurred or suffered by any Seller Indemnified Party resulting from:

(i) any breach or inaccuracy as of the Closing Date (as though made on and as of the Closing Date except to the extent otherwise provided in this Agreement) of any representation or warranty of Buyer contained in this Agreement or any certificate delivered pursuant to Section 8.3;

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(ii) any breach of any covenant or agreement of Buyer contained in this Agreement; and

(iii) the Assigned Contracts, but only to the extent such Losses relate to periods on or after Closing.

10.2 Limitations of Liability. Notwithstanding anything in this Agreement to the contrary:

(a) the representations, warranties, covenants, agreements and obligations in this Agreement shall survive the Closing; provided, however, that no Party may make or bring a Claim for liability with respect to (i) any representations or warranties contained in Articles III, IV or V (other than those representations and warranties contained in Section 3.2 (Authority), 3.4 (Capitalization), 4.1 (Organization), 4.3 (Capitalization) and 4.6 (Subsidiaries) (collectively, the “Title and Authority Representations”)) or any covenants, agreements or obligations in Sections 6.3 or 6.9, after the one-year anniversary of the Closing Date, (ii) the Title and Authority Representations, after the five-year anniversary of the Closing Date, and (iii) the representations and warranties contained in Section 4.11 (Taxes) and the covenants in Section 6.19 after the expiration of 60 days following the expiration of the applicable statute of limitations (including extensions thereof consented to in writing by Seller, such consent not to be unreasonably withheld) and (iv) any covenants, agreements or obligations of the Parties (other than those contained in Sections 6.2(b), 6.3 and 6.9) that by their terms are to be performed prior to Closing, after the Closing;

(b) any breach of a representation or warranty in this Agreement (other than a breach of a representation or warranty contained in Section 4.11) in connection with any single item or group of related items that results in Losses of less than $500,000 shall be deemed, for all purposes of this Article X, not to be a breach of such representation or warranty;

(c) Seller shall have no liability for breaches of representations and warranties, in this Agreement (other than a breach of a representation or warranty contained in Section 4.11) until the aggregate amount of all Losses incurred by Buyer equals or exceeds 1.5% of the Base Purchase Price (the “Deductible Amount”), in which event Seller shall be liable for Losses only to the extent they are in excess of the Deductible Amount (except as set forth below);

(d) in no event shall Seller’s aggregate liability (i) arising out of or relating to this Agreement, whether relating to breach of representation and warranty, covenant, agreement or obligation in this Agreement and whether based on contract, tort, strict liability, other Laws or otherwise (except as set forth in Section 10.2(j) below), exceed 10% of the Base Purchase Price, except as set forth in clause (ii) below; and (ii) arising out of or relating to any breach of a Title or Authority Representation, a breach of a representation or warranty contained in Section 4.11

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or a breach of Section 6.19 (together with the aggregate liability pursuant to clause (i) above) exceed 100% of the Base Purchase Price;

(e) Seller shall have no liability for any breach of a representation, warranty, covenant, agreement or obligation in this Agreement by Seller (i) of which Buyer had knowledge prior to the date hereof or (ii) (x) of which Buyer did not have knowledge prior to the date hereof but of which Buyer had knowledge prior to the Closing Date and (y) where due to such breach Buyer’s conditions to closing in Article VII were not met (and for purposes of this Section 10.2(e), the documents disclosed to Buyer or its Representatives in the course of its due diligence, and their contents, are deemed to be known to Buyer); provided that this provision shall not apply to any willful breaches of a representation, warranty, covenant, agreement or obligation;

(f) Notwithstanding anything to the contrary herein, the Parties agree that each representation or warranty of Seller made herein shall be limited solely to Seller’s Knowledge as such representation or warranty relates to any of the Jointly Owned Project Companies, and the requirement of any covenant, obligation or agreement of Seller herein (other than those set forth in Article II) relating to any of the Jointly Owned Project Companies shall be limited solely to a requirement to use commercially reasonable efforts to perform such covenant, obligation or agreement;

(g) a Party must give written notice to the other Party within a reasonable period of time after becoming aware of any breach by such other Party of any representation, warranty, covenant, agreement or obligation in this Agreement;

(h) the Parties shall have a duty to mitigate any Loss in connection with this Agreement;

(i) Seller shall have no liability for any Losses that represent the cost of repairs, replacements or improvements which enhance the value of the repaired, replaced or improved asset above its value on the Closing Date or which represent the cost of repair or replacement exceeding the lowest reasonable cost of repair or replacement;

(j) Notwithstanding anything herein to the contrary, the limitations, covenants, agreements and obligations set forth in this Section 10.2 shall not apply to Seller’s indemnification obligations pursuant to Section 10.1(a)(iii).

