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, 2020 , 2019 and 2018. 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, 2019 , filed with theSEC onFebruary 20, 2020 , for a discussion of variance drivers for the year endedDecember 31, 2019 , as compared toDecember 31, 2018 . 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 2020, we met our near-term financial commitments and continued to provide safe and reliable service while managing the impacts of the COVID-19 pandemic. In early 2021, we continued to position the company for sustainable long-term growth, executing an important coal ash settlement agreement inNorth Carolina and announcing the$2 billion sale of a minority interest inDuke Energy Indiana , providing a source of efficient capital at an attractive valuation. We remain focused on a business portfolio that will deliver a reliable and growing dividend with 2020 representing the 94th consecutive year Duke Energy paid a cash dividend on its common stock. With these recent announcements, we also increased our long-term adjusted EPS growth rate to 5% to 7% through 2025. This growth is supported by our$59 billion capital plan from 2021 to 2025, clean energy investments that benefit our customers, timely cost-recovery mechanisms in most jurisdictions and our ability to effectively manage our cost structure. Financial Results [[Image Removed: duk-20201231_g6.jpg]][[Image Removed: duk-20201231_g7.jpg]] 42 --------------------------------------------------------------------------------
MD&A DUKE ENERGY (a)See Results of Operations below for Duke Energy's definition of adjusted earnings and adjusted 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 basic share. Duke Energy's 2020 Net Income Available toDuke Energy Corporation (GAAP Reported Earnings) were impacted by: regulatory settlements related to coal ash cost recovery inElectric Utilities and Infrastructure; the cancellation of the ACP pipeline 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. 2020 Areas of Focus and Accomplishments Clean Energy Transformation. Our industry has been undergoing an incredible transformation and 2020 was a milestone year for our company where we articulated a clear vision for the future and outlined investments to achieve a clean energy future for our customers. We continue to transform the customer experience by generating cleaner energy, modernizing the energy grid, and expanding natural gas infrastructure. Generating Cleaner Energy InOctober 2020 , we held our first-ever Environmental, Social, and Governance (ESG) Day for investors, successfully outlining our climate strategy and highlighting our strong progress to date in reducing carbon (a greater than 40% reduction from 2005) and our commitment to do more (at least 50% reduction by 2030 and net-zero by 2050). In the Carolinas, we participated in extensive stakeholder processes focused on carbon reduction and regulatory reform and filed comprehensive IRP consistent with that strategy. Our planned coal retirements and transition to cleaner energy sources in the Carolinas are some of the largest in the industry. We also committed to an all-electric light-duty fleet and 50% of all medium- and heavy-duty vehicles by 2030 - a pledge that also leads our industry. Our commitment for 2030 includes retiring plants, operating our existing carbon-free resources and investing in renewables, our energy delivery system, and natural gas infrastructure. 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-duration energy storage, advanced nuclear technologies, carbon capture and zero-carbon fuels. 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 2020, 98% of our jurisdictions were equipped with smart meters and we remain on track to be fully deployed across all regions by the end of this year. We continue to expand our self-optimizing grid capabilities, and in 2020, smart, self-healing technologies helped to avoid more than 800,000 extended customer outages across our six-state electric service area, saving customers more than 1.8 million hours of lost outage time. Duke Energy also has a demonstrated track record of driving efficiencies and productivity into the business and we continue to leverage new technology, digital tools and data analytics across the business in response to a transforming landscape. Expanding Natural Gas Infrastructure InJuly 2020 , Duke Energy and Dominion announced the cancellation of the ACP pipeline. Litigation risks and delays presented too much uncertainty on our ability to economically complete the project on schedule to meet our customers' needs. Additionally, Dominion reached a decision to exit their natural gas transmission business, further impeding our ability to consider ongoing investment in the project. The Company remains committed to pursuing natural gas infrastructure investments and continues to explore additional resources in easternNorth Carolina for the Piedmont system and securing more transport capacity to support power generation. Construction is expected to be completed this year 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. In the fall of 2020, recognizing the continued importance of natural gas to our plans, we announced a net-zero methane emission goal by 2030 related to our gas distribution business, as well as our commitment to lead on reduction of upstream methane emissions through work with our natural gas supply chain. 