DUKE ENERGY CORPORATION Management's Discussion and Analysis includes financial information prepared in accordance with GAAP in theU.S. , as well as certain non-GAAP financial measures such as adjusted earnings and adjusted EPS discussed below. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies. The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations is separately filed byDuke Energy Corporation and its subsidiaries.Duke Energy Carolinas, LLC ,Progress Energy, Inc. ,Duke Energy Progress, LLC ,Duke Energy Florida, LLC ,Duke Energy Ohio, Inc. ,Duke Energy Indiana, LLC andPiedmont Natural Gas Company, Inc. . However, none of the registrants make any representation as to information related solely to Duke Energy or the subsidiary registrants of Duke Energy other than itself. Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes for the years endedDecember 31, 2019 , 2018 and 2017. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in Duke Energy's Annual Report on Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onFebruary 28, 2019 , for a discussion of variance drivers for the year endedDecember 31, 2018 , as compared toDecember 31, 2017 . DUKE ENERGY Duke Energy is an energy company headquartered inCharlotte, North Carolina . Duke Energy operates in theU.S. primarily through its wholly owned subsidiaries,Duke Energy Carolinas ,Duke Energy Progress ,Duke Energy Florida ,Duke Energy Ohio ,Duke Energy Indiana and Piedmont. When discussing Duke Energy's consolidated financial information, it necessarily includes the results of the Subsidiary Registrants, which along with Duke Energy, are collectively referred to as the Duke Energy Registrants. Executive Overview At Duke Energy the fundamentals of our business are strong and allow us to deliver growth in earnings and dividends in a low-risk, predictable and transparent way. In 2019, we met our near-term financial commitments and positioned the company for sustainable long-term growth. We are focused on a business portfolio that will deliver a reliable dividend with 4% to 6% EPS growth through 2024. This growth is supported by our capital plan, timely cost-recovery mechanisms in most jurisdictions and our ability to manage our cost structure. The strength of our balance sheet is of vital importance to the cost-effective financing of our growth strategy, and in 2019 we continued to strengthen it by issuing$2 billion of preferred equity and$2.5 billion of common stock through a forward sales agreement which is expected to settle on or prior toDecember 31, 2020 . Financial Results [[Image Removed: chart-2051b954d7e7543ab18.jpg]][[Image Removed: chart-55fced0db9ba521cbab.jpg]] (a) See Results of Operations below for Duke Energy's definition of adjusted
earnings and adjusted diluted EPS as well as a reconciliation of this
non-GAAP financial measure to net income available to Duke Energy and net
income available to Duke Energy per diluted share.
40--------------------------------------------------------------------------------
MD&A DUKE ENERGY Duke Energy's 2019 Net Income Available toDuke Energy Corporation (GAAP Reported Earnings) were impacted by: favorable rate case and rider recovery outcomes, net of regulatory lag, and ongoing cost management efforts inElectric Utilities and Infrastructure; improved margins and increased ACP investment inGas Utilities and Infrastructure; and growth in project investments in Commercial Renewables. See "Results of Operations" below for a detailed discussion of the consolidated results of operations and a detailed discussion of financial results for each of Duke Energy's reportable business segments, as well as Other where financing costs increased in 2019 to fund segment operations and other liquidity needs. 2019 Areas of Focus and Accomplishments Operational Excellence, Safety and Reliability. The reliable and safe operation of our power plants, electric distribution system and natural gas infrastructure in our communities is foundational to our customers, our financial results and our credibility with stakeholders. Our regulated generation fleet performance was strong throughout the year. All of our nuclear sites have achieved the industry's highest distinction rating. Our electric distribution system performed well throughout the year, with outage durations down when adjusted for storms. The safety of our workforce is a core value. Our employees delivered strong safety results in 2019, and we are at or near the top of our industry. Storm Response and System Restoration. The 2019Atlantic hurricane season was the fourth consecutive year of above-average damaging storms. Our ability to effectively handle all facets of the 2019 storm response efforts is a testament to our team's extensive preparation and coordination, applying lessons learned from previous storms, and to on-the-ground management throughout the restoration efforts. Notably in 2019 Duke Energy earned EEI's Emergency Recovery Award, our 22nd EEI award since 1998 and a strong affirmation of the work of our employees to support customers when they need us most. Customer Satisfaction. Duke Energy continues to transform the customer experience through our use of customer data to better inform operational priorities and performance levels. This data-driven approach allows us to identify the investments that are the most important to the customer experience. In 2019, we instituted billing and payment-related communications and options, and we continue to enhance outage-related communications to customers. Constructive Regulatory and Legislative Outcomes. One of our long-term strategic goals is to achieve modernized regulatory constructs in our jurisdictions. Modernized constructs provide benefits, which include improved earnings and cash flows through more timely recovery of investments, as well as stable pricing for customers. In 2019, Duke Energy,North Carolina regulators and environmentalists reached an agreement to permanently close all remaining coal ash basins inNorth Carolina . This agreement reduces the cost to close our coal ash basins for our Carolinas customers in comparison to the initial NCDEQ closure order. In 2019 we achieved constructive rate case outcomes driving earnings growth through rate base increases inSouth Carolina (electric),North Carolina (natural gas),Ohio (electric distribution) andKentucky (natural gas). In addition, we have a multiyear rate plan inFlorida and grid investment riders in the Midwest which enable more timely cost recovery and earnings growth. Digital Transformation. Duke Energy has a demonstrated track record of driving efficiencies and productivity into the business. We continue to leverage new technology, digital tools and data analytics across the business in response to a transforming landscape. In 2019, we created a team dedicated to developing applications and other solutions to deliver productivity gains and improvements to the customer experience. Modernizing the Power Grid. Our grid improvement programs continue to be a key component of our growth strategy. Modernization of the electric grid, including smart meters, storm hardening, self-healing and targeted undergrounding helps to ensure the system is better prepared for severe weather, improves the system's reliability and flexibility, and provides better information and services for customers. In 2019, 79% of our jurisdictions were equipped with smart meters and we remain on track to be fully deployed across all regions by 2021. We continue to expand our self-optimizing grid capabilities, and in 2019 that saved over a half million customer interruptions. Generating Cleaner Energy. Overall, we have lowered our carbon emissions by 39% since 2005, consistent with our new goal to reduce carbon emissions by at least 50% by 2030 and to achieve net-zero carbon emissions by 2050. Our commitment for 2030 includes retiring plants, operating our existing carbon-free resources and investing in natural gas infrastructure, renewables and our energy delivery system. As we look beyond 2030, we will need additional tools to continue our progress. We will work actively to advocate for research and development of carbon-free, dispatchable resources. That includes longer-term energy storage, advanced nuclear technologies, carbon capture and zero-carbon fuels. Expanding the Natural Gas Platform. We continue to pursue natural gas infrastructure investments. While the judicial and administrative challenges to date have been substantial, we are committed to the construction of the ACP pipeline to bring low-cost gas supply and economic development opportunities to theSoutheast U.S. Construction is underway on a liquefied natural gas facility inRobeson County, North Carolina , on property Piedmont owns. This investment will help Piedmont provide a reliable gas supply to customers during peak usage periods and protect customers from price volatility when there is a higher-than-normal demand for natural gas. Dividend Growth. In 2019, Duke Energy continued to grow the dividend payment to shareholders. 2019 represented the 93rd consecutive year Duke Energy paid a cash dividend on its common stock. 41 --------------------------------------------------------------------------------
MD&A DUKE ENERGY Duke Energy Objectives - 2020 and Beyond Duke Energy will continue to deliver exceptional value to customers, be an integral part of the communities in which we do business and provide attractive returns to investors. We have an achievable, long-term strategy in place, and it is producing tangible results, yet the industry in which we operate is becoming more and more dynamic. We are adjusting, where necessary, and accelerating our focus in key areas to ensure the company is well positioned to be successful for many decades into the future. As we look ahead to 2020, our plans include: • Continuing to place the customer at the center of all that we do which
includes providing customized products and solutions
• Strengthening our relationships with all our vast stakeholders in the
communities in which we operate and invest
• Generating cleaner energy and working to achieve net-zero carbon emissions by
2050
• Maintaining the safety of our communities and employees
• Modernizing and strengthening the energy grid
• Expanding the natural gas infrastructure
• Deploying digital tools across our business
Results of Operations Non-GAAP Measures Management evaluates financial performance in part based on non-GAAP financial measures, including adjusted earnings and adjusted diluted EPS. These items represent income from continuing operations available to Duke Energy common stockholders in dollar and per-share amounts, adjusted for the dollar and per-share impact of special items. As discussed below, special items include certain charges and credits, which management believes are not indicative of Duke Energy's ongoing performance. Management believes the presentation of adjusted earnings and adjusted diluted EPS provides useful information to investors, as it provides them with an additional relevant comparison of Duke Energy's performance across periods. Management uses these non-GAAP financial measures for planning and forecasting, and for reporting financial results to the Board of Directors, employees, stockholders, analysts and investors. Adjusted diluted EPS is also used as a basis for employee incentive bonuses. The most directly comparable GAAP measures for adjusted earnings and adjusted diluted EPS are GAAP Reported Earnings and Diluted EPS Available toDuke Energy Corporation common stockholders (GAAP Reported EPS), respectively. Special items included in the periods presented include the following, which management believes do not reflect ongoing costs: • Impairment Charges in 2019 represents a reduction of a prior year impairment
at Citrus County CC and an OTTI on the remaining investment in
For 2018, it represents an impairment at Citrus County CC, a goodwill
impairment at Commercial Renewables and an OTTI of an investment in
Constitution .
• Costs to Achieve Mergers represents charges that result from strategic
acquisitions.
• Regulatory and Legislative Impacts in 2018 represents charges related to the
orders and the repeal of the South Carolina Base Load Review Act.
• Sale of Retired Plant represents the loss associated with selling Beckjord, a
nonregulated generating facility in
• Impacts of the Tax Act represents amounts recognized related to the Tax Act.
• Severance Charges relate to companywide initiatives, excluding merger
integration, to standardize processes and systems, leverage technology and
workforce optimization.
Duke Energy's adjusted earnings and adjusted diluted EPS may not be comparable
to similarly titled measures of another company because other companies may not
calculate the measures in the same manner.
42
--------------------------------------------------------------------------------MD&A DUKE ENERGY
Reconciliation of GAAP Reported Amounts to Adjusted Amounts The following table presents a reconciliation of adjusted earnings and adjusted diluted EPS to the most directly comparable GAAP measures.
Years Ended December 31,
2019 2018
(in millions, except per share amounts) Earnings EPS Earnings
EPS GAAP Reported Earnings/EPS$ 3,707 $ 5.06 $ 2,666 $ 3.76 Adjustments to Reported: Impairment Charges(a) (8 ) (0.01 ) 179 0.25 Costs to Achieve Piedmont Merger(b) - - 65
0.09
Regulatory and Legislative Impacts(c) - - 202
0.29 Sale of Retired Plant(d) - - 82 0.12 Impacts of the Tax Act(e) - - 20 0.03 Severance Charges(f) - - 144 0.21 Discontinued Operations 7 0.01 (19 ) (0.03 ) Adjusted Earnings/Adjusted Diluted EPS$ 3,706 $ 5.06 $ 3,339
(a) Net of tax expense of$3 million in 2019. Net of tax benefit of$27 million and Noncontrolling Interests of$2 million in 2018.
(b) Net of tax benefit of
(c) Net of tax benefit of
(d) Net of
(e) The Tax Act reduced the corporate income tax rate from 35% to 21%,
effective January 1, 2018 . As the tax change was enacted in 2017, Duke
Energy was required to remeasure its existing deferred tax assets and
liabilities at the lower rate at
regulated operations, where the reduction in the net accumulated deferred
income tax liability is expected to be returned to customers in future
rates, the remeasurement has been deferred as a regulatory liability. This
amount represents a true up of existing regulatory liabilities related to
the Tax Act. See Note 24 to the Consolidated Financial Statements, "Income
Taxes" for more information.