(k) Upon and after the Closing, none of the Project Companies shall have any liability or obligation to indemnify, save or hold harmless or otherwise pay, reimburse or make any Seller Indemnified Party whole for or on account of any indemnification claim made by the Seller or any of its Affiliates or Representatives for any breach of any representation, warranty, covenant or agreement of the Seller, and the Seller shall have no right of contribution against any Project Company; other than, in all cases under this clause (k), with respect to any Contracts between a Project Company, on the one hand, and Seller or any of its Affiliates, on the other.

(1) The Losses suffered by any Indemnified Party shall be calculated after giving effect to any amounts covered by third parties, including insurance proceeds, in each case net of costs and expenses of such recoveries and net of any associated tax benefits to Buyer or

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any Project Company (it being understood and agreed that the Indemnified Parties shall use their commercially reasonable efforts to seek insurance recoveries in respect of Losses to be indemnified hereunder). In the event any insurance proceeds or other recoveries from third parties are actually realized (in each case calculated net of costs and expenses of such recoveries) by an Indemnified Party subsequent to the receipt by such Indemnified Party of an indemnification payment hereunder in respect of the claims to which such insurance proceedings or third party recoveries relate, appropriate refunds shall be made promptly to the indemnifying party regarding the amount of such indemnification payment.

10.3 Indirect Claims. From and after the Closing, Buyer agrees to release, indemnify and hold harmless Seller, its Affiliates and the officers, directors and employees of the Project Companies (acting in their capacity as such) from and against any Claims for controlling stockholder liability or breach of any fiduciary duty relating to any pre-Closing actions or failures to act (including negligence or gross negligence) by Seller or any of its Affiliates in connection with the business of the Project Companies prior to the Closing.

10.4 Waiver of Other Representations. (a) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO, AND THE PARTIES HEREBY AGREE, THAT NONE OF SELLER OR ANY OF ITS AFFILIATES OR REPRESENTATIVES HAS MADE OR IS MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO THE CONDITION, MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE COMPANY INTERESTS, THE PROJECT COMPANIES OR ANY OF THE PURCHASED ASSETS, OR ANY PART THEREOF, EXCEPT THOSE REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLES III AND IV. IN PARTICULAR, AND WITHOUT IN ANY WAY LIMITING THE FOREGOING, (I) SELLER MAKES NO REPRESENTATION OR WARRANTY REGARDING ANY ENVIRONMENTAL MATTERS EXCEPT AS EXPRESSLY SET FORTH IN SECTIONS 4.15 AND 4.16 AND (II) SELLER MAKES NO REPRESENTATION OR WARRANTY TO BUYER WITH RESPECT TO ANY FINANCIAL PROJECTIONS OR FORECASTS RELATING TO THE PROJECT COMPANIES OR THE PURCHASED ASSETS.

(b) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THE REPRESENTATIONS AND WARRANTIES IN ARTICLES III AND IV, SELLER’S INTERESTS IN THE PROJECT COMPANIES ARE BEING TRANSFERRED THROUGH THE SALE OF THE COMPANY INTERESTS “AS IS, WHERE IS, WITH ALL FAULTS,” AND SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO THE CONDITION, VALUE OR QUALITY OF THE PROJECT COMPANIES AND THEIR ASSETS OR THE PROSPECTS (FINANCIAL OR OTHERWISE), RISKS AND OTHER INCIDENTS OF THE PROJECT COMPANIES AND THEIR ASSETS.

10.5 Waiver of Remedies. (a) The Parties hereby agree that, except with respect to Claims for fraud (but not constructive fraud), neither Party shall have any liability, and neither Party shall make any Claim, for any Loss or other matter, under, relating to or arising out of this

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Agreement or any other document, agreement, certificate or other matter delivered pursuant hereto, whether based on contract, tort, strict liability, other Laws or otherwise, except as provided in Articles IX and X.

(b) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, NO PARTY SHALL BE LIABLE FOR SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES OR LOST PROFITS, WHETHER BASED ON CONTRACT, TORT, STRICT LIABILITY, OTHER LAW OR OTHERWISE AND WHETHER OR NOT ARISING FROM THE OTHER PARTY’S SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT (“Non reimbursable Damages”), PROVIDED THAT ANY AMOUNTS PAYABLE TO THIRD PARTIES PURSUANT A THIRD-PARTY CLAIM (OTHER THAN A CLAIM FOR CONSEQUENTIAL DAMAGES ARISING UNDER A CONTRACT PROVISION AGREED TO BY THE INDEMNIFIED PARTY THAT DOES NOT NEGATE CONSEQUENTIAL DAMAGES) SHALL NOT BE DEEMED NON-REIMBURSABLE DAMAGES.

(c) Notwithstanding anything in this Agreement to the contrary, no Representative or Affiliate of Seller shall have any liability to Buyer or any other Person as a result of the breach of any representation, warranty, covenant, agreement or obligation of Seller in this Agreement and, except as set forth in the commitment letter executed by the Funds as of the date hereof with respect to obligations relating to Section 9.3, no Representative or Affiliate of Buyer shall have any liability to Seller or any other Person as a result of the breach of any representation, warranty, covenant, agreement or obligation of Buyer in this Agreement.