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 2020, we conducted the bulk of proceedings related to ourNorth Carolina rate cases for bothDuke Energy Carolinas andDuke Energy Progress and achieved a partial settlement with the North Carolina Public Staff and ten other intervening parties. InJanuary 2021 ,Duke Energy Carolinas andDuke Energy Progress reached an important settlement agreement, which subject to NCUC approval, resolves historical coal ash prudence and cost recovery issues and provides clarity on coal ash cost recovery for the next decade. In 2020, we also achieved constructive rate case outcomes inIndiana (our first rate base request in 15 years) andKentucky (electric). We have a multiyear rate plan inFlorida and inJanuary 2021 reached a constructive settlement agreement with key consumer groups, subject to FPSC approval, to bring additional certainty to rates through 2024, In addition, grid investment riders in the Midwest enable more timely cost recovery and earnings growth. 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. Our work has been recognized by our customers with external measures showing Duke Energy is improving customer satisfaction at a rate greater than the utility industry. Additionally, in 2020, we surpassed our internal target that measures customer satisfaction by approximately 14%. 43 --------------------------------------------------------------------------------
MD&A DUKE ENERGY 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 and nuclear sites had strong performance throughout the year and our electric distribution system performed well. The safety of our workforce is a core value. Our employees delivered strong safety results in 2020, and we are at or near the top of our industry. Additionally, the 2020Atlantic hurricane season was incredibly active and marked the fifth consecutive year of above-average damaging storms. Our ability to effectively handle all facets of the 2020 storm response efforts, including navigating COVID-19 protocols, 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. Leading Through COVID-19. COVID-19 impacted all that we accomplished in 2020 and demonstrated our resiliency and agility: •As the pandemic spread, stay-at-home orders coupled with recessionary economic conditions caused overall retail electric sales to decline by approximately 2%. To offset this challenge, as well as mild weather and other COVID-related costs, we successfully achieved the high end of our goal of$400 million to$450 million of broad-based O&M reductions and other mitigating actions. The Company's results were within its adjusted EPS guidance range and we expect to sustain approximately$200 million of the 2020 O&M cost mitigation into 2021 forward. •Duke Energy kept electricity and gas flowing while voluntarily making significant accommodations for our customers. We led the way in our sector nationally, suspending all nonpay disconnects in all jurisdictions and waiving late payment fees and other fees until the national state of emergency was lifted. In the fall, we began returning to normal business practices, ensuring diligent communication with our customers and providing flexible payment arrangements. •We ensured the physical safety of our workers and provided support for our employees. As cases spiked nationally, we deployed COVID-19 safety protocols for our front-line essential workers and moved 18,000 colleagues to remote work. Our COVID-19 Case Management Team managed exposures of our workforce and IT ensured our networks could handle the remote work while strengthening cyber protection. Under our COVID-19 protocols, our front-line employees completed 150 fossil and nuclear outages, executed large major projects, restored service from storms and hurricanes, and managed high-water events. Overall, our operations continued, and our team completed their work with excellence. Duke Energy Objectives - 2021 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 2021, 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 and net zero methane emissions by 2030 •Modernizing and strengthening a green-enabled energy grid •Expanding our natural gas infrastructure •Maintaining the safety of our communities and employees •Deploying digital tools across our business Matters Impacting Future Results The matters discussed herein could materially impact the future operating results, financial condition and cash flows of the Duke Energy Registrants and Business Segments. Regulatory Matters Coal Ash Costs As a result of the NCDEQ settlement onDecember 31, 2019 ,Duke 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. The majority of spend is expected to occur over the next 15-20 years. InJanuary 2021 ,Duke Energy Carolinas andDuke Energy Progress reached a settlement agreement on recovery of coal ash costs as outlined in Note 3, "Regulatory Matters," which is subject to review and approval of the NCUC. The company agreed not to seek recovery of approximately$1 billion of deferred coal ash expenditures andDuke Energy Carolinas andDuke Energy Progress took a charge of approximately$500 million each. In 2019,Duke Energy Carolinas andDuke Energy Progress received orders from the PSCSC denying recovery of certain coal ash costs.Duke Energy Carolinas andDuke Energy Progress have appealed these decisions to theSouth Carolina Supreme Court and those appeals are pending. An order from regulatory or judicial authorities that rejects our proposed settlement or disallows recovery of costs related to closure of these ash basins could have an adverse impact on future results. 