(f) Net of tax benefit of
Year EndedDecember 31, 2019 , as compared to 2018 GAAP Reported EPS was$5.06 for the year endedDecember 31, 2019 , compared to$3.76 for the year endedDecember 31, 2018 . The increase in GAAP Reported earnings was primarily due to current year favorable rate case and rider recovery outcomes, an adjustment related to income tax recognition for equity method investments, growth in Commercial Renewables from new solar farms commencing commercial operations and prior year regulatory and legislative impacts, impairments, severance, loss on sale of a retired plant and costs to achieve merger. This favorability was partially offset by higher depreciation and higher financing costs in the current year. The equity method investment adjustment was immaterial and relates to prior years. As discussed and shown in the table above, management also evaluates financial performance based on adjusted diluted EPS. Duke Energy's adjusted diluted EPS was$5.06 for the year endedDecember 31, 2019 , compared to$4.72 for the year endedDecember 31, 2018 . SEGMENT RESULTS The remaining information presented in this discussion of results of operations is on a GAAP basis. Management evaluates segment performance based on segment income. Segment income is defined as income from continuing operations net of income attributable to noncontrolling interests and preferred stock dividends. Segment income includes intercompany revenues and expenses that are eliminated in the Consolidated Financial Statements. Duke Energy's segment structure includes the following segments:Electric Utilities and Infrastructure,Gas Utilities and Infrastructure and Commercial Renewables. The remainder of Duke Energy's operations is presented as Other. See Note 3 to the Consolidated Financial Statements, "Business Segments," for additional information on Duke Energy's segment structure. 43 --------------------------------------------------------------------------------
MD&A SEGMENT RESULTS - ELECTRIC UTILITIES AND INFRASTRUCTURE
Years Ended December 31,
(in millions) 2019 2018 Variance
Operating Revenues $ 22,831 $ 22,273 $ 558
Operating Expenses
Fuel used in electric generation and purchased power 6,904 6,917 (13 )
Operations, maintenance and other 5,497 5,631 (134 )
Depreciation and amortization 3,951 3,523 428
Property and other taxes 1,175 1,134 41
Impairment charges (8 ) 309 (317 )
Total operating expenses 17,519 17,514 5
Gains on Sales of Other Assets and Other, net 1 8 (7 )
Operating Income 5,313 4,767 546
Other Income and Expenses, net 353 378 (25 )
Interest Expense 1,345 1,288 57
Income Before Income Taxes 4,321 3,857 464
Income Tax Expense 785 799 (14 )
Segment Income $ 3,536 $ 3,058 $ 478
Duke Energy Carolinas GWh sales 89,920 92,280 (2,360 )
Duke Energy Progress GWh sales 68,356 69,331 (975 )
Duke Energy Florida GWh sales 42,173 41,559 614
Duke Energy Ohio GWh sales 24,729 25,329 (600 )
Duke Energy Indiana GWh sales 31,886 34,229 (2,343 )
Total Electric Utilities and Infrastructure GWh sales 257,064 262,728 (5,664 )
Net proportional MW capacity in operation 50,070 49,684 386
Year Ended December 31, 2019 , as compared to 2018
Electric Utilities and Infrastructure's results were impacted by positive
contributions from the Duke Energy Carolinas and Duke Energy Progress North
Carolina and South Carolina rate cases and Duke Energy Florida's base rate
adjustments due to the Citrus County CC being placed in service. These drivers
were partially offset by higher depreciation from a growing asset base and
higher interest expense. The following is a detailed discussion of the variance
drivers by line item.
Operating Revenues. The variance was driven primarily by:
• a $603 million increase in retail pricing primarily due to the Duke Energy
Carolinas and Duke Energy Progress North Carolina and
cases and
County CC being placed in service.
Partially offset by: • a$45 million decrease in weather-normal retail sales volumes.
Operating Expenses. The variance was driven primarily by:
• a
due to additional plant in service and new depreciation rates associated
with the
South Carolina rate cases andDuke Energy Florida's Citrus County CC being placed in service; and
• a
property taxes for additional plant in service at
current year property tax reassessments at Duke Energy Progress and Duke
Energy Ohio .
Partially offset by:
• a
associated with the
Carolina rate cases as well as impairment impacts related to Duke Energy
• a
primarily due to lower payroll and benefit costs resulting from prior year
workforce reductions and lower storm costs at Duke Energy Progress and
Duke Energy Carolinas in the current year.
Other Income and Expenses, net. The variance was driven primarily by AFUDC
equity return ending on the Citrus County CC in the fourth quarter of 2018 at
44
--------------------------------------------------------------------------------MD&A SEGMENT RESULTS - ELECTRIC UTILITIES AND INFRASTRUCTURE
Interest Expense. The variance was driven primarily by higher debt outstanding in the current year and AFUDC debt return ending in the fourth quarter of 2018 on the Citrus County CC atDuke Energy Florida . Income Tax Expense. The decrease in tax expense was primarily due to an increase in the amortization of excess deferred taxes, mostly offset by an increase in pretax income. The ETRs for the years endedDecember 31, 2019 , and 2018, were 18.2% and 20.7%, respectively. The decrease in the ETR was primarily due to an increase in the amortization of excess deferred taxes.Matters Impacting Future Electric Utilities and Infrastructure Results OnDecember 31, 2019 ,Duke Energy Carolinas andDuke Energy Progress entered into a settlement agreement with NCDEQ and certain community groups under whichDuke Energy Carolinas andDuke Energy Progress agreed to excavate seven of the nine remaining coal ash basins inNorth Carolina with ash moved to on-site lined landfills. At the two remaining basins, uncapped basin ash will be excavated and moved to lined landfills. An order from regulatory authorities disallowing recovery of costs related to closure of these ash basins could have an adverse impact onElectric Utilities and Infrastructure's results of operations, financial position and cash flows. See Notes 4 and 5 to the Consolidated Financial Statements, "Regulatory Matters" and "Commitments and Contingencies," respectively, for additional information. OnMay 21, 2019 ,Duke Energy Carolinas andDuke Energy Progress received orders from the PSCSC granting the companies' requests for retail rate increases but denying recovery of certain coal ash costs.Duke Energy Carolinas andDuke Energy Progress filed notices of appeals with theSouth Carolina Supreme Court onNovember 15, 2019 . Appellant briefs are due onMarch 2, 2020 , and Appellee response briefs are due onMay 15, 2020 .Electric Utilities and Infrastructure's results of operations, financial position and cash flows could be adversely impacted if coal ash costs are not ultimately approved for recovery. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. OnJune 22, 2018 ,Duke Energy Carolinas received an order from the NCUC, which denied the Grid Rider Stipulation and deferral treatment of grid improvement costs.Duke Energy Carolinas andDuke Energy Progress have petitioned for deferral of future grid improvement costs in their 2019 rate cases.Electric Utilities and Infrastructure's results of operations, financial position and cash flows could be adversely impacted if grid improvement costs are not ultimately approved for recovery and/or deferral treatment. During the last half of 2018,Duke Energy Carolinas ,Duke Energy Progress andDuke Energy Florida's service territories were impacted by several named storms. Hurricane Florence, Hurricane Michael and Winter Storm Diego caused flooding, extensive damage and widespread power outages to the service territories ofDuke Energy Carolinas andDuke Energy Progress .Duke Energy Florida's service territory was also impacted by Hurricane Michael, a Category 5 hurricane and the most powerful storm to hit the FloridaPanhandle in recorded history. InSeptember 2019 , Hurricane Dorian impactedDuke Energy Progress andDuke Energy Florida's service territories. A significant portion of the incremental operation and maintenance expenses related to these storms has been deferred. An order from regulatory authorities disallowing the deferral and future recovery of storm restoration costs could have an adverse impact onElectric Utilities and Infrastructure's results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. In 2019,Duke Energy Indiana filed a general rate case with the IURC, andDuke Energy Carolinas andDuke Energy Progress filed general rate cases with the NCUC. The outcome of these rate cases could materially impactElectric Utilities and Infrastructure's results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. OnApril 17, 2015 , theEPA published in theFederal Register a rule to regulate the disposal of CCR from electric utilities as solid waste.Duke Energy Indiana has interpreted the rule to identify the coal ash basin sites impacted and has assessed the amounts of coal ash subject to the rule and a method of compliance.Duke Energy Indiana's interpretation of the requirements of the CCR rule is subject to potential legal challenges and further regulatory approvals, which could result in additional ash basin closure requirements, higher costs of compliance and greater AROs. Additionally,Duke Energy Indiana has retired facilities that are not subject to the CCR rule.Duke Energy Indiana may incur costs at these facilities to comply with environmental regulations or to mitigate risks associated with on-site storage of coal ash. An order from regulatory authorities disallowing recovery of costs related to closure of ash basins could have an adverse impact onDuke Energy Indiana's results of operations, financial position and cash flows. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act. 45 --------------------------------------------------------------------------------
MD&A SEGMENT RESULTS - GAS UTILITIES AND INFRASTRUCTURE
Years Ended December 31,
(in millions) 2019 2018 Variance
Operating Revenues $ 1,866 $ 1,881 $ (15 )
Operating Expenses
Cost of natural gas 627 697 (70 )
Operation, maintenance and other 446 421 25
Depreciation and amortization 256 245 11
Property and other taxes 106 107 (1 )
Total operating expenses 1,435 1,470 (35 )
Operating Income 431 411 20
Other Income and Expenses, net 140 47 93
Interest Expense 117 106 11
Income Before Income Taxes 454 352 102
Income Tax Expense 22 78 (56 )
Segment Income $ 432 $ 274 $ 158
Piedmont Local Distribution Company (LDC)
throughput (Dth) 511,243,774 557,145,128 (45,901,354 )
Duke Energy Midwest LDC throughput (MCF) 89,025,972 90,604,833 (1,578,861 )
Year EndedDecember 31, 2019 , as compared to 2018Gas Utilities and Infrastructure's results were primarily impacted by higher equity earnings at ACP, the OTTI recorded on theConstitution investment and a 2019 adjustment related to the income tax recognition for equity method investments. The equity method investment adjustment was immaterial and relates to prior years. The following is a detailed discussion of the variance drivers by line item. Operating Revenues. The variance was driven primarily by: • a$70 million decrease due to lower natural gas costs passed through to customers; and • a$13 million decrease due to rider revenues related to MGP and Accelerated Main Replacement Program.
Partially offset by:
• a
increases;
• a
• an$11 million increase due to NCUC approval related to tax reform accounting from fixed rate contracts.
Operating Expenses. The variance was driven primarily by:
• a
prices.
Partially offset by:
• a $25 million increase in operation, maintenance and other expense
primarily due to increased labor, benefits and information technology
costs; and
• an
additional plant in service.