10.6 Arbitration. (a) Any and all disputes between the Parties arising out of or relating to this Agreement (a “Dispute”) must be resolved through the use of binding arbitration using three arbitrators, selected in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”), as supplemented to the extent necessary to determine any procedural appeal questions by the Federal Arbitration Act (Title 9 of the United States Code). If there is any inconsistency between this Section 10.6 and the Commercial Arbitration Rules or the Federal Arbitration Act, the terms of this Section 10.6 will control the rights and obligations of the Parties. If there is more than one Arbitrable Dispute that involves the same facts and parties as the facts and parties with respect to which an arbitration has been initiated pursuant to this Agreement, such Disputes shall be consolidated into the first arbitration initiated pursuant to this Agreement. No other arbitration shall be consolidated with any arbitration initiated pursuant to this Agreement without the agreement of the Parties or parties thereto.

(b) Arbitration must be initiated within the time limits specified in Section 10.2(a) or, if no time limit is specified, within the time period allowed by the applicable statute of limitations. Arbitration may be initiated by either Seller or Buyer (“Claimant”) serving written notice on the other Party (“Respondent”) that Claimant elects to refer the Dispute to binding arbitration (the “Arbitrable Dispute”).

(c) Claimant’s notice initiating binding arbitration must describe in reasonable detail the nature of the Arbitrable Dispute and the facts and circumstances relating thereto and identify the arbitrator Claimant has appointed. Respondent shall respond to Claimant within 60

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days after receipt of Claimant’s notice, identifying the arbitrator Respondent has appointed. If Respondent fails for any reason to name an arbitrator within the 60 day period, the arbitrator for Respondent’s account shall be selected by the AAA office in New York, New York, with due regard for the selection criteria set forth below and input from the Parties. The two arbitrators so chosen shall select a third arbitrator within 30 days after the second arbitrator has been appointed. If the two arbitrators are unable to agree on a third arbitrator within 90 days from initiation of arbitration, then a third arbitrator shall be selected by the AAA office in New York, New York, with due regard for the selection criteria set forth below and input from the Parties and other arbitrators.

(d) The AAA shall select the third arbitrator not later than 120 days from initiation of arbitration. In the event AAA should fail to select the third arbitrator within 120 days from initiation of arbitration, then either Party may petition the Chief United States District Judge in New York County, New York to select the third arbitrator. Due regard shall be given to the selection criteria set forth below and input from the Parties and other arbitrators.

(e) Subject to the arbitrators’ award of costs to the prevailing party, Claimant shall pay the compensation and expenses of the arbitrator named by or for it, Respondent shall pay the compensation and expenses of the arbitrator named by or for it, and Claimant and Respondent shall each pay one-half of the compensation and expenses of the third arbitrator. All arbitrators must be neutral parties who have never been officers, directors or employees of, or otherwise affiliated in any material respect within the preceding five years with, the Parties or any of their Affiliates. Each of the three arbitrators must have not less than seven years experience as an attorney or accountant handling complex business transactions and have formal training in dispute resolution.

(f) The hearing will be conducted in New York, New York and commence within 60 days after the selection of the third arbitrator. The Parties and the arbitrators should proceed diligently and in good faith in order that the award may be made as promptly as possible. The arbitrators shall determine the Arbitrable Disputes of the Parties and render a final award in accordance with the choice of Law set forth in this Agreement. The arbitrators shall render their decision within 60 days following completion of the hearing. The arbitrators’ decision shall be in writing and set forth the reasons for the award and shall include an award of costs to the prevailing Party (or an allocation of such costs between the Parties based upon the extent to which each prevails), including reasonable attorneys’ fees and disbursements and the fees and expenses of the arbitrators. All statutes of limitations and defenses based upon passage of time applicable to any Arbitrable Dispute (including any counterclaim or setoff) shall be interrupted by the filing of the arbitration and suspended while the arbitration is pending. The terms of this Section 10.6 shall not create nor limit any obligations of a Party hereunder to defend, indemnify or hold harmless another Party against Claims or Losses. In order to prevent irreparable harm, the arbitrators shall have the power to grant temporary or permanent injunctive or other equitable relief.

(g) A Party may, notwithstanding anything in this Agreement to the contrary, seek temporary injunctive relief from any court of competent jurisdiction; provided, however, that the Party seeking such relief shall (if arbitration has not already been commenced)

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simultaneously commence arbitration. Such court-ordered relief shall not continue more than ten days after the appointment of the arbitrators and in no event for longer than 60 days.

(h) Except as provided in the Federal Arbitration Act, the decision of the arbitrators will be binding on and non-appealable by the Parties. Each Party agrees that any arbitration award against it may be enforced in any court of competent jurisdiction and that any Party may authorize any such court to enter judgment on the arbitrators’ decisions. In no circumstances shall the arbitrators grant or award Non-reimbursable Damages.

