INTRODUCTION

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

Duke Energy Carolinas, LLC (Duke Energy Carolinas), a wholly owned subsidiary of Duke Energy Corp. (Duke Energy), generates, transmits, distributes and sells electricity in North Carolina and South Carolina.

BASIS OF PRESENTATION

The results of operations and variance discussion for Duke Energy Carolinas is presented in reduced disclosure format in accordance with General Instructions H(2) of Form 10-Q.

DUKE ENERGY CAROLINAS



                                                          Three Months Ended
                                                               March 31,
                                                   ---------------------------------
                                                                            Increase
   (in millions)                                       2008      2007     (Decrease)
   Operating revenues                              $  1,384   $ 1,333   $         51
   Operating expenses                                 1,077     1,046             31
   Gains on sales of other assets and other, net          -         1             (1 )
                                                   -- -----   - -----   ---- ------- -
   Operating income                                     307       288             19
   Other income and expenses, net                        25         7             18
   Interest expense                                      79        73              6
                                                   -- -----   - -----   ---- ------- -
   Income before income taxes                           253       222             31
   Income tax expense                                    85        76              9
                                                   -- -----   - -----   ---- ------- -
   Net income                                      $    168   $   146   $         22
                                                   -- -----   - -----   ---- ------- -

The $22 million increase in Duke Energy Carolinas' net income was primarily due to the following factors:

Operating Revenues. The increase was primarily due to:

• An approximate $53 million increase in fuel revenues driven primarily by higher fuel rates, which increased primarily due to increased coal transportation costs. These fuel revenues represent sales to both retail and wholesale customers,

• An approximate $38 million increase due to the completion in 2007 of the sharing of anticipated merger savings, through rate decrement riders, with regulated customers in North Carolina and South Carolina, and

• An approximate $15 million increase in gigawatt-hour (GWh) sales to retail customers due to favorable weather conditions. The number of heating degree days for the first quarter of 2008 was approximately 1% below normal compared to 8% below normal during the same period in 2007.

Partially offsetting these increases were:

• An approximate $45 million decrease in retail rates primarily related to the new retail base rates implemented in North Carolina in the first quarter of 2008 resulting from the 2007 rate review, and

• An approximate $9 million decrease in wholesale power revenues, net of sharing, primarily due to increased sharing of profits with retail customers. Duke Energy Carolinas is required to share profits from certain wholesale transactions with retail customers in North Carolina and South Carolina. Beginning in first quarter 2008, Duke Energy Carolinas is required to share a greater percentage of profits with retail customers in the North Carolina jurisdiction.

Operating Expenses. The increased was primarily due to:

• An approximate $59 million increase in fuel expense (including purchased power) due primarily to higher coal costs resulting from higher freight costs and increased generation at coal fired plants during the first quarter of 2008 compared to the first quarter of 2007. This increase also reflects a $19 million reimbursement in first quarter 2007 of previously incurred fuel expenses resulting from a settlement between Duke Energy Carolinas and the U.S. Department of Justice resolving Duke Energy Carolinas' used nuclear fuel litigation against the Department of Energy. The settlement between the parties was finalized on March 5, 2007,

• An approximate $21 million increase in operating and maintenance expenses, primarily due to higher outage and maintenance costs at generating plants and increased costs for reserve capacity from third party generators, allowing Duke Energy Carolinas to purchase additional energy, if needed, to mitigate the effects of drought conditions in the region, and

• An approximate $8 million increase in depreciation due to additional capital spending.

Partially offsetting these increases was:

• An approximate $56 million decrease in regulatory amortization expenses due to the completion in 2007 of amortization of compliance costs related to North Carolina clean air legislation.

Other Income and Expenses, net. The increase in other income and expenses, net is primarily due to the equity component of allowance for funds used during construction (AFUDC) as a result of additional capital spending for ongoing construction projects.

Interest Expense. The increase in interest expense for the three months ended March 31, 2008 compared to the same period in the prior year was due primarily to increased long-term debt, partially offset by the debt component of AFUDC due to additional capital spending.

Income Tax Expense. Income tax expense increased for the three months ended March 31, 2008 as compared to the same period in the prior year due to higher pre-tax income. The effective tax rate was approximately 34% for both periods.