Other Income and Expenses, net. The increase was primarily due to higher equity earnings at ACP as a result of higher cumulative project spending and a higher OTTI recorded on theConstitution investment in the prior year. Interest Expense. The variance was driven by higher debt outstanding in the current year and higher interest expense due to customers as a result of tax reform deferrals, partially offset by favorable AFUDC debt interest. Income Tax Expense. The decrease in tax expense was primarily due to an adjustment related to the income tax recognition for equity method investments, partially offset by an increase in pretax income. The equity method investment adjustment was immaterial and relates to prior years. The ETRs for the years endedDecember 31, 2019 , and 2018, were 4.8% and 22.2%, respectively. The decrease in the ETR was primarily due to an adjustment related to the income tax recognition for equity method investments that was recorded during the first quarter of 2019 and current year AFUDC equity. The equity method investment adjustment was immaterial and relates to prior years. 46 --------------------------------------------------------------------------------
MD&A SEGMENT RESULTS - GAS UTILITIES AND INFRASTRUCTURE
Matters Impacting Future Gas Utilities andInfrastructure Results Gas Utilities and Infrastructure has a 47% ownership interest in ACP, which is building an approximately 600-mile interstate natural gas pipeline intended to transport diverse natural gas supplies into southeastern markets. Affected states (West Virginia ,Virginia andNorth Carolina ) have issued certain necessary permits; the project remains subject to other pending federal and state approvals, which will allow full construction activities to begin. In 2018,FERC issued a series of Notices to Proceed, which authorized the project to begin certain construction-related activities along the pipeline route. Given legal challenges and ongoing discussions with customers, ACP expects mechanical completion of the full project in late 2021 with in-service likely in the first half of 2022. The delays resulting from legal challenges have also impacted the cost for the project. Project cost is approximately$8 billion , excluding financing costs. This estimate is based on the current facts available around construction costs and timelines, and is subject to future changes as those facts develop. Abnormal weather, work delays (including delays due to judicial or regulatory action) and other conditions may result in cost or schedule modifications, a suspension of AFUDC for ACP and/or impairment charges potentially material to Duke Energy's cash flows, financial position and results of operations. ACP and Duke Energy will continue to consider their options with respect to the foregoing given their existing contractual and legal obligations. See Notes 4 and 18 to the Consolidated Financial Statements, "Regulatory Matters" and "Variable Interest Entities," respectively, for additional information. OnNovember 13, 2013 , the PUCO issued an order authorizing recovery of MGP costs at certain sites inOhio with a deadline to complete the MGP environmental investigation and remediation work prior toDecember 31, 2016 . This deadline was subsequently extended toDecember 31, 2019 .Duke Energy Ohio has filed a request for extension of the deadline. A hearing on that request has not been scheduled. Disallowance of costs incurred, failure to complete the work by the deadline or failure to obtain an extension from the PUCO could result in an adverse impact onGas Utilities and Infrastructure's results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act. Commercial Renewables Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues$ 487 $ 477 $ 10 Operating Expenses Operation, maintenance and other 297 304 (7 ) Depreciation and amortization 168 155 13 Property and other taxes 23 25 (2 ) Impairment charges - 93 (93 ) Total operating expenses 488 577 (89 ) Losses on Sales of Other Assets and Other, net (3 ) (1 ) (2 ) Operating Loss (4 ) (101 )
97
Other Income and Expenses, net 5 23 (18 ) Interest Expense 95 88 7 Loss Before Income Taxes (94 ) (166 ) 72 Income Tax Benefit (115 ) (147 ) 32
Less: Loss Attributable to Noncontrolling Interests (177 ) (28 )
(149 )
Segment Income $ 198 $ 9 Renewable plant production, GWh 8,574 8,522
52
Net proportional MW capacity in operation(a) 3,485 2,991
494
(a) Certain projects are included in tax-equity structures where investors
have differing interests in the project's economic attributes. In the
table above, 100% of the tax-equity project's capacity is included.
Year Ended December 31, 2019 , as compared to 2018
Commercial Renewables' results were favorable primarily due to new tax equity
solar projects in the current year and a prior year goodwill impairment charge.
The following is a detailed discussion of the variance drivers by line item.
Operating Revenues. The increase was primarily due to new solar projects placed
in service and higher irradiance.
Operating Expenses. The decrease was primarily due to a goodwill impairment
charge in the prior year, partially offset by increased depreciation due to new
solar projects placed in service.
Other Income and Expenses, net. The decrease was primarily due to income from
the FES settlement agreement in the prior year.
Income Tax Benefit. The decrease in the tax benefit was primarily driven by
taxes associated with Duke Energy's interest in tax equity solar projects
recorded during 2019 and a reduction in PTCs generated.
47
--------------------------------------------------------------------------------MD&A SEGMENT RESULTS - COMMERCIAL RENEWABLES
Loss Attributable to Noncontrolling Interests. The variance was primarily due to an increase in solar projects with tax equity investors. HLBV accounting was utilized, resulting in allocation of losses to the noncontrolling interest partners. See Note 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies" for more information. Matters Impacting Future Commercial Renewables Results Commercial Renewables continues to experience growth with tax equity projects; however, the future expiration of federal tax incentives could result in adverse impacts to future results of operations, financial position and cash flows. During 2019, Duke Energy evaluated recoverability of its renewable merchant plants principally in theElectric Reliability Council of Texas West market, due to declining market pricing and declining long-term forecasted energy prices, primarily driven by lower forecasted natural gas prices. These assets were not impaired; however, a continued decline in energy market pricing would likely result in a future impairment. Impairment of these assets could result in adverse impacts to the future results of operations, financial position and cash flows of Commercial Renewables. See Note 11 to the Consolidated Financial Statements, "Property, Plant and Equipment," for additional information. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act. Other Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues$ 95 $ 89 $ 6 Operating Expenses 117 380 (263 ) Losses on Sales of Other Assets and Other, net (2 ) (96 ) 94 Operating Loss (24 ) (387 ) 363 Other Income and Expenses, net 145 73 72 Interest Expense 705 657 48 Loss Before Income Taxes (584 ) (971 ) 387 Income Tax Benefit (173 ) (282 ) 109 Less: Net Income Attributable to Noncontrolling Interests - 5 (5 ) Less: Preferred Dividends 41 - 41 Net Loss$ (452 ) $ (694 ) $ 242 Year EndedDecember 31, 2019 , as compared to 2018 The variance was driven by the prior year severance charges related to a corporate initiative, prior year loss on sale of the retired Beckjord station, and the absence in the current year of costs related to the Piedmont acquisition, offset by obligations to theDuke Energy Foundation in 2019. The following is a detailed discussion of the variance drivers by line item. Operating Expenses. The variance was primarily due to prior year severance charges related to a corporate initiative as well as costs associated with the Piedmont acquisition, partially offset by obligations to theDuke Energy Foundation in 2019. Losses on Sales of Other Assets and Other, net. The variance was driven by the prior year loss on sale of the retired Beckjord station, including the transfer of coal ash basins and other real property and indemnification from all potential future claims related to the property, whether arising under environmental laws or otherwise. Other Income and Expenses, net. The variance was primarily due to higher returns on investments that fund certain employee benefit obligations and Bison investment income. Interest Expense. The variance was primarily due to higher outstanding debt in the current year and higher short-term interest rates. Income Tax Benefit. The decrease in the tax benefit was primarily driven by a decrease in pretax losses. Preferred Dividends. The variance was driven by the declarations of preferred stock dividend on preferred stock issued in 2019. Matters Impacting Future Other Results Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act. 48 --------------------------------------------------------------------------------
MD&ADUKE ENERGY CAROLINAS SUBSIDIARY REGISTRANTS Basis of Presentation The results of operations and variance discussion for the Subsidiary Registrants is presented in a reduced disclosure format in accordance with General Instruction (I)(2)(a) of Form 10-K.DUKE ENERGY CAROLINAS Results of Operations Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues$ 7,395 $ 7,300 $ 95 Operating Expenses Fuel used in electric generation and purchased power 1,804 1,821 (17 ) Operation, maintenance and other 1,868 2,130 (262 ) Depreciation and amortization 1,388 1,201 187 Property and other taxes 292 295 (3 ) Impairment charges 17 192 (175 ) Total operating expenses 5,369 5,639 (270 ) Losses on Sales of Other Assets and Other, net - (1 ) 1 Operating Income 2,026 1,660 366 Other Income and Expenses, net 151 153 (2 ) Interest Expense 463 439 24 Income Before Income Taxes 1,714 1,374 340 Income Tax Expense 311 303 8 Net Income$ 1,403 $ 1,071 $ 332 The following table shows the percent changes in GWh sales and average number of customers forDuke Energy Carolinas . The below percentages for retail customer classes represent billed sales only. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized. Increase (Decrease) over prior year 2019 2018 Residential sales (2.9 )% 11.7 % General service sales (0.1 )% 4.5 % Industrial sales (1.9 )% (0.3 )% Wholesale power sales (13.6 )% 12.5 % Joint dispatch sales 4.7 % 23.1 % Total sales (2.6 )% 5.7 % Average number of customers 2.1 % 1.5 %
Year Ended
year North Carolina rate case and the current year South Carolina rate
case.
Partially offset by:
• a
taxes, partially offset by EE programs and a decrement rider relating to
nuclear decommissioning that ended in the prior year;
• a
• a
unfavorable weather in the current year.
Operating Expenses. The variance was driven primarily by:
• a
primarily due to decreased labor and storm restoration costs; and
• a
the prior year
Base Load Review Act and charges related to coal ash costs in South
Carolina .
49--------------------------------------------------------------------------------
MD&ADUKE ENERGY CAROLINAS
Partially offset by:
• a
due to additional plant in service, new depreciation rates associated with
the prior year North Carolina rate case and the current year South
Carolina rate case and higher amortization of deferred coal ash costs
associated with the prior year North Carolina rate case.
Interest Expense. The variance was primarily due to higher debt outstanding in
the current year.
Matters Impacting Future Results
On December 31, 2019 , Duke Energy Carolinas entered into a settlement agreement
with NCDEQ and certain community groups under which Duke Energy Carolinas agreed
to excavate five of the six remaining coal ash basins in North Carolina with ash
moved to on-site lined landfills. At the one remaining basin, uncapped basin ash
will be excavated and moved to lined landfills. An order from regulatory
authorities disallowing recovery of costs related to closure of these ash basins
could have an adverse impact on Duke Energy Carolinas' results of operations,
financial position and cash flows. See Notes 4 and 5 to the Consolidated
Financial Statements, "Regulatory Matters" and "Commitments and Contingencies,"
respectively, for additional information.
Duke Energy Carolinas filed a general rate case with the NCUC on September 30,
2019 . The outcome of this rate case could materially impact Duke Energy
Carolina's results of operations, financial position and cash flows. See Note 4
to the Consolidated Financial Statements, "Regulatory Matters," for additional
information.
On May 21, 2019 , the PSCSC issued an order granting Duke Energy Carolinas
request for a retail rate increase but denying recovery of certain coal ash
costs. Duke Energy Carolinas filed a notice of appeal with the South Carolina
Supreme Court on November 15, 2019 . Appellant briefs are due on March 2, 2020 ,
and Appellee response briefs are due on May 15, 2020 . Duke Energy Carolinas'
results of operations, financial position and cash flows could be adversely
impacted if coal ash costs are not ultimately approved for recovery. See Note 4
to the Consolidated Financial Statements, "Regulatory Matters," for additional
information.
On June 22, 2018 , Duke Energy Carolinas received an order from the NCUC, which
denied the Grid Rider Stipulation and deferral treatment of grid improvement
costs. Duke Energy Carolinas has petitioned for deferral of future grid
improvement costs in its 2019 rate case. Duke Energy Carolinas' results of
operations, financial position and cash flows could be adversely impacted if
grid improvement costs are not ultimately approved for recovery and/or deferral
treatment.
During the last half of 2018, Duke Energy Carolinas' service territory was
impacted by several named storms. Hurricane Florence, Hurricane Michael and
Winter Storm Diego caused flooding, extensive damage and widespread power
outages in the service territory. A significant portion of the incremental
operation and maintenance expenses related to these storms has been deferred. An
order from regulatory authorities disallowing the deferral and future recovery
of storm restoration costs could have an adverse impact on Duke Energy
Carolinas' results of operations, financial position and cash flows. See Note 4
to the Consolidated Financial Statements, "Regulatory Matters," for additional
information.