10.7 Procedure with Respect to Third-Party Claims. (a) If any Party (or as to Buyer after Closing, any Project Company) becomes subject to a pending or threatened Claim of a third party and such Party (the “Claiming Party”) believes it has a claim against the other Party (the “Responding Party”) as a result, then the Claiming Party shall notify the Responding Party in writing of the basis for such Claim setting forth the nature of the Claim in reasonable detail. The failure of the Claiming Party to so notify the Responding Party shall not relieve the Responding Party of liability hereunder except to the extent that the defense of such Claim is prejudiced by the failure to give such notice.

(b) If any proceeding is brought by a third party against a Claiming Party and the Claiming Party gives notice to the Responding Party pursuant to Section 10.7, the Responding Party shall be entitled to participate in such proceeding and, to the extent that it wishes, to assume the defense of such proceeding, if (i) the Responding Party provides written notice to the Claiming Party that the Responding Party intends to undertake such defense, (ii) the Responding Party conducts the defense of the third-party Claim actively and diligently with counsel reasonably satisfactory to the Claiming Party and (iii) if the Responding Party is a party to the proceeding, the Responding Party or the Claiming Party has not determined in good faith that joint representation would be inappropriate because of a conflict in interest. The Claiming Party shall, in its sole discretion, have the right to employ separate counsel (who may be selected by the Claiming Party in its sole discretion) in any such action and to participate in the defense thereof, and the fees and expenses of such counsel shall be paid by such Claiming Party. The Claiming Party shall fully cooperate with the Responding Party and its counsel in the defense or compromise of such Claim. If the Responding Party assumes the defense of a proceeding, no compromise or settlement of such Claims may be effected by the Responding Party without the Claiming Party’s consent unless (A) there is no finding or admission of any violation of Law or any violation of the rights of any Person and no effect on any other Claims that may be made against the Claiming Party and (B) the sole relief provided is monetary damages that are paid in full by the Responding Party.

(c) If (i) notice is given to the Responding Party of the commencement of any third-party legal proceeding and the Responding Party does not, within 30 days after the Claiming Party’s notice is given, give notice to the Claiming Party of its election to assume the defense of such legal proceeding, (ii) any of the conditions set forth in clauses (i) through (iii) of Section 10.7(b) above become unsatisfied or (iii) a Claiming Party determines in good faith that there is a reasonable probability that a legal proceeding may adversely affect it other than as a result of monetary damages for which it would be entitled to indemnification from the Responding Party under this Agreement, then the Claiming Party shall (upon notice to the Responding Party) have the right to undertake the defense, compromise or settlement of such

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claim; provided, however, that the Responding Party shall reimburse the Claiming Party for the costs of defending against such third-party claim (including reasonable attorneys’ fees and expenses) and shall remain otherwise responsible for any liability with respect to amounts arising from or related to such third-party claim, in both cases to the extent it is ultimately determined that such Responding Party is liable with respect to such third-party claim for a breach under this Agreement. The Responding Party may elect to participate in such legal proceedings, negotiations or defense at any time at its own expense.

10.8 Access to Information. After the Closing Date, Seller and Buyer shall grant each other (or their respective designees), and Buyer shall cause the Project Companies to grant to Seller (or its designees), access at all reasonable times to all of the information, books and records relating to the Project Companies in its possession, and shall afford such party the right (at such party’s expense) to take extracts therefrom and to make copies thereof, to the extent reasonably necessary to implement the provisions of, or to investigate or defend any claims between the Parties arising under, this Agreement.

ARTICLE XI

MISCELLANEOUS

11.1 Notices. (a) Unless this Agreement specifically requires otherwise, any notice, demand or request provided for in this Agreement, or served, given or made in connection with it, shall be in writing and shall be deemed properly served, given or made if delivered in person or sent by facsimile or sent by registered or certified mail, postage prepaid, or by a nationally recognized overnight courier service that provides a receipt of delivery, in each case, to the Parties at the addresses specified below:

If to Buyer, to:

LSP BAY II HARBOR HOLDING, LLC

c/o LS Power Development LLC

Two Tower Center, 11th Floor

East Brunswick, NJ 08816

Facsimile No.: (732) 249-7290

Attn: Corporate Counsel

If to Seller, to:

Duke Energy Americas, LLC

c/o Duke Energy Corporation

5400 Westheimer Court

Houston, Texas 77056-5310

Facsimile No.: (713) 386-4087

Attn: General Counsel - Acquisitions & Divestitures

(b) Notice given by personal delivery, mail or overnight courier pursuant to this Section 11.1 shall be effective upon physical receipt. Notice given by facsimile pursuant to this Section 11.1 shall be effective as of the date of confirmed delivery if delivered before 5:00

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p.m. Central Time on any Business Day or the next succeeding Business Day if confirmed delivery is after 5:00 p.m. Central Time on any Business Day or during any non-Business Day.