44 --------------------------------------------------------------------------------
MD&A DUKE ENERGYDuke Energy Indiana has interpreted the CCR 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. In 2020, theHoosier Environmental Council filed a petition challenging theIndiana Department of Environmental Management's partial approval ofDuke Energy Indiana's ash pond closure plans. Interpretation of the requirements of the CCR rule is subject to further legal challenges and 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. Storm CostsDuke Energy Carolinas ,Duke Energy Progress andDuke Energy Florida's service territories were impacted by several named storms in 2018. 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. In 2020,Duke Energy Carolinas andDuke Energy Progress reached partial settlements in the 2019 North Carolina rates cases by filing a petition to securitize deferred storm costs, which is subject to review and approval of the NCUC. InJanuary 2021 ,Duke Energy Florida filed a settlement agreement with the FPSC, which if approved, allows recovery of the remaining storm cost balance for hurricanes Michael and Dorian. An order from regulatory authorities disallowing the deferral and future recovery of storm restoration costs could have an adverse impact. Grid Improvement CostsDuke Energy Carolinas received an order from the NCUC in 2018, 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. Partial settlements filed with the NCUC inJuly 2020 included the allowance for deferral for certain grid projects placed in service fromJune 2020 throughDecember 2022 . There could be adverse impacts if grid improvement costs are not ultimately approved for recovery and/or deferral treatment. Rate Cases In 2019,Duke Energy Carolinas andDuke Energy Progress filed general rate cases with the NCUC. Several partial settlement agreements have been filed with the NCUC and are awaiting approval. The outcome of these rate cases could have a material impact. MGP The PUCO has 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 for 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. For additional information, see Note 3 to the Consolidated Financial Statements, "Regulatory Matters." Sale of Minority Interest inDuke Energy Indiana InJanuary 2021 , Duke Energy entered into a definitive agreement providing for the sale of a 19.9% minority interest inDuke Energy Indiana with an affiliate of GIC,Singapore's sovereign wealth fund. The sale is subject to the satisfaction of certain customary conditions described in the investment agreement, including receipt of the approval of theFERC and completion of review by theCommittee on Foreign Investments inthe United States . Failure to obtain related approvals or satisfy the conditions in the investment agreement could result in the termination of the transaction and could result in an adverse impact. For additional information, see Note 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies." Commercial Renewables Duke Energy continues to monitor recoverability of renewable merchant plants located in theElectric Reliability Council of Texas West market and PJM, due to declining market pricing and declining long-term forecasted energy prices, primarily driven by lower forecasted natural gas prices. Based on the most recent recoverability test, the carrying value approximated the aggregate estimated future undiscounted cash flows for the assets under review. A continued decline in energy market pricing would likely result in a future impairment. Impairment of these assets could result in adverse impacts. For additional information, see Note 10 to the Consolidated Financial Statements, "Property, Plant and Equipment." InFebruary 2021 , a severe winter storm impacted certain Commercial Renewables assets inTexas . Extreme weather conditions limited the ability for these solar and wind facilities to generate and sell electricity into theElectric Reliability Council of Texas market. Both lost revenues and higher than expected purchased power costs are expected to negatively impact the operating results of these generating units. The estimated financial impact of the storm is expected to have a material impact on the Commercial Renewables segment's 2021 operating results. See Note 25 to the Consolidated Financial Statements, "Subsequent Events." 45 --------------------------------------------------------------------------------