Within this Item 7, see Liquidity and Capital Resources for discussion of risks
associated with the Tax Act.
PROGRESS ENERGY
Results of Operations
Years Ended December 31,
(in millions) 2019 2018 Variance
Operating Revenues $ 11,202 $ 10,728 $ 474
Operating Expenses
Fuel used in electric generation and purchased power 4,024 3,976 48
Operation, maintenance and other 2,495 2,613 (118 )
Depreciation and amortization 1,845 1,619 226
Property and other taxes 561 529 32
Impairment charges (24 ) 87 (111 )
Total operating expenses 8,901 8,824 77
Gains on Sales of Other Assets and Other, net - 24 (24 )
Operating Income 2,301 1,928 373
Other Income and Expenses, net 141 165 (24 )
Interest Expense 862 842 20
Income Before Income Taxes 1,580 1,251 329
Income Tax Expense 253 218 35
Net Income 1,327 1,033 294Less: Net Income Attributable to Noncontrolling Interests -
6 (6 )
Net Income Attributable to Parent $ 1,327 $ 1,027 $ 300
50--------------------------------------------------------------------------------
MD&A PROGRESS ENERGY
Year Ended
the prior year
rate case at
adjustments related to Citrus County CC being placed in service and annual
increases from the 2017 Settlement Agreement;
• a
due to coal ash cost recovery in the current year at
and increased demand at
• a
fuel cost recovery due to extreme weather in the prior year at Duke Energy
Progress, partially offset by a decrease in fuel and capacity rates billed
to retail customers at Duke Energy Florida ;
• a $22 million increase in retail sales, net of fuel revenues, due to
favorable weather in the current year at Duke Energy Florida ; and
• a
transmission revenues and nonregulated products and services revenues at
Duke Energy Florida . Partially offset by: • a$47 million decrease in retail rider revenues primarily related to decreased revenue requirements in the current year; and • a$14 million decrease in weather-normal retail sales volumes atDuke Energy Florida .
Operating Expenses. The variance was driven primarily by:
• a
due to higher amortization of deferred coal ash costs, new depreciation
rates associated with the prior year Duke Energy Progress North Carolina
rate case and Duke Energy Florida's base rate adjustments related to
Citrus County CC being placed in service;
• a
power primarily due to an increase in the North Carolina Renewable Energy
and Energy Efficiency Portfolio Standard requirement from the prior year
at Duke Energy Progress , partially offset by lower purchased power and
lower fuel costs, net of deferrals, at Duke Energy Florida ; and
• a $32 million increase in property and other taxes primarily due tocurrent year property tax reassessments and a favorable sales and use tax
credit in the prior year at Duke Energy Progress and higher property taxes
for additional plant in service at Duke Energy Florida .
Partially offset by:
• a
primarily due to lower storm costs, reduced outage costs, and lower
employee benefit costs, partially offset by increased vegetation
management costs at Duke Energy Florida ; and
• a
impacts associated with the
Progress as well as the impairment of
CC.
Other Income and Expenses, net. The variance was driven primarily by AFUDC equity return ending on the Citrus County CC in the fourth quarter of 2018 atDuke Energy Florida , partially offset by life insurance proceeds atDuke Energy Progress . Interest Expense. The variance was driven primarily by AFUDC debt return ending in the fourth quarter of 2018 on the Citrus County CC atDuke Energy Florida . Income Tax Expense. The increase in tax expense was primarily due to an increase in pretax income, partially offset by an increase in the amortization of excess deferred taxes and a Tax Act adjustment in the prior year related to excess deferred taxes. Matters Impacting Future Results OnDecember 31, 2019 ,Duke Energy Progress entered into a settlement agreement with NCDEQ and certain community groups under whichDuke Energy Progress agreed to excavate two of the three remaining coal ash basins inNorth Carolina with ash moved to on-site lined landfills. At the one remaining basin, uncapped basin ash will be excavated and moved to lined landfills. An order from regulatory authorities disallowing recovery of costs related to closure of these ash basins could have an adverse impact onDuke Energy Progress' results of operations, financial position and cash flows. See Notes 4 and 5 to the Consolidated Financial Statements, "Regulatory Matters" and "Commitments and Contingencies," respectively, for additional information.Duke Energy Progress filed a general rate case with the NCUC onOctober 30, 2019 . The outcome of this rate case could materially impact Progress Energy's results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. OnMay 21, 2019 , the PSCSC issued an order grantingDuke Energy Progress' request for a retail rate increase but denying recovery of certain coal ash costs.Duke Energy Progress filed a notice of appeal with theSouth Carolina Supreme Court onNovember 15, 2019 . Appellant briefs are due onMarch 2, 2020 , and Appellee response briefs are due onMay 15, 2020 . Progress Energy's results of operations, financial position and cash flows could be adversely impacted if coal ash costs are not ultimately approved for recovery. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. 51 --------------------------------------------------------------------------------
MD&A PROGRESS ENERGYDuke Energy Progress has petitioned for deferral of future grid improvement costs in its 2019 rate case. Progress Energy's results of operations, financial position and cash flows could be adversely impacted if grid improvement costs are not ultimately approved for recovery and/or deferral treatment. During the last half of 2018,Duke Energy Progress andDuke Energy Florida's service territories were impacted by several named storms. Hurricane Florence, Hurricane Michael and Winter Storm Diego caused flooding, extensive damage and widespread power outages to the service territory ofDuke Energy Progress .Duke Energy Florida's service territory was also impacted by Hurricane Michael, a Category 5 hurricane and the most powerful storm to hit the FloridaPanhandle in recorded history. InSeptember 2019 , Hurricane Dorian impactedDuke Energy Progress' andDuke Energy Florida's service territories. A significant portion of the incremental operation and maintenance expenses related to these storms has been deferred. An order from regulatory authorities disallowing the deferral and future recovery of storm restoration costs could have an adverse impact on Progress Energy's results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act.DUKE ENERGY PROGRESS Results of Operations Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues$ 5,957 $ 5,699 $ 258 Operating Expenses Fuel used in electric generation and purchased power 2,012 1,892 120 Operation, maintenance and other 1,446 1,578 (132 ) Depreciation and amortization 1,143 991 152 Property and other taxes 176 155 21 Impairment charges 12 33 (21 ) Total operating expenses 4,789 4,649 140 Gains on Sales of Other Assets and Other, net - 9 (9 ) Operating Income 1,168 1,059 109 Other Income and Expenses, net 100 87 13 Interest Expense 306 319 (13 ) Income Before Income Taxes 962 827 135 Income Tax Expense 157 160 (3 ) Net Income$ 805 $ 667 $ 138 The following table shows the percent changes in GWh sales and average number of customers forDuke Energy Progress . The below percentages for retail customer classes represent billed sales only. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized. Increase (Decrease) over prior year 2019 2018 Residential sales (4.0 )% 9.9 % General service sales (1.6 )% 2.3 % Industrial sales 0.6 % 0.8 % Wholesale power sales (1.5 )% 4.6 % Joint dispatch sales (0.8 )% 2.1 % Total sales (1.4 )% 3.8 % Average number of customers 1.3 % 1.5 %
Year Ended
year North Carolina rate case and the current year South Carolina rate
case;
• a
fuel cost recovery due to extreme weather in the prior year; and
• a
due to coal ash cost recovery in the current year.
Partially Offset by:
• a
incomes taxes created by the reduction in the corporate income tax rate,
partially offset by an increase in rider revenues related to EE programs.
52
--------------------------------------------------------------------------------MD&ADUKE ENERGY PROGRESS
Operating Expenses. The variance was driven primarily by:
• a
due to higher amortization of deferred coal ash costs and new depreciation
rates associated with the prior year North Carolina and current year South
Carolina rate cases, partially offset by the amortization credit for theNorth Carolina Renewable Energy and Energy Efficiency Portfolio Standard
requirement increase from prior year;
• a
power primarily due to a higher deferred fuel balance and an increase in
the North Carolina Renewable Energy and Energy Efficiency Portfolio
Standard requirement from prior year, partially offset by lower demand and
changes in generation mix; and
• a $21 million increase in property and other taxes primarily due tocurrent year property tax reassessments and a favorable sales and use tax
credit in the prior year.
Partially offset by:
• a
primarily due to lower storm costs in current year, reduced outage costs
and lower employee benefit costs; and
• a
impacts associated with the
Other Income and Expenses, net. The variance was driven primarily by life insurance proceeds. Interest Expense. The variance was driven primarily by lower interest rates on outstanding debt. Matters Impacting Future Results OnDecember 31, 2019 ,Duke Energy Progress entered into a settlement agreement with NCDEQ and certain community groups under whichDuke Energy Progress agreed to excavate two of the three remaining coal ash basins inNorth Carolina with ash moved to on-site lined landfills. At the one remaining basin, uncapped basin ash will be excavated and moved to lined landfills. An order from regulatory authorities disallowing recovery of costs related to closure of these ash basins could have an adverse impact onDuke Energy Progress' results of operations, financial position and cash flows. See Notes 4 and 5 to the Consolidated Financial Statements, "Regulatory Matters" and "Commitments and Contingencies," respectively, for additional information.Duke Energy Progress filed a general rate case with the NCUC onOctober 30, 2019 . The outcome of this rate case could materially impactDuke Energy Progress' results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. OnMay 21, 2019 , the PSCSC issued an order grantingDuke Energy Progress' request for a retail rate increase but denying recovery of certain coal ash costs.Duke Energy Progress filed a notice of appeal with theSouth Carolina Supreme Court onNovember 15, 2019 . Appellant briefs are due onMarch 2, 2020 , and Appellee response briefs are due onMay 15, 2020 .Duke Energy Progress' results of operations, financial position and cash flows could be adversely impacted if coal ash costs are not ultimately approved for recovery. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information.Duke Energy Progress has petitioned for deferral of future grid improvement costs in its 2019 rate case.Duke Energy Progress' results of operations, financial position and cash flows could be adversely impacted if grid improvement costs are not ultimately approved for recovery and/or deferral treatment. During the last half of 2018,Duke Energy Progress' service territory was impacted by several named storms. Hurricane Florence, Hurricane Michael and Winter Storm Diego caused flooding, extensive damage and widespread power outages in the service territory. InSeptember 2019 , Hurricane Dorian reached the Carolinas bringing high winds, tornadoes and heavy rain, impacting about 300,000 customers within the service territory. A significant portion of the incremental operation and maintenance expenses related to these storms has been deferred. An order from regulatory authorities disallowing the deferral and future recovery of storm restoration costs could have an adverse impact onDuke Energy Progress' results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act. 53 --------------------------------------------------------------------------------
MD&ADUKE ENERGY FLORIDA DUKE ENERGY FLORIDA Results of Operations Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues$ 5,231 $ 5,021 $ 210 Operating Expenses Fuel used in electric generation and purchased power 2,012 2,085 (73 ) Operation, maintenance and other 1,034 1,025 9 Depreciation and amortization 702 628 74 Property and other taxes 392 374 18 Impairment charges (36 ) 54 (90 ) Total operating expenses 4,104 4,166 (62 ) Gains on Sales of Other Assets and Other, net - 1 (1 ) Operating Income 1,127 856 271 Other Income and Expenses, net 48 86 (38 ) Interest Expense 328 287 41 Income Before Income Taxes 847 655 192 Income Tax Expense 155 101 54 Net Income$ 692 $ 554 $ 138 The following table shows the percent changes in GWh sales and average number of customers forDuke Energy Florida . The below percentages for retail customer classes represent billed sales only. Wholesale power sales include both billed and unbilled sales. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized. Increase (Decrease) over prior year 2019 2018 Residential sales 0.7 % 4.3 % General service sales 0.3 % 1.9 % Industrial sales (4.6 )% (0.4 )% Wholesale power sales 28.8 % 5.2 % Total sales 1.5 % 2.4 % Average number of customers 1.6 % 1.5 %
Year Ended
related to Citrus County CC being placed in service, annual increases from
the 2017 Settlement Agreement and the Solar Base Rate Adjustment;
• a $22 million increase in retail sales, net of fuel revenues, due to
favorable weather in the current year;
• a
transmission revenues and nonregulated products and services revenues; and
• a
due to increased demand.