11.2 Entire Agreement. Except for the Confidentiality Agreement, this Agreement supersedes all prior discussions and agreements between the Parties with respect to the subject matter hereof and contains the sole and entire agreement between the Parties hereto with respect to the subject matter hereof.

11.3 Expenses. Except as otherwise expressly provided in this Agreement, whether or not the transactions contemplated hereby are consummated, each Party will pay its own costs and expenses incurred in anticipation of, relating to and in connection with the negotiation and execution of this Agreement and the transactions contemplated hereby.

11.4 Disclosure. Seller may, at its option, include in the Schedules items that are not material in order to avoid any misunderstanding, and any such inclusion, or any references to dollar amounts, shall not be deemed to be an acknowledgment or representation that such items are material, to establish any standard of materiality or to define further the meaning of such terms for purposes of this Agreement. Information disclosed in any Schedule shall constitute a disclosure for purposes of all other Schedules notwithstanding the lack of specific cross-reference thereto, to the extent the applicability of such disclosure to such other Schedule is reasonably apparent on its face. The Parties shall promptly notify each other of (a) the occurrence, or failure to occur, of any event, which occurrence or failure has caused any representation or warranty of such Party contained in this Agreement or in any exhibit, schedule, certificate, document or written instrument attached hereto to be untrue or inaccurate, (b) any failure of such Party to comply with, perform or satisfy, in any respect, any covenant, condition or agreement to be complied with, performed by or satisfied by it under this Agreement or any exhibit, schedule, certificate, document or written instrument attached hereto and (c) any notice or other communication from any Governmental Authority in connection with this Agreement, the Assignment and Assumption Agreement, the Company Assignment Agreement or the transactions contemplated herein and therein; provided that such disclosure, except as set forth in Section 10.2(e), shall not be deemed to cure, or to relieve any Party of any liability or obligation with respect to, any breach of or failure to satisfy any representation, warranty, covenant or agreement or any condition hereunder, and, except as set forth in Section 10.2(e), shall not affect any Party’s right with respect to indemnification hereunder.

11.5 Waiver. Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. No waiver by any Party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative.

11.6 Amendment. This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each Party.

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11.7 No Third Party Beneficiary. Except for the provisions of Section 6.2(b), 6.5(e)(ii) and (h), the third sentence of Section 6.7(b), 10.1 (a) and (b) and 10.3 (which are intended for the benefit of the Persons identified therein), the terms and provisions of this Agreement are intended solely for the benefit of the Parties and their respective successors or permitted assigns, and it is not the intention of the Parties to confer third-party beneficiary rights upon any other Person, including, without limitation, any Continued Employee, any beneficiary or dependents thereof, or any collective bargaining representative thereof.

11.8 Assignment; Binding Effect. Buyer may assign its rights and obligations hereunder to any Affiliate or Affiliates, or to Buyer’s lenders for collateral security purposes, but such assignment shall not release Buyer from its obligations hereunder. Except as provided in the preceding sentence, neither this Agreement nor any right, interest or obligation hereunder may be assigned by any Party without the prior written consent of the other Party, and any attempt to do so will be void, except for assignments and transfers by operation of Law. Subject to this Section 11.8, this Agreement is binding upon, inures to the benefit of and is enforceable by the Parties and their respective successors and permitted assigns.

11.9 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof.

11.10 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any Party under this Agreement will not be materially and adversely affected thereby, such provision will be fully severable, this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible.

11.11 Counterparts; Facsimile. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Any facsimile copies hereof or signature hereon shall, for all purposes, be deemed originals.

11.12 Governing Law; Venue; and Jurisdiction. (a) This Agreement shall be governed by and construed in accordance with the Laws of the State of New York, without giving effect to any conflict or choice of law provision that would result in the imposition of another state’s Law.

(b) WITH RESPECT TO THE ENFORCEMENT OF ANY ARBITRATION AWARD PURSUANT TO SECTION 10.6, THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT IN NEW YORK, NEW YORK.

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(c) WITH RESPECT TO THE ENFORCEMENT OF ANY ARBITRATION AWARD PURSUANT TO SECTION 10.6, EACH PARTY HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY.

11.13 Attorneys’ Fees. If either of the Parties shall bring an action to enforce the provisions of this Agreement, the prevailing Party shall be entitled to recover its reasonable attorneys’ fees and expenses incurred in such action from the unsuccessful Party.

[signature page follows]

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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each Party as of the date first above written.