MD&A DUKE ENERGY COVID-19 Duke Energy cannot predict the extent to which the COVID-19 pandemic will impact its results of operations, financial position and cash flows in the future. Duke Energy will continue to actively monitor the impacts of COVID-19 including the economic slowdown caused by business closures or by reduced operations of businesses and governmental agencies. The pandemic and resultant economic slowdown continues to cause an increase in certain costs, such as bad debt, and a reduction in the demand for energy. Duke Energy has mitigation plans in place to partially offset these impacts, and the ability to execute these plans is critical to preserving future financial results.The Company is in the process of reviewing the long-term real estate strategy due to a potential change of in-office work policies after the COVID-19 pandemic. The plan may result in a reduction of physical work space which could create accounting impacts starting in 2021. Accounting impacts may include reassessments of lease terms and lease modifications which could result in termination penalties, as well as, asset impairments on property, plant and equipment. See Item 1A. Risk Factors for discussion of risks associated with COVID-19 and Liquidity and Capital Resources within this section for a discussion of liquidity impacts of COVID-19. Within this Item 7, see Liquidity and Capital Resources for a discussion on risks associated with the Tax Act. Results of Operations Non-GAAP Measures Management evaluates financial performance in part based on non-GAAP financial measures, including adjusted earnings and adjusted 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 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 EPS is also used as a basis for employee incentive bonuses. The most directly comparable GAAP measures for adjusted earnings and adjusted EPS are GAAP Reported Earnings and 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: •Gas Pipeline Investments represents costs related to the cancellation of the ACP pipeline and additional exit costs related toConstitution . •Regulatory Settlements represents charges related toDuke Energy Carolinas' andDuke Energy Progress' CCR Settlement Agreement and the partial settlements in the 2019 North Carolina rate cases. •Severance represents the reversal of 2018 costs, which were deferred as a result of a partial settlement in theDuke Energy Carolinas and theDuke Energy Progress 2019 North Carolina rate cases. •Impairment Charges represents a reduction of a prior year impairment at Citrus County CC and an OTTI on the remaining investment inConstitution . Duke Energy's adjusted earnings and adjusted EPS may not be comparable to similarly titled measures of another company because other companies may not calculate the measures in the same manner. Reconciliation of GAAP Reported Amounts to Adjusted Amounts The following table presents a reconciliation of adjusted earnings and adjusted EPS to the most directly comparable GAAP measures. Years Ended December
31,
2020
2019
(in millions, except per share amounts) Earnings EPS Earnings EPS GAAP Reported Earnings/EPS$ 1,270 $ 1.72 $ 3,707 $ 5.06 Adjustments to Reported: Gas Pipeline Investments(a) 1,711 2.32 - - Regulatory Settlements(b) 872 1.19 - - Severance(c) (75) (0.10) - - Impairment Charges(d) - - (8) (0.01) Discontinued Operations (7) (0.01) 7 0.01 Adjusted Earnings/Adjusted EPS$ 3,771 $ 5.12 $
3,706
(a) Net of tax benefit of$399 million . (b) Net of tax benefit of$263 million . (c) Net of tax expense of$23 million . (d) Net of tax expense of$3 million . 46
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MD&A DUKE ENERGY Year EndedDecember 31, 2020 , as compared to 2019 GAAP Reported EPS was$1.72 for the year endedDecember 31, 2020 , compared to$5.06 for the year endedDecember 31, 2019 . The decrease in GAAP Reported Earnings/EPS was primarily due to the cancellation of the ACP pipeline and the CCR Settlement Agreement filed with the NCUC. As discussed and shown in the table above, management also evaluates financial performance based on adjusted EPS. Duke Energy's adjusted EPS was$5.12 for the year endedDecember 31, 2020 , compared to$5.06 for the year endedDecember 31, 2019 . The increase in Adjusted Earnings/Adjusted EPS was primarily due to positive rate case contributions, growth in wholesale, lower operations and maintenance expense in response to the pandemic and growth in Commercial Renewables, partially offset by higher depreciation expense from a growing asset base, impacts of the pandemic, mild weather and the loss of ACP earnings. SEGMENT RESULTS The remaining information presented in this discussion of results of operations is on a GAAP basis. Management evaluates segment performance based on segment income. Segment income is defined as income from continuing operations net of income attributable to noncontrolling interests and preferred stock dividends. Segment income includes intercompany revenues and expenses that are eliminated in the Consolidated Financial Statements. Duke Energy's segment structure