Partially offset by:
• a
decrease in fuel and capacity rates billed to retail customers;
• a
decreased revenue requirements in the current year; and
• a
54
--------------------------------------------------------------------------------MD&ADUKE ENERGY FLORIDA
Operating Expenses. The variance was driven primarily by:
• a
impairment at Citrus County CC and a reduction of the impairment in the
current year; and
• a
power primarily due to lower purchased power and lower fuel costs, net of
deferrals.
Partially offset by:
• a
due to base rate adjustments related to Citrus County CC being placed in
service, other additional plant in service and increases resulting from
the 2018 Crystal River Unit 3 nuclear decommissioning cost study;
• an $18 million increase in property and other taxes primarily due to
higher property taxes from additional plant in service; and
• a $9 million increase in operation, maintenance and other expenseprimarily due to increased vegetation management costs and deregulation
initiative costs, partially offset by lower severance charges.
Other Income and Expenses, net. The variance was driven primarily by AFUDC equity return ending on the Citrus County CC in the fourth quarter of 2018. Interest Expense. The variance was driven primarily by AFUDC debt return ending on the Citrus County CC in the fourth quarter of 2018 and higher debt outstanding in the current year. Income Tax Expense. The increase in tax expense was primarily due to an increase in pretax income in the current year. Matters Impacting Future Results OnOctober 10, 2018 , Hurricane Michael made landfall onFlorida's Panhandle as a Category 5 hurricane, the most powerful storm to hit the FloridaPanhandle in recorded history. The storm caused significant damage within the service territory ofDuke Energy Florida , particularly fromPanama City Beach toMexico Beach . InSeptember 2019 ,Duke Energy Florida's service territory was threatened by Hurricane Dorian with landfall as a possible Category 5 hurricane and thereforeDuke Energy Florida incurred costs to secure necessary resources to be prepared for that potential impact. A significant portion of the incremental operation and maintenance expenses related to these storms has been deferred. An order from regulatory authorities disallowing the future recovery of storm restoration costs could have an adverse impact onDuke Energy Florida's financial position, results of operations and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act. 55 --------------------------------------------------------------------------------
MD&ADUKE ENERGY OHIO DUKE ENERGY OHIO Results of Operations Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues Regulated electric$ 1,456 $ 1,450 $ 6 Regulated natural gas 484 506 (22 ) Nonregulated electric and other - 1 (1 ) Total operating revenues 1,940 1,957 (17 ) Operating Expenses Fuel used in electric generation and purchased power - regulated 388 412 (24 ) Cost of natural gas 95 113 (18 ) Operation, maintenance and other 520 480 40 Depreciation and amortization 265 268 (3 ) Property and other taxes 308 290 18 Total operating expenses 1,576 1,563 13 Losses on Sales of Other Assets and Other, net - (106 ) 106 Operating Income 364 288 76 Other Income and Expenses, net 24 23 1 Interest Expense 109 92 17 Income from Continuing Operations Before Income Taxes 279 219 60 Income Tax Expense from Continuing Operations 40 43 (3 ) Income from Continuing Operations 239 176 63 Loss from Discontinued Operations, net of tax (1 ) - (1 ) Net Income$ 238 $ 176 $ 62 The following table shows the percent changes in GWh sales of electricity, MCF of natural gas delivered and average number of electric and natural gas customers forDuke Energy Ohio . The below percentages for retail customer classes represent billed sales only. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized. Electric Natural Gas
Increase (Decrease) over prior year 2019 2018 2019 2018 Residential sales
(3.9 )% 12.2 % (3.7 )% 18.0 %
General service sales (1.9 )% 3.3 % (1.2 )% 15.4 %
Industrial sales (2.1 )% 1.0 % (0.4 )% 8.1 %
Wholesale electric power sales (4.9 )% (46.6 )% n/a n/a
Other natural gas sales n/a n/a 0.7 % 0.7 %
Total sales (2.4 )% 2.8 % (1.7 )% 11.9 %
Average number of customers 0.7 % 0.8 % 0.7 % 0.9 %
Year Ended
decrease in price;
• a
the Smart Grid Rider in 2018 and the Tax Cut and Jobs Act Rider beginning
in 2019, partially offset by new riders implemented in conjunction with
rate cases including the Price Stabilization Rider, Electric Service
Reliability Rider and the Environmental Surcharge Mechanism;
• a
• a
fuel revenues, due to unfavorable weather in the current year.
Partially offset by: • a$71 million increase in retail pricing primarily due to rate case impacts; and
• an
an increase in the Network Integration Transmission Service rate primarily
due to additional plant in service.
56--------------------------------------------------------------------------------
MD&ADUKE ENERGY OHIO
Operating Expenses. The variance was driven primarily by:
• a
primarily due to the
transmission costs previously billed by PJM recorded in 2018 and increased
PJM transmission expansion fees; and
• an $18 million increase in property and other taxes primarily due toadditional plant in service, partially offset by a negotiated reassessment
of property values and property tax true ups for prior periods.
Partially offset by:
• a
power expense due to the prior year outage at East Bend Station and the
deferral of OVEC related purchased power costs; and
• an
costs passed through to customers, as a result of a lower natural gas
prices.
Losses on Sales of Other Assets and Other, net. The increase was driven by the
loss on the prior year sale of Beckjord.
Interest Expense. The variance was primarily due to higher debt outstanding in
the current year.
57
--------------------------------------------------------------------------------MD&ADUKE ENERGY OHIO Matters Impacting Future Results OnNovember 13, 2013 , the PUCO issued an order authorizing recovery of MGP costs at certain sites inOhio with a deadline to complete the MGP environmental investigation and remediation work prior toDecember 31, 2016 . This deadline was subsequently extended toDecember 31, 2019 .Duke Energy Ohio has filed a request for extension of the deadline. A hearing on that request has not been scheduled. Disallowance of costs incurred, failure to complete the work by the deadline or failure to obtain an extension from the PUCO could result in an adverse impact onDuke Energy Ohio's results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act.DUKE ENERGY INDIANA Results of Operations Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues$ 3,004 $ 3,059 $ (55 ) Operating Expenses Fuel used in electric generation and purchased power 935 1,000 (65 ) Operation, maintenance and other 790 788 2 Depreciation and amortization 525 520 5 Property and other taxes 69 78 (9 ) Impairment charges - 30 (30 ) Total operating expenses 2,319 2,416 (97 ) Operating Income 685 643 42 Other Income and Expenses, net 41 45 (4 ) Interest Expense 156 167 (11 ) Income Before Income Taxes 570 521 49 Income Tax Expense 134 128 6 Net Income$ 436 $ 393 $ 43 The following table shows the percent changes in GWh sales and average number of customers forDuke Energy Indiana . The below percentages for retail customer classes represent billed sales only. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized. Increase (Decrease) over prior year 2019 2018 Residential sales (3.9 )% 12.5 % General service sales (2.2 )% 2.8 % Industrial sales (2.6 )% 0.5 % Wholesale power sales (27.7 )% (0.9 )% Total sales (6.8 )% 3.3 % Average number of customers 1.2 % 1.3 %
Year Ended
expiration of a contract with a wholesale customer;
• a
congestion; and
• a
Operating Expenses. The variance was driven primarily by:
• a
power expense primarily due to lower coal and natural gas costs, partially
offset by higher purchase power fuel clause, higher amortization of
deferred fuel costs and higher deferred MISO charges; and
• a $30 million decrease in impairments primarily due to the prior year
Edwardsport IGCC settlement agreement.
58--------------------------------------------------------------------------------
MD&ADUKE ENERGY INDIANA Matters Impacting Future Results OnApril 17, 2015 , theEPA published in theFederal Register a rule to regulate the disposal of CCR from electric utilities as solid waste.Duke Energy Indiana has interpreted the rule to identify the coal ash basin sites impacted and has assessed the amounts of coal ash subject to the rule and a method of compliance.Duke Energy Indiana's interpretation of the requirements of the CCR rule is subject to potential legal challenges and further regulatory approvals, which could result in additional ash basin closure requirements, higher costs of compliance and greater AROs. Additionally,Duke Energy Indiana has retired facilities that are not subject to the CCR rule.Duke Energy Indiana may incur costs at these facilities to comply with environmental regulations or to mitigate risks associated with on-site storage of coal ash. An order from regulatory authorities disallowing recovery of costs related to closure of ash basins could have an adverse impact onDuke Energy Indiana's results of operations, financial position and cash flows.Duke Energy Indiana filed a general rate case with the IURC onJuly 2, 2019 , its first general rate case inIndiana in 16 years. The outcome of this rate case could materially impactDuke Energy Indiana's results of operations, financial position and cash flows. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. Within this Item 7, see Liquidity and Capital Resources for discussion of risks associated with the Tax Act. PIEDMONT Results of Operations Years Ended December 31, (in millions) 2019 2018 Variance Operating Revenues$ 1,381 $ 1,375 $ 6 Operating Expenses Cost of natural gas 532 584 (52 ) Operation, maintenance and other 328 357 (29 ) Depreciation and amortization 172 159 13 Property and other taxes 45 49 (4 ) Total operating expenses 1,077 1,149 (72 ) Operating Income 304 226 78 Equity in earnings of unconsolidated affiliates 8 7 1 Other income and expenses, net 20 14 6 Total other income and expenses 28 21 7 Interest Expense 87 81 6 Income Before Income Taxes 245 166 79 Income Tax Expense 43 37 6 Net Income$ 202 $ 129 $ 73 The following table shows the percent changes in Dth delivered and average number of customers. The percentages for all throughput deliveries represent billed and unbilled sales. Amounts are not weather-normalized. Increase (Decrease) over prior year 2019 2018 Residential deliveries (8.0 )% 23.6 % Commercial deliveries (4.6 )% 14.9 % Industrial deliveries 1.7 % 4.2 % Power generation deliveries (11.8 )% 23.6 % For resale 4.8 % 17.0 % Total throughput deliveries (8.2 )% 19.0 % Secondary market volumes (0.5 )% (8.1 )% Average number of customers 1.4 % 1.6 % Piedmont's throughput was 511,243,774 Dth and 557,145,128 Dth for the years endedDecember 31, 2019 , and 2018, respectively. Due to the margin decoupling mechanism inNorth Carolina , WNA mechanisms inSouth Carolina andTennessee and fixed price contracts with most power generation customers, changes in throughput deliveries do not have a material impact on Piedmont's revenues or earnings. The margin decoupling mechanism adjusts for variations in residential and commercial use per customer, including those due to weather and conservation. The WNA mechanisms mostly offset the impact of weather on bills rendered, but do not ensure full recovery of approved margin during periods when winter weather is significantly warmer or colder than normal. Year EndedDecember 31, 2019 , as compared to 2018 Operating Revenues. The variance was driven primarily by: • a$24 million increase due toNorth Carolina base rate case increases;
• a
59
--------------------------------------------------------------------------------
MD&A PIEDMONT
• an $11 million increase due to NCUC approval related to tax reform
accounting from fixed rate contracts.
Partially offset by:
• a
customers.
Operating Expenses. The variance was driven primarily by:
• a
prices; and
• a
lower information technology outside services and labor costs.