SELLER
DUKE ENERGY AMERICAS, LLC
By:	/s/ Robert B. Evans
Name:	Robert B. Evans
Title:	President and CEO

SIGNATURE PAGE

PURCHASE AGREEMENT

BUYER
LSP BAY HARBOR HOLDING, LLC
By:	/s/ Jim Bartlett
Name:	Jim Bartlett
Title:	President

SIGNATURE PAGE

PURCHASE AGREEMENT

EX-10.2.1

Exhibit 10.2.1

EXECUTION VERSION

AMENDMENT TO PURCHASE AND SALE AGREEMENT

This Amendment to Purchase and Sale Agreement dated as of May 4, 2006 (this “Amendment”) is made and entered into by and among Duke Energy Americas, LLC, a Delaware limited liability company (together with its successors and permitted assigns, “Seller”) and LS Power Generation, LLC, a Delaware limited liability company (formerly known as LSP Bay II Harbor Holding, LLC) (together with its successors and permitted assigns, “Buyer”), LSP Gen Finance Co, LLC, a Delaware limited liability company (together with its successors and permitted assigns, “LSP Gen Finance”), LSP South Bay Holdings, LLC, a Delaware limited liability company (together with its successors and permitted assigns, “LSP South Bay Holdings”), LSP Oakland Holdings, LLC, a Delaware limited liability company (together with its successors and permitted assigns, “LSP Oakland Holdings”), LSP Morro Bay Holdings, LLC, a Delaware limited liability company (together with its successors and permitted assigns, “LSP Morro Bay Holdings” and together with Buyer, LSP Gen Finance, LSP South Bay Holdings, LSP Oakland Holdings and Seller, the “Parties”). Capitalized terms used but not defined herein shall have the meanings assigned to them in the PSA (as defined below).

RECITALS

A. Buyer and Seller entered into that certain Purchase and Sale Agreement dated as of January 8, 2006 (as amended, modified and supplemented, the “PSA”).

B. Buyer and Seller entered into that certain letter agreement dated as of February 15, 2006 relating to the financial assurance requirements of the California State Lands Commission (the “CSLC Bond Letter”).

C. Buyer and Seller entered into that certain letter agreement dated February 24, 2006 relating to the tolling agreement for Units 6 and 7 of the Moss Landing Project (the “Moss Landing Toll Letter”).

D. Buyer, LSP Gen Finance, LSP South Bay Holdings, LSP Oakland Holdings and LSP Morro Bay Holdings entered into that certain Assignment and Assumption Agreement dated as of March 21, 2006, pursuant to which certain of Buyer’s rights and obligations under the PSA were assigned to and assumed by LSP Gen Finance, LSP South Bay Holdings, LSP Oakland Holdings and LSP Morro Bay Holdings.

E. On or about April 17, 2006, the Griffith Project suffered a casualty loss event when, among other things, a steam turbine trip occurred resulting in damage to one of the Griffith Project’s steam turbines.

F. The Parties now desire to further amend the PSA to, among other things, (i) establish procedures for any payment of Restoration Costs from the Griffith Casualty Event, and (ii) make such other agreements as are set forth herein.

Now, therefore, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

ARTICLE I

AMENDMENTS AND AGREEMENTS

1.1 Amendments to the PSA. The PSA is hereby amended as follows:

(a) Section 1 of the PSA is hereby amended to add the following new definition thereto in the appropriate alphabetical order:

“Designated Assignee” shall mean, with respect to each Contract listed on Schedule 1.1-AC, the entity set forth under the heading “Designated Assignee” with respect to such Contract.

“Griffith Casualty Event” means the casualty loss event suffered by the Griffith Project with respect to one of the steam turbines of such Project on or about April 17, 2006 as a result of, among other things, the tripping of such steam turbine.

“Griffith Subject Amount” means $5,000,000, which amount is not intended to be an estimate or approximation of the Griffith Repair Amount (which Griffith Repair Amount may be greater than, less than or equal to the Griffith Subject Amount).

“Griffith Repair Amount” means an amount equal to the difference between (a) the Griffith Restoration Amount and (b) any amounts paid through Adjusted Net Working Capital by or on behalf of Seller with respect to Restoration Costs relating to the Griffith Casualty Event.

“Griffith Restoration Amount” means the estimated Restoration Costs resulting from the Griffith Casualty Event.

“Griffith True-Up Amount” means an amount, which may be positive or negative, equal to the difference between the Griffith Repair Amount and the Griffith Subject Amount.

(b) The definition of “Parent Companies” in Section 1 of the PSA is hereby amended by deleting the following proviso from the definition:

“; and provided further that from and after the DEGM Restructuring, DEGM Holding Subsidiary shall be a Parent Company and DEGM shall cease to be a Parent Company”

(c) Section 2.1(d) of the PSA is hereby amended by replacing the words “one of the Project Companies,” in the first parenthetical with the words “Designated Assignee” and by replacing the words “Project Company” in each instance therein with the word “Designated Assignee”.

(d) Section 2.2(a) of the PSA is hereby amended by deleting the number “$1,631,000,000” and replacing it with the following:

“$1,598,500,000”

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(e) Section 2.2 of the PSA is hereby amended by deleting the word “and” at the end of clause (c) thereof, changing the period at the end of clause (d) to “,”, and adding a new clause (e) at the end thereof as follows:

“(e) if the Griffith Repair Amount is greater than $2,500,000, minus the Griffith True-Up Amount.”