includes the following segments:Electric Utilities and Infrastructure,Gas Utilities and Infrastructure and Commercial Renewables. The remainder of Duke Energy's operations is presented as Other. See Note 2 to the Consolidated Financial Statements, "Business Segments," for additional information on Duke Energy's segment structure.Electric Utilities and Infrastructure Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 21,720 $ 22,831 $ (1,111) Operating Expenses Fuel used in electric generation and purchased power 6,128 6,904 (776) Operations, maintenance and other 5,391 5,497 (106) Depreciation and amortization 4,068 3,951 117 Property and other taxes 1,188 1,175 13 Impairment charges 971 (8) 979 Total operating expenses 17,746 17,519 227 Gains on Sales of Other Assets and Other, net 11 1 10 Operating Income 3,985 5,313 (1,328) Other Income and Expenses, net 344 353 (9) Interest Expense 1,320 1,345 (25) Income Before Income Taxes 3,009 4,321 (1,312) Income Tax Expense 340 785 (445) Segment Income$ 2,669 $ 3,536 $ (867) Duke Energy Carolinas GWh sales 84,574 89,920 (5,346) Duke Energy Progress GWh sales 65,240 68,356 (3,116) Duke Energy Florida GWh sales 42,490 42,173 317 Duke Energy Ohio GWh sales 23,484 24,729 (1,245) Duke Energy Indiana GWh sales 30,528 31,886 (1,358)Total Electric Utilities and Infrastructure GWh sales 246,316 257,064 (10,748) Net proportional MW capacity in operation 50,419 50,070 349 Year EndedDecember 31, 2020 , as compared to 2019Electric Utilities and Infrastructure's variance is primarily due to impairment charges and revenue reductions related to the CCR settlement agreement filed with the NCUC to resolve coal ash cost recovery issues, unfavorable weather and lower volumes driven by impacts from the COVID-19 pandemic, partially offset by base rate adjustments in various jurisdictions. The following is a detailed discussion of the variance drivers by line item. Operating Revenues. The variance was driven primarily by: •an$826 million decrease in fuel revenues driven by lower sales volumes as well as an accelerated refund of fuel costs atDuke Energy Florida in response to the COVID-19 pandemic; •a$237 million decrease in wholesale revenue primarily driven by the CCR Settlement Agreement filed with the NCUC inJanuary 2021 and decreased volumes; 47 --------------------------------------------------------------------------------
MD&A SEGMENT RESULTS - ELECTRIC UTILITIES AND INFRASTRUCTURE •a$207 million decrease in retail sales, net of fuel revenues, due to unfavorable weather; •a$130 million decrease in rider revenues from EE programs; •a$44 million decrease in nuclear cost recovery rider revenue due to recovery of theCrystal River 3 uprate regulatory asset in 2019 atDuke Energy Florida ; and •a$17 million decrease in weather-normal retail sale volumes driven by lower nonresidential customer demand due to impacts from the COVID-19 pandemic. Partially offset by: •a$214 million increase due to higher pricing from theIndiana retail rate case, net of rider revenues; •a$92 million increase in retail pricing due toDuke Energy Florida's base rate adjustments related to annual increases from the 2017 Settlement Agreement and the Solar Base Rate Adjustment; and •a$32 million increase due to higher pricing fromSouth Carolina retail rate cases, net of a return of EDIT to customers. Operating Expenses. The variance was driven primarily by: •a$979 million increase in impairment charges primarily driven by the CCR Settlement Agreement filed with the NCUC inJanuary 2021 ; •a$117 million increase in depreciation and amortization expense primarily due to additional plant in service and new depreciation rates from theIndiana retail rate cases; and •a$13 million increase in property and other taxes primarily due to prior year property tax reassessments. Partially offset by: •a$776 million decrease in fuel used in electric generation and purchased power primarily due to lower generation demand and lower fuel and natural gas costs; and •a$106 million decrease in operation, maintenance and other expense primarily driven by cost mitigation efforts. Interest Expense. The variance was primarily due to lower interest rates on outstanding debt. Income Tax Expense. The ETRs for the years endedDecember 31, 2020 , and 2019, were 11.3% and 18.2%, respectively. The decrease in the ETR was primarily due to an increase in the amortization of excess deferred taxes. 48 --------------------------------------------------------------------------------
MD&A SEGMENT RESULTS - GAS UTILITIES AND INFRASTRUCTURE
Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 1,748 $ 1,866 $ (118) Operating Expenses Cost of natural gas 460 627 (167) Operation, maintenance and other 430 446 (16) Depreciation and amortization 258 256 2 Property and other taxes 112 106 6 Impairment charges 7 - 7 Total operating expenses 1,267 1,435 (168) Operating Income 481 431 50 Other Income and Expenses Equity in (losses) earnings of unconsolidated affiliates (2,017) 114 (2,131) Other Income and Expenses, net 56 26 30 Total other income and expenses (1,961) 140 (2,101) Interest Expense 135 117 18 (Loss) Income Before Income Taxes (1,615) 454 (2,069) Income Tax (Benefit) Expense (349) 22 (371) Segment (Loss) Income$ (1,266) $ 432$ (1,698)