Partially offset by:
• a
additional plant in service.
Matters Impacting Future Results
Within this Item 7, see Liquidity and Capital Resources for discussion of risks
associated with the Tax Act.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of financial statements requires the application of accounting
policies, judgments, assumptions and estimates that can significantly affect the
reported results of operations, cash flows or the amounts of assets and
liabilities recognized in the financial statements. Judgments made include the
likelihood of success of particular projects, possible legal and regulatory
challenges, earnings assumptions on pension and other benefit fund investments
and anticipated recovery of costs, especially through regulated operations.
Management discusses these policies, estimates and assumptions with senior
members of management on a regular basis and provides periodic updates on
management decisions to the Audit Committee. Management believes the areas
described below require significant judgment in the application of accounting
policy or in making estimates and assumptions that are inherently uncertain and
that may change in subsequent periods.
For further information, see Note 1 to the Consolidated Financial Statements,
"Summary of Significant Accounting Policies."
Regulated Operations Accounting
Substantially all of Duke Energy's regulated operations meet the criteria for
application of regulated operations accounting treatment. As a result, Duke
Energy is required to record assets and liabilities that would not be recorded
for nonregulated entities. Regulatory assets generally represent incurred costs
that have been deferred because such costs are probable of future recovery in
customer rates. Regulatory liabilities are recorded when it is probable that a
regulator will require Duke Energy to make refunds to customers or reduce rates
to customers for previous collections or deferred revenue for costs that have
yet to be incurred.
Management continually assesses whether recorded regulatory assets are probable
of future recovery by considering factors such as:
• applicable regulatory environment changes;
• historical regulatory treatment for similar costs in Duke Energy's
jurisdictions;
• litigation of rate orders;
• recent rate orders to other regulated entities;
• levels of actual return on equity compared to approved rates of return on
equity; and
• the status of any pending or potential deregulation legislation.
If future recovery of costs ceases to be probable, asset write-offs would be recognized in operating income. Additionally, regulatory agencies can provide flexibility in the manner and timing of the depreciation of property, plant and equipment, recognition of asset retirement costs and amortization of regulatory assets, or may disallow recovery of all or a portion of certain assets. As required by regulated operations accounting rules, significant judgment can be required to determine if an otherwise recognizable incurred cost qualifies to be deferred for future recovery as a regulatory asset. Significant judgment can also be required to determine if revenues previously recognized are for entity specific costs that are no longer expected to be incurred or have not yet been incurred and are therefore a regulatory liability. Goodwill Impairment Assessments Duke Energy performed its annual goodwill impairment tests for all reporting units as ofAugust 31, 2019 . Additionally, Duke Energy monitors all relevant events and circumstances during the year to determine if an interim impairment test is required. Such events and circumstances include an adverse regulatory outcome, declining financial performance and deterioration of industry or market conditions. As ofAugust 31, 2019 , all of the reporting units' estimated fair value of equity substantially exceeded the carrying value of equity. The fair values of the reporting units were calculated using a weighted combination of the income approach, which estimates fair value based on discounted cash flows, and the market approach, which estimates fair value based on market comparables within the utility and energy industries. 60 --------------------------------------------------------------------------------
MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Estimated future cash flows under the income approach are based on Duke Energy's internal business plan. Significant assumptions used are growth rates, future rates of return expected to result from ongoing rate regulation and discount rates. Management determines the appropriate discount rate for each of its reporting units based on the WACC for each individual reporting unit. The WACC takes into account both the after-tax cost of debt and cost of equity. A major component of the cost of equity is the current risk-free rate on 20-yearU.S. Treasury bonds. In the 2019 impairment tests, Duke Energy considered implied WACCs for certain peer companies in determining the appropriate WACC rates to use in its analysis. As each reporting unit has a different risk profile based on the nature of its operations, including factors such as regulation, the WACC for each reporting unit may differ. Accordingly, the WACCs were adjusted, as appropriate, to account for company specific risk premiums. The discount rates used for calculating the fair values as ofAugust 31, 2019 , for each of Duke Energy's reporting units ranged from 5.2% to 5.9%. The underlying assumptions and estimates are made as of a point in time. Subsequent changes, particularly changes in the discount rates, authorized regulated rates of return or growth rates inherent in management's estimates of future cash flows, could result in future impairment charges. One of the most significant assumptions utilized in determining the fair value of reporting units under the market approach is implied market multiples for certain peer companies. Management selects comparable peers based on each peer's primary business mix, operations, and market capitalization compared to the applicable reporting unit and calculates implied market multiples based on available projected earnings guidance and peer company market values as ofAugust 31 . Duke Energy primarily operates in environments that are rate-regulated. In such environments, revenue requirements are adjusted periodically by regulators based on factors including levels of costs, sales volumes and costs of capital. Accordingly, Duke Energy's regulated utilities operate to some degree with a buffer from the direct effects, positive or negative, of significant swings in market or economic conditions. However, significant changes in discount rates over a prolonged period may have a material impact on the fair value of equity. For further information, see Note 12 to the Consolidated Financial Statements, "Goodwill and Intangible Assets." Asset Retirement Obligations AROs are recognized for legal obligations associated with the retirement of property, plant and equipment at the present value of the projected liability in the period in which it is incurred, if a reasonable estimate of fair value can be made. The present value of the initial obligation and subsequent updates are based on discounted cash flows, which include estimates regarding timing of future cash flows, selection of discount rates and cost escalation rates, among other factors. These estimates are subject to change. Obligations for nuclear decommissioning are based on site-specific cost studies.Duke Energy Carolinas andDuke Energy Progress assume prompt dismantlement of the nuclear facilities after operations are ceased. During 2019,Duke Energy Florida , entered into an agreement for the accelerated decommissioning of the Crystal River Unit 3 nuclear power station. Closing of this agreement is contingent upon approval of the NRC and FPSC. The retirement obligations for the decommissioning of Crystal River Unit 3 nuclear power station are measured using probability weightings of an obligation based on accelerated decommissioning from 2020 continuing through 2027 and an obligation based on the unit in SAFSTOR, with decommissioning beginning in 2067 and ending in 2074.Duke Energy Carolinas ,Duke Energy Progress andDuke Energy Florida also assume that spent fuel will be stored on-site until such time that it can be transferred to a yet to be builtDOE facility. Obligations for closure of ash basins are based upon discounted cash flows of estimated costs for site-specific plans. During 2019, Duke Energy reached a settlement agreement with the NCDEQ andSELC to excavate 7 and partially excavate 2 of the remaining ash basins inDuke Energy Carolinas andDuke Energy Progress service territories. In 2019,Duke Energy Carolinas andDuke Energy Progress remeasured their obligations to reflect the results of the settlement. For further information, see Notes 4, 5 and 10 to the Consolidated Financial Statements, "Regulatory Matters," "Commitments and Contingencies" and "Asset Retirement Obligations." Long-Lived Asset Impairment Assessments, Excluding Regulated Operations Duke Energy evaluates property, plant and equipment for impairment when events or changes in circumstances (such as a significant change in cash flow projections or the determination that it is more likely than not that an asset or asset group will be sold) indicate the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows attributable to the assets, as compared with their carrying value. Performing an impairment evaluation involves a significant degree of estimation and judgment in areas such as identifying circumstances that indicate an impairment may exist, identifying and grouping affected assets and developing the undiscounted future cash flows. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value and recording a loss if the carrying value is greater than the fair value. Additionally, determining fair value requires probability weighting future cash flows to reflect expectations about possible variations in their amounts or timing and the selection of an appropriate discount rate. Although cash flow estimates are based on relevant information available at the time the estimates are made, estimates of future cash flows are, by nature, highly uncertain and may vary significantly from actual results. When determining whether an asset or asset group has been impaired, management groups assets at the lowest level that has discrete cash flows. During 2019, Duke Energy sold a minority interest in a portion of certain Commercial Renewable assets. Following the sale, Duke Energy evaluated recoverability of the assets included in the sale as the fair value of consideration received for the portfolio was less than the carrying value of the assets. It was determined the assets were all recoverable. Additionally, Duke Energy evaluated recoverability of certain renewable merchant plants during 2019 due to declining market pricing and declining long-term forecasted energy prices. It was determined the assets were all recoverable as the carrying value of the assets approximated the aggregate estimated future cash flows. 61 --------------------------------------------------------------------------------
MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For further information, see Notes 3 and 11 to the Consolidated Financial Statements, "Business Segments" and "Property, Plant and Equipment." Equity Method Investments Equity method investments are assessed for impairment when conditions exist that indicate that the fair value of the investment is less than book value. If the decline in value is considered to be other-than-temporary, an impairment charge is recorded and the investment is written down to its estimated fair value, which establishes a new cost basis in the investment. Events or changes in circumstances are monitored that may indicate, in management's judgment, the carrying value of such investments may have experienced an other-than-temporary decline in value. The fair value of equity method investments is generally estimated using an income approach where significant judgments and assumptions include expected future cash flows, the appropriate discount rate, and probability weighted-scenarios, if applicable. In certain instances, a market approach may also be used to estimate the fair value of the equity method investment. Events or changes in circumstances that may be indicative of an other-than-temporary decline in value will vary by investment, but may include: • Significant delays in or failure to complete significant growth projects
of investees;
• Adverse regulatory actions expected to substantially reduce the investee's
product demand or profitability;
• Expected financial performance significantly worse than anticipated when
initially invested;
• Prolonged period the fair value is below carrying value;
• A significant or sustained decline in the market value of an investee;
• Lower than expected cash distributions from investees;
• Significant asset impairments or operating losses recognized by investees; and
• Loss of significant customers or suppliers with no immediate prospects for
replacement.
ACP
As ofDecember 31, 2019 , the carrying value of the equity method investment in ACP is$1.2 billion , and Duke Energy's maximum exposure to loss for its guarantee of the ACP revolving credit facility is$827 million . During 2018 and 2019, ACP received several adverse court rulings as described in Note 4 to the Consolidated Financial Statements, "Regulatory Matters." As a result, Duke Energy evaluated this investment for impairment and determined that fair value approximated carrying value and therefore no impairment was necessary. Duke Energy estimated the fair value of its investment in ACP using an income approach that primarily considered probability-weighted scenarios of discounted future net cash flows based on the most recent estimate of total construction costs and revenues. These scenarios included assumptions of various court decisions and the impact those decisions may have on the timing and extent of investment, including scenarios assuming the full resolution of permitting issues in addition to a scenario where the project does not proceed. Certain scenarios within the analysis included growth expectations from additional compression or other expansion opportunities and reopeners for pricing. An after-tax discount rate of 5.9% was used in the analysis. The discount rate was derived using a market participant approach with an adjusted risk premium for the underlying investment. Higher probabilities were generally assigned to those scenarios where court approvals were received and the project moves forward reflecting interim rates at prices subject to the reopeners. A low probability was assigned to the scenario where the project does not proceed. Judgments and assumptions are inherent in our estimates of future cash flows, discount rates, growth assumptions, and the likelihood of various scenarios. It is reasonably possible that future unfavorable developments, such as a reduced likelihood of success with court approvals, increased estimates of construction costs, material increases in the discount rate, important feedback on customer price increases or further significant delays, could result in a future impairment. For further information on ACP, see Notes 4 and 13 to the Consolidated Financial Statements, "Regulatory Matters" and "Investments in Unconsolidated Affiliates". Pension and Other Post-Retirement Benefits The calculation of pension expense, other post-retirement benefit expense and net pension and other post-retirement assets or liabilities require the use of assumptions and election of permissible accounting alternatives. Changes in assumptions can result in different expense and reported asset or liability amounts and future actual experience can differ from the assumptions. Duke Energy believes the most critical assumptions for pension and other post-retirement benefits are: • the expected long-term rate of return on plan assets;
• the assumed discount rate applied to future projected benefit payments; and
• the heath care cost trend rate.