(f) Section 2.4(b) of the PSA is hereby amended by (i) replacing the words “one of the Project Companies,” with the words “Designated Assignee” and (ii) inserting the phrase “or in such other form as the Parties may agree” after the phrase “Exhibit B” therein.

(g) Section 2.5(a) of the PSA is hereby amended by adding the following new clause (iv) prior to the semicolon at the end thereof:

“, minus (iv) the Griffith Subject Amount”

(h) Article II of the PSA is hereby amended by adding a new Section 2.8 to the PSA as follows:

“Section 2.8. Griffith Repair Adjustment. (a) After the Closing Date, Seller and Buyer shall cooperate and provide each other access to their respective books, records and employees (and those of the Griffith Project) as are reasonably requested in connection with the matters addressed in this Section 2.8. The Designated Firm shall provide to Buyer and Seller the Griffith Restoration Amount, along with reasonable supporting information and calculations, no earlier than September 15, 2006 and no later than September 22, 2006. For purposes hereof, the “Designated Firm” means Pace Global Energy Services, LLC, unless either Buyer or Seller objects in writing to the selection of Pace Global Energy Services, LLC within 10 Business Days after the Closing, or, if there is an objection to Pace Global Services LLC pursuant hereto, then Black & Veatch; provided that if either Buyer or Seller objects in writing to the selection of Black & Veatch within 10 Business Days after an objection notice has been given in respect of Pace Global Energy Services, LLC, then the Designated Firm shall be a qualified firm reasonably acceptable to Buyer and Seller.

(b) If the Griffith Repair Amount (as determined by the above-referenced firm or as otherwise agreed by Buyer and Seller) is $2,500,000 or less, then Buyer shall pay Seller within 5 Business Days after such amounts are agreed by Buyer and Seller or determined by such firm, by wire transfer of immediately available funds to an account designated by Seller, the Griffith Subject Amount. If the Griffith Repair Amount is greater than $2,500,000 and the Griffith True-Up Amount is a negative number, then Buyer shall pay to Seller within 5 Business Days after such amounts are agreed by Buyer and Seller or determined by such firm, by wire transfer of immediately available funds to an account designated by Seller, the absolute value of the Griffith True-Up Amount. If the Griffith Repair Amount is greater than $2,500,000 and the Griffith True-Up Amount is a positive number, then Seller shall pay to Buyer within 5 Business Days after such amounts

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are agreed by Buyer and Seller or determined by such firm, by wire transfer of immediately available funds to an account designated by Buyer, the Griffith True-Up Amount.

(i) Section 4.13 of the PSA is hereby amended by adding a new clause (e) at the end thereof as follows:

“(e) Seller hereby represents and warrants to Buyer as of the Closing Date that Seller has disclosed all material Contracts relating to the calculation and determination of True-Up Payments (as such term is defined in the GE LTSAs).”

(j) Section 6.5(e)(iv)(A) of the PSA is hereby amended by the following at the end thereof:

“Notwithstanding anything to the contrary in this Agreement, any beneficiary of the Letter of Credit described in this Section 6.5(e)(iv)(A) may draw on such Letter of Credit in accordance with the drawing certificate relating thereto (x) in an amount not to exceed $2,000,000 in the aggregate with respect to the Corporate Guaranty for Closure and Post-Closure Care dated as of September 14, 2001, as amended, issued by Duke Capital Corporation (or its successors or assigns) for the benefit of Arizona Department of Environmental Quality (or its successor or assigns), and (y) in amount not to exceed $20,000,000 in the aggregate with respect to the Guaranty dated as of April 8, 2002, as amended, issued by Duke Energy North America, LLC (or its successors or assigns) in favor of the unions signatory to the Maintenance Labor Agreement (as amended) described as item 12 on Schedule 1.1-AC of the PSA; provided, however, if Duke Capital Corporation, Duke Energy North America, LLC or the applicable Affiliate thereof is fully and unconditionally released from its obligations under such guaranty, then from and after the date of such release none of Duke Capital Corporation, Duke Energy North America, LLC and any Affiliate thereof may draw on such Letter of Credit in connection with or for any event relating to such guaranty.”

(k) Section 6.5 of the PSA is hereby amended by adding a new clause (i) at the end thereof as follows:

“(i) From and after the Closing Date, Buyer shall use commercially reasonable efforts to effect as promptly as practicable the full defeasance of the Outstanding Bonds (as defined in the South Bay Indenture) in accordance with the South Bay Indenture, including Article IX of the South Bay Indenture.”

(l) Schedule 1.1-AC of the PSA is hereby replaced in its entirety with the version of Schedule 1.1-AC attached hereto as Exhibit A.

(m) Schedule 6.5(a) is hereby replaced in its entirety with the version of Schedule 6.5(a) attached hereto as Exhibit B.