511,243,774 (21,172,735) Duke Energy Midwest LDC throughput (MCF) 84,160,162 89,025,972 (4,865,810) Year EndedDecember 31, 2020 , as compared to 2019Gas Utilities and Infrastructure's results were impacted primarily by the cancellation of the ACP pipeline. The following is a detailed discussion of the variance drivers by line item. Operating Revenues. The variance was driven primarily by: •a$167 million decrease due to lower natural gas costs passed through to customers, lower volumes, and decreased off-system sales natural gas costs; and •a$47 million decrease due to return of EDIT to customers. Partially offset by: •an$87 million increase due toNorth Carolina base rate case increases. Operating Expenses. The variance was driven primarily by: •a$167 million decrease in cost of natural gas due to lower natural gas prices, lower volumes and decreased off-system sales natural gas costs. Equity in (losses) earnings of unconsolidated affiliates. The variance was driven primarily by the cancellation of the ACP pipeline. Other Income and Expenses, net. The variance was driven primarily by AFUDC equity and other income related toBelews Creek and Marshall Power Generation contracts. Income Tax (Benefit) Expense. The increase in tax benefit was primarily due to a decrease in pretax income driven by the impact of the cancellation of the ACP pipeline. The ETRs for the years endedDecember 31, 2020 , and 2019, were 21.6% and 4.8%, respectively. The increase in the ETR was primarily due to an adjustment, recorded in the first quarter of 2019, related to the income tax recognition for equity method investments. The equity method investment adjustment was immaterial and relates to prior years. 49 -------------------------------------------------------------------------------- MD&A SEGMENT RESULTS - COMMERCIAL RENEWABLES Commercial Renewables Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 502 $ 487 $ 15 Operating Expenses Operation, maintenance and other 285 297 (12) Depreciation and amortization 199 168 31 Property and other taxes 27 23 4 Impairment charges 6 - 6 Total operating expenses 517 488 29 Losses on Sales of Other Assets and Other, net (1) (3) 2 Operating Loss (16) (4) (12) Other Income and Expenses, net 7 5 2 Interest Expense 66 95 (29) Loss Before Income Taxes (75) (94) 19 Income Tax Benefit (65) (115) 50 Add: Loss Attributable to Noncontrolling Interests 296 177 119 Segment Income$ 286
Renewable plant production, GWh 10,204 8,574 1,630 Net proportional MW capacity in operation(a) 3,937 3,485 452 (a) Certain projects are included in tax-equity structures where investors have differing interests in the project's economic attributes. Amounts shown represent 100% of the tax-equity project's capacity. Year EndedDecember 31, 2020 , as compared to 2019 Commercial Renewables' results were favorable primarily due to growth of new project investments. SinceDecember 31, 2019 , Commercial Renewables has placed in service approximately 500 MW of capacity. The following is a detailed discussion of the variance drivers by line item. Operating Revenues. The variance was primarily driven by a$39 million increase associated with the growth of new projects placed in service, partially offset by a$24 million decrease primarily within the distributed energy portfolios for lower engineering and construction activities related to delays from COVID-19. Operating Expenses. The variance was primarily driven by a$52 million increase in operating expenses due to the growth of new projects placed in service. This was partially offset by a$24 million decrease in operating expenses within the distributed energy portfolios for lower engineering and construction costs related to delays from COVID-19. Interest Expense. The decrease was primarily driven by non-qualifying hedge activity in the prior year, higher capitalized interest in the current year for solar and wind projects in development and lower outstanding debt balances. Income Tax Benefit. The decrease in the tax benefit was primarily driven by an increase in taxes associated with tax equity investments and a decrease in PTCs generated. Loss Attributable to Noncontrolling Interests. The increase was driven primarily by the growth of new projects financed by tax equity. 50 -------------------------------------------------------------------------------- MD&A SEGMENT RESULTS - OTHER Other Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 97 $ 95 $ 2 Operating Expenses 12 117 (105) Losses on Sales of Other Assets and Other, net - (2) 2 Operating Income (Loss) 85 (24) 109 Other Income and Expenses, net 92 145 (53) Interest Expense 657 705 (48) Loss Before Income Taxes (480) (584) 104 Income Tax Benefit (162) (173) 11 Less: Net Income Attributable to Noncontrolling Interests 1 - 1 Less: Preferred Dividends 107 41 66 Net Loss$ (426) $ (452) $ 26 Year EndedDecember 31, 2020 , as compared to 2019 The variance was primarily driven by a reversal of corporate allocated severance costs, obligations to