Duke Energy elects to amortize net actuarial gain or loss amounts that are in
excess of 10% of the greater of the market-related value of plan assets or the
plan's projected benefit obligation, into net pension or other post-retirement
benefit expense over the average remaining service period of active participants
expected to benefit under the plan. If all or almost all of a plan's
participants are inactive, the average remaining life expectancy of the inactive
participants is used instead of average remaining service period. Prior service
cost or credit, which represents an increase or decrease in a plan's pension
benefit obligation resulting from plan amendment, is amortized on a
straight-line basis over the average expected remaining service period of active
participants expected to benefit under the plan. If all or almost all of a
plan's participants are inactive, the average remaining life expectancy of the
inactive participants is used instead of average remaining service period.
62
--------------------------------------------------------------------------------MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As ofDecember 31, 2019 , Duke Energy assumes pension and other post-retirement plan assets will generate a long-term rate of return of 6.85%. The expected long-term rate of return was developed using a weighted average calculation of expected returns based primarily on future expected returns across asset classes considering the use of active asset managers, where applicable. The asset allocation targets were set after considering the investment objective and the risk profile. Equity securities are held for their higher expected returns. Debt securities are primarily held to hedge the qualified pension liability. Real assets, return-seeking fixed income, hedge funds and other global securities are held for diversification. Investments within asset classes are diversified to achieve broad market participation and reduce the impact of individual managers on investments. Duke Energy discounted its futureU.S. pension and other post-retirement obligations using a rate of 3.3% as ofDecember 31, 2019 . Discount rates used to measure benefit plan obligations for financial reporting purposes reflect rates at which pension benefits could be effectively settled. As ofDecember 31, 2019 , Duke Energy determined its discount rate forU.S. pension and other post-retirement obligations using a bond selection-settlement portfolio approach. This approach develops a discount rate by selecting a portfolio of high quality corporate bonds that generate sufficient cash flow to provide for projected benefit payments of the plan. The selected bond portfolio is derived from a universe of non-callable corporate bonds rated Aa quality or higher. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plan's projected benefit payments discounted at this rate with the market value of the bonds selected. Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in Duke Energy's pension and post-retirement plans will impact future pension expense and liabilities. Duke Energy cannot predict with certainty what these factors will be in the future. The following table presents the approximate effect on Duke Energy's 2019 pretax pension expense, pretax other post-retirement expense, pension obligation and other post-retirement benefit obligation if a 0.25% change in rates were to occur. Qualified and Non- Other Post-Retirement Qualified Pension Plans Plans (in millions) 0.25 % (0.25 )% 0.25 % (0.25 )% Effect on 2019 pretax pension and other post-retirement expense Expected long-term rate of return$ (21 ) $ 21 $ (1 ) $ 1 Discount rate (9 ) 9 - (1 ) Effect on pension and other post-retirement benefit obligation atDecember 31, 2019 Discount rate (197 ) 201 (14 ) 14 Duke Energy's other post-retirement plan uses a health care cost trend rate covering both pre- and post-age 65 retired plan participants, which is comprised of a medical care cost trend rate, which reflects the near- and long-term expectation of increases in medical costs, and a prescription drug cost trend rate, which reflects the near- and long-term expectation of increases in prescription drug costs. As ofDecember 31, 2019 , the health care cost trend rate was 6.0%, trending down to 4.75% by 2026. These plans are closed to new employees. For further information, see Note 23 to the Consolidated Financial Statements, "Employee Benefit Plans." LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash Duke Energy relies primarily upon cash flows from operations, debt and equity issuances and its existing cash and cash equivalents to fund its liquidity and capital requirements. Duke Energy's capital requirements arise primarily from capital and investment expenditures, repaying long-term debt and paying dividends to shareholders. Among other provisions, the Tax Act lowered the corporate federal income tax rate from 35% to 21% and eliminated bonus depreciation for regulated utilities. For Duke Energy's regulated operations, the reduction in federal income taxes will result in lower regulated customer rates. However, due to its existing NOL position and other tax credits, Duke Energy does not expect to be a significant federal cash tax payer through at least 2027. As a result, any reduction in customer rates could cause a material reduction in consolidated cash flows from operations in the short term. Over time, the reduction in deferred tax liabilities resulting from the Tax Act will increase Duke Energy's regulated rate base investments and customer rates. Impacts of Tax Act to Duke Energy's cash flows and credit metrics are subject to the regulatory actions of its state commissions, of which a substantial amount remain uncertain through ongoing rate case activity, and theFERC . See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information. The Subsidiary Registrants generally maintain minimal cash balances and use short-term borrowings to meet their working capital needs and other cash requirements. The Subsidiary Registrants, excluding Progress Energy, support their short-term borrowing needs through participation with Duke Energy and certain of its other subsidiaries in a money pool arrangement. The companies with short-term funds may provide short-term loans to affiliates participating under this arrangement. See Note 7 to the Consolidated Financial Statements, "Debt and Credit Facilities," for additional discussion of the money pool arrangement. Duke Energy and the Subsidiary Registrants, excluding Progress Energy, may also use short-term debt, including commercial paper and the money pool, as a bridge to long-term debt financings. The levels of borrowing may vary significantly over the course of the year due to the timing of long-term debt financings and the impact of fluctuations in cash flows from operations. From time to time, Duke Energy's current liabilities exceed current assets resulting from the use of short-term debt as a funding source to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate due to the seasonality of its businesses. 63 --------------------------------------------------------------------------------
MD&A LIQUIDITY AND CAPITAL RESOURCES
Equity Issuance In order to strengthen its balance sheet and credit metrics and bolster cash flows, inNovember 2019 , Duke Energy entered into forward sales agreements for$2.5 billion of common stock equity expected to be settled in late 2020. Duke Energy plans to issue$500 million of common stock equity per year through at least 2022 through the DRIP and ATM programs. Additionally, Duke Energy will utilize other instruments as needed. See Note 20 to the Consolidated Financial Statements, "Stockholders' Equity," for further information regarding Duke Energy's equity issuances in 2019. Credit Facilities and Registration Statements See Note 7 to the Consolidated Financial Statements, "Debt and Credit Facilities," for further information regarding credit facilities and shelf registration statements available to Duke Energy and the Duke Energy Registrants. CAPITAL EXPENDITURES Duke Energy continues to focus on reducing risk and positioning its business for future success and will invest principally in its strongest business sectors. Duke Energy's projected capital and investment expenditures, including AFUDC debt and capitalized interest, for the next three fiscal years are included in the table below. (in millions) 2020 2021 2022 New generation$ 115 $ 230 $ 475 Regulated renewables 515 450 410 Environmental 975 725 750 Nuclear fuel 465 410 415 Major nuclear 405 285 175 Customer additions 630 630 620 Grid modernization and other transmission and distribution projects 3,345 3,845
4,380
Maintenance and other 2,275 1,925
2,050
Total Electric Utilities and Infrastructure 8,725 8,500
9,275
Gas Utilities and Infrastructure 2,275 1,950
1,150
Commercial Renewables and Other 825 875
725
Total projected capital and investment expenditures$ 11,825 $ 11,325 $ 11,150 DEBT MATURITIES See Note 7 to the Consolidated Financial Statements, "Debt and Credit Facilities," for further information regarding significant components of Current Maturities of Long-Term Debt on the Consolidated Balance Sheets. DIVIDEND PAYMENTS In 2019, Duke Energy paid quarterly cash dividends for the 93rd consecutive year and expects to continue its policy of paying regular cash dividends in the future. There is no assurance as to the amount of future dividends because they depend on future earnings, capital requirements, financial condition and are subject to the discretion of the Board of Directors. Duke Energy targets a dividend payout ratio of between 65% and 75%, based upon adjusted diluted EPS, and expects this trend to continue through 2024. In 2019 and 2018, Duke Energy increased the dividend by approximately 2% and 4%, respectively, and the company remains committed to continued growth of the dividend. Dividend and Other Funding Restrictions of Duke Energy Subsidiaries As discussed in Note 4 to the Consolidated Financial Statements, "Regulatory Matters," Duke Energy's wholly owned public utility operating companies have restrictions on the amount of funds that can be transferred to Duke Energy through dividends, advances or loans as a result of conditions imposed by various regulators in conjunction with merger transactions.Duke Energy Progress andDuke Energy Florida also have restrictions imposed by their first mortgage bond indentures and Articles of Incorporation, which in certain circumstances, limit their ability to make cash dividends or distributions on common stock. Additionally, certain other Duke Energy subsidiaries have other restrictions, such as minimum working capital and tangible net worth requirements pursuant to debt and other agreements that limit the amount of funds that can be transferred to Duke Energy. AtDecember 31, 2019 , the amount of restricted net assets of wholly owned subsidiaries of Duke Energy that may not be distributed to Duke Energy in the form of a loan or dividend does not exceed a material amount of Duke Energy's net assets. Duke Energy does not have any legal or other restrictions on paying common stock dividends to shareholders out of its consolidated equity accounts. Although these restrictions cap the amount of funding the various operating subsidiaries can provide to Duke Energy, management does not believe these restrictions will have a significant impact on Duke Energy's ability to access cash to meet its payment of dividends on common stock and other future funding obligations. CASH FLOWS FROM OPERATING ACTIVITIES Cash flows from operations ofElectric Utilities andInfrastructure and Gas Utilities and Infrastructure are primarily driven by sales of electricity and natural gas, respectively, and costs of operations. These cash flows from operations are relatively stable and comprise a substantial portion of Duke Energy's operating cash flows. Weather conditions, working capital and commodity price fluctuations and unanticipated expenses including unplanned plant outages, storms, legal costs and related settlements can affect the timing and level of cash flows from operations. 64 --------------------------------------------------------------------------------
MD&A LIQUIDITY AND CAPITAL RESOURCES
Duke Energy believes it has sufficient liquidity resources through the commercial paper markets, and ultimately, the Master Credit Facility, to support these operations. Cash flows from operations are subject to a number of other factors, including, but not limited to, regulatory constraints, economic trends and market volatility (see Item 1A, "Risk Factors," for additional information). AtDecember 31, 2019 , Duke Energy had cash and cash equivalents and short-term investments of$311 million . DEBT ISSUANCES Depending on availability based on the issuing entity, the credit rating of the issuing entity, and market conditions, the Subsidiary Registrants prefer to issue first mortgage bonds and secured debt, followed by unsecured debt. This preference is the result of generally higher credit ratings for first mortgage bonds and secured debt, which typically result in lower interest costs.Duke Energy Corporation primarily issues unsecured debt. In 2020, Duke Energy anticipates issuing additional debt of$5.2 billion , primarily for the purpose of funding capital expenditures and debt maturities. See to Note 7 to the Consolidated Financial Statements, "Debt and Credit Facilities," for further information regarding significant debt issuances in 2019. Duke Energy's capitalization is balanced between debt and equity as shown in the table below. Projected 2020 Actual 2019 Actual 2018 Equity 45 % 44 % 43 % Debt 55 % 56 % 57 % Restrictive Debt Covenants Duke Energy's debt and credit agreements contain various financial and other covenants. Duke Energy's Master Credit Facility contains a covenant requiring the debt-to-total capitalization ratio to not exceed 65% for each borrower, excluding Piedmont, and 70% for Piedmont. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements or sublimits thereto. As ofDecember 31, 2019 , each of the Duke Energy Registrants was in compliance with all covenants related to their debt agreements. In addition, some credit agreements may allow for acceleration of payments or termination of the agreements due to nonpayment, or 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. 65 --------------------------------------------------------------------------------
MD&A LIQUIDITY AND CAPITAL RESOURCES
Credit RatingsMoody's Investors Service, Inc. and S&P provide credit ratings for various Duke Energy Registrants. InJanuary 2020 ,Fitch Ratings, Inc. publicly announced plans to withdraw the ratings onDuke Energy Corporation on or aboutFebruary 20, 2020 . The following table includes Duke Energy and certain subsidiaries' credit ratings and ratings outlook as ofFebruary 2020 . Moody's S&P Duke Energy Corporation Stable Stable Issuer Credit Rating Baa1 A- Senior Unsecured Debt Baa1 BBB+ Commercial Paper P-2 A-2 Duke Energy Carolinas Stable Stable Senior Secured Debt Aa2 A Senior Unsecured Debt A1 A- Progress Energy Stable Stable Senior Unsecured Debt Baa1 BBB+ Duke Energy Progress Stable Stable Senior Secured Debt Aa3 A Duke Energy Florida Stable Stable Senior Secured Debt A1 A Senior Unsecured Debt A3 A- Duke Energy Ohio Stable Stable Senior Secured Debt A2 A Senior Unsecured Debt Baa1 A- Duke Energy Indiana Stable Stable Senior Secured Debt Aa3 A Senior Unsecured Debt A2 A- Duke Energy Kentucky Stable Stable Senior Unsecured Debt Baa1 A- Piedmont Natural Gas Stable Stable Senior Unsecured A3 A- Credit ratings are intended to provide credit lenders a framework for comparing the credit quality of securities and are not a recommendation to buy, sell or hold. The Duke Energy Registrants' credit ratings are dependent on the rating agencies' assessments of their ability to meet their debt principal and interest obligations when they come due. If, as a result of market conditions or other factors, the Duke Energy Registrants are unable to maintain current balance sheet strength, or if earnings and cash flow outlook materially deteriorates, credit ratings could be negatively impacted. Cash Flow Information The following table summarizes Duke Energy's cash flows for the two most recently completed fiscal years. Years Ended December 31, (in millions) 2019 2018 Cash flows provided by (used in): Operating activities$ 8,209 $ 7,186 Investing activities (11,957 ) (10,060 ) Financing activities 3,730 2,960
Net (decrease) increase in cash, cash equivalents and restricted cash
(18 ) 86
Cash, cash equivalents and restricted cash at beginning of period
591 505
Cash, cash equivalents and restricted cash at end of period
$ 591 66
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MD&A LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOWS
The following table summarizes key components of Duke Energy's operating cash
flows for the two most recently completed fiscal years.