1.2 GE LTSAs. Buyer and Seller hereby agree to the items set forth on Exhibit C.

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1.3 Assigned Contracts. The rights and obligations of the Parties and their Affiliates with respect to the assignment of the Contract identified as item 6 on Schedule 1.1-AC shall be subject to the terms of the Prearranged Capacity Release Agreement dated as of April 12, 2006, between LS Power Generation, LLC, and Duke Energy Trading and Marketing, L.L.C. (the “El Paso Capacity Release Agreement”) and with respect to the Contract identified as item 10 on Schedule 1.1-AC shall be subject to the terms of the Prearranged Capacity Release Agreement dated as of March 29, 2006, between LS Power Generation, LLC, and Duke Energy Marketing America, LLC (the “Iroquois Capacity Release Agreement” and together with the “El Paso Capacity Release Agreement”, the “Capacity Release Agreements”).

(b) Notwithstanding anything in the PSA to the contrary, from and after the Closing, the Affiliate Contracts numbered 11, 12, 15, 16 and 17 on Schedule 1.1-AC shall be deemed Assigned Contracts for all purposes under the PSA.

1.4 Continuing Support Obligations. Notwithstanding anything in the PSA to the contrary, Seller hereby agrees that, as of the Closing Date, Buyer has fully complied with all of its obligations required to be performed by it on or prior to the Closing Date under Sections 6.5(b) and 6.5(c)(ii) of the PSA.

1.5 Letter of Credit Notification. Seller agrees to notify Buyer one Business Day prior to the delivery by Seller of a drawing certificate with respect to the Letter of Credit described in Section 6.5(e)(iv)(A) of the PSA.

ARTICLE II

MISCELLANEOUS

2.1 Effect on PSA. This amendment shall be deemed to be an amendment to the PSA, and the PSA, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the PSA therein or in any other document instrument or agreement shall hereafter be deemed to be references to the PSA as amended hereby. In the event of a conflict between the terms of the PSA and the terms of this Amendment, the terms of this Amendment shall control.

2.2 Construction and Other Provisions. The rules of construction in Section 1.2 of the PSA and the provisions of Articles X and Article XI of the PSA are incorporated herein by reference.

2.3 Headings. The headings used in this Amendment have been inserted for convenience of reference only and do not define or limit the provisions hereof.

2.4 Counterparts; Facsimile. This Amendment may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Any facsimile copies hereof or signature hereon shall, for all purposes, be deemed originals.

2.5 Governing Law. This Amendment shall be governed by and construed in accordance with the Laws of the State of New York, without giving effect to any conflict or choice of law provision that would result in the imposition of another state’s Law.

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[Signature Pages Follow]

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IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by the duly authorized officer of each Party as of the date first above written.

DUKE ENERGY AMERICAS, LLC
By:	/s/ Lon C. Mitchell, Jr.
Name:	Lon C. Mitchell, Jr.
Title:	Group Vice President, CFO & Treasurer

[Signature Page to Amendment to Purchase and Sale Agreement]

1

LS POWER GENERATION, LLC
By:	/s/ James Bartlett
Name:	James Bartlett
Title:	Executive Vice President

Signature Page to Amendment to Purchase and Sale Agreement

LSP GEN FINANCE CO, LLC
By:	/s/ James Bartlett
Name:	James Bartlett
Title:	President

Signature Page to Amendment to Purchase and Sale Agreement

LSP SOUTH BAY HOLDING, LLC
By:	/s/ James Bartlett
Name:	James Bartlett
Title:	President

Signature Page to Amendment to Purchase and Sale Agreement

LSP OAKLAND HOLDINGS, LLC
By:	/s/ James Bartlett
Name:	James Bartlett
Title:	President

Signature Page to Amendment to Purchase and Sale Agreement

LSP MORRO BAY HOLDINGS, LLC
By:	/s/ James Bartlett
Name:	James Bartlett
Title:	President

Signature Page to Amendment to Purchase and Sale Agreement

EX-31.1

PART II

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;

4) The registrant’s other certifying officers 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:

a) 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;

b) 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;

c) 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

d) 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):

a) 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

b) 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: May 9, 2006	/s/ JAMES E. ROGERS
	James E. Rogers
	President and
	Chief Executive Officer

EX-31.2

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;

4) The registrant’s other certifying officers 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:

a) 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;

b) 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;

c) 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

d) 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):

a) 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

b) 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: May 9, 2006	/s/ DAVID L. HAUSER
	David L. Hauser
	Group Executive and
	Chief Financial Officer

EX-32.1

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 March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Rogers, 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/ JAMES E. ROGERS

James E. Rogers

President and Chief Executive Officer

May 9, 2006

EX-32.2

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 March 31, 2006 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/ DAVID L. HAUSER

David L. Hauser

Group Executive and Chief Financial Officer

May 9, 2006