Years Ended December 31,
(in millions) 2019 2018 Variance
Net income $ 3,571 $ 2,644 $ 927
Non-cash adjustments to net income 5,761 6,447 (686 )
Contributions to qualified pension plans (77 ) (141 ) 64
Payments for AROs (746 ) (533 ) (213 )
Payment for disposal of other assets - (105 ) 105
Refund of AMT credit carryforwards 573 -
573
Working capital (873 ) (1,126 )
253
Net cash provided by operating activities
The variance was driven primarily by:
• a
primarily due to increases in revenues as a result of rate increases in the
current year, partially offset by decreases in current year non-cash
adjustments;
• a
• a
to fluctuations in accounts receivable balances, including a prior year
increase for AMT refunds, and prior year increases in regulatory assets
related to fuel costs, partially offset by fluctuations in inventory levels
and current year decreases in property tax and severance accruals; and
• a
Partially offset by: • a$213 million increase in payments for AROs. INVESTING CASH FLOWS The following table summarizes key components of Duke Energy's investing cash flows for the two most recently completed fiscal years. Years EndedDecember 31 , (in millions) 2019
2018
$ (11,435 ) $ (9,668 ) $ (1,767 ) Debt and equity securities, net (5 ) (15 ) 10 Other investing items (517 ) (377 ) (140 ) Net cash used in investing activities$ (11,957 ) $
(10,060 )
The primary use of cash related to investing activities is capital, investment and acquisition expenditures, net of return of investment capital detailed by reportable business segment in the following table. The increase includes expenditures related to line improvements in theElectric Utilities and Infrastructure segment and pipeline construction and improvement in theGas Utilities and Infrastructure segment, as well as increased investment in the Commercial Renewables segment. Years Ended December 31, (in millions) 2019 2018 Variance Electric Utilities and Infrastructure$ 8,258 $ 8,086 $ 172 Gas Utilities and Infrastructure 1,533 1,133 400 Commercial Renewables 1,423 193 1,230 Other 221 256 (35 )
Total capital, investment and acquisition expenditures, net of return of investment capital
$ 11,435 $ 9,668 $ 1,767 67
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MD&A LIQUIDITY AND CAPITAL RESOURCES
FINANCING CASH FLOWS
The following table summarizes key components of Duke Energy's financing cash
flows for the two most recently completed fiscal years.
Years Ended December 31,
(in millions) 2019 2018 Variance
Issuance of common stock $ 384 $ 1,838 $ (1,454 )
Issuance of preferred stock 1,962 - 1,962
Issuances of long-term debt, net 3,615 2,393 1,222
Notes payable and commercial paper (380 ) 1,171 (1,551 ) Dividends paid (2,668 ) (2,471 ) (197 ) Contributions from noncontrolling interests 843 41 802 Other financing items (26 ) (12 )
(14 )
Net cash provided by financing activities
The variance was driven primarily by:
• a
• a
primarily due to timing of issuances and redemptions of long-term debt; and
• an
including $415 million related to the sale of a noncontrolling interest in
the Commercial Renewables segment.
Partially offset by:
• a
• a
paper primarily due to the use of proceeds from the preferred stock issuance
and increased long-term debt issuances used to pay down outstanding
commercial paper.
Off-Balance Sheet Arrangements Duke Energy and certain of its subsidiaries enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include performance guarantees, standby letters of credit, debt guarantees, surety bonds and indemnifications. Most of the guarantee arrangements entered into by Duke Energy enhance the credit standing of certain subsidiaries, non-consolidated entities or less than wholly owned entities, enabling them to conduct business. As such, these guarantee arrangements involve elements of performance and credit risk, which are not always included on the Consolidated Balance Sheets. The possibility of Duke Energy, either on its own or on behalf ofSpectra Capital through indemnification agreements entered into as part of theJanuary 2, 2007 , spin-off ofSpectra Energy Corp , having to honor its contingencies is largely dependent upon the future operations of the subsidiaries, investees and other third parties, or the occurrence of certain future events. Duke Energy performs ongoing assessments of its respective guarantee obligations to determine whether any liabilities have been incurred as a result of potential increased non-performance risk by third parties for which Duke Energy has issued guarantees. See Note 8 to the Consolidated Financial Statements, "Guarantees and Indemnifications," for further details of the guarantee arrangements. Issuance of these guarantee arrangements is not required for the majority of Duke Energy's operations. Thus, if Duke Energy discontinued issuing these guarantees, there would not be a material impact to the consolidated results of operations, cash flows or financial position. InNovember 2019 , Duke Energy executed equity forward sales agreements. Settlement of the forward sales agreements are expected to occur on or prior toDecember 31, 2020 . See Note 20 to the Consolidated Financial Statements, "Stockholders' Equity" for further details on the equity forward sales agreements. Other than the guarantee arrangements discussed above, the equity forward sales agreements and off-balance sheet debt related to non-consolidated VIEs, Duke Energy does not have any material off-balance sheet financing entities or structures. For additional information, see Note 18 to the Consolidated Financial Statements, "Variable Interest Entities". 68 --------------------------------------------------------------------------------
MD&A OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Contractual Obligations Duke Energy enters into contracts that require payment of cash at certain specified periods, based on certain specified minimum quantities and prices. The following table summarizes Duke Energy's contractual cash obligations as ofDecember 31, 2019 . Payments Due By Period More than Less than 2-3 years 4-5 years 5 years 1 year (2021 & (2023 & (2025 & (in millions) Total (2020) 2022) 2024) beyond) Long-term debt(a)$ 56,174 $ 3,021 $ 9,135 $ 4,870 $ 39,148 Interest payments on long-term debt(b) 33,988 2,163 3,986 3,516 24,323 Finance leases(c) 1,659 181 359 296 823 Operating leases(c) 2,036 268 417 367 984 Purchase obligations:(d) Fuel and purchased power(e)(f) 26,250 4,124 5,390 3,798 12,938 Other purchase obligations(g) 5,456 4,836 322 76 222 Nuclear decommissioning trust annual funding(h) 606 24 62 62 458 Land easements(i) 217 9 18 20 170 Total contractual cash obligations(j)(k)$ 126,386 $ 14,626 $ 19,689 $ 13,005 $ 79,066
(a) See Note 7 to the Consolidated Financial Statements, "Debt and Credit
Facilities."
(b) Interest payments on variable rate debt instruments were calculated using
of the instruments.
(c) See Note 6 to the Consolidated Financial Statements, "Leases." Amounts in
the table above include the interest component of finance leases based on
the interest rates stated in the lease agreements and exclude certain
related executory costs. Amounts exclude contingent lease obligations.
(d) Current liabilities, except for current maturities of long-term debt, and
purchase obligations reflected on the Consolidated Balance Sheets have
been excluded from the above table.
(e) Includes firm capacity payments that provide Duke Energy with
uninterrupted firm access to electricity transmission capacity and natural
gas transportation contracts, as well as undesignated contracts and
contracts that qualify as NPNS. For contracts where the price paid is
based on an index, the amount is based on market prices at December 31 ,2019, or the best projections of the index. For certain of these amounts,
Duke Energy may settle on a net cash basis since Duke Energy has entered
into payment netting arrangements with counterparties that permit Duke
Energy to offset receivables and payables with such counterparties.
(f) Amounts exclude obligations under the OVEC PPA. See Note 18 to the
Consolidated Financial Statements, "Variable Interest Entities," for
additional information.
(g) Includes contracts for software, telephone, data and consulting or
advisory services. Amount also includes contractual obligations for EPC
costs for new generation plants, wind and solar facilities, plantrefurbishments, maintenance and day-to-day contract work and commitments
to buy certain products. Amount excludes certain open purchase orders for
services that are provided on demand for which the timing of the purchase
cannot be determined.
(h) Related to future annual funding obligations to NDTF through nuclear powerstations' relicensing dates. See Note 10 to the Consolidated Financial
Statements, "Asset Retirement Obligations."
(i) Related to Commercial Renewables wind facilities.
(j) Unrecognized tax benefits of$126 million are not reflected in this table as Duke Energy cannot predict when open income tax years will close with completed examinations. See Note 24 to the Consolidated Financial Statements, "Income Taxes." (k) The table above excludes reserves for litigation, environmental remediation, asbestos-related injuries and damages claims and self-insurance claims (see Note 5 to the Consolidated Financial Statements, "Commitments and Contingencies") because Duke Energy is uncertain as to the timing and amount of cash payments that will be
required. Additionally, the table above excludes annual insurance premiums
that are necessary to operate the business, including nuclear insurance
(see Note 5 to the Consolidated Financial Statements, "Commitments and
Contingencies"), funding of pension and other post-retirement benefit
plans (see Note 23 to the Consolidated Financial Statements, "Employee
Benefit Plans"), AROs, including ash management expenditures (see Note 10
to the Consolidated Financial Statements, "Asset Retirement Obligations")
and regulatory liabilities (see Note 4 to the Consolidated Financial
Statements, "Regulatory Matters") because the amount and timing of the
cash payments are uncertain. Also excluded are Deferred Income Taxes and
ITCs recorded on the Consolidated Balance Sheets since cash payments for
income taxes are determined based primarily on taxable income for each
discrete fiscal year.© Edgar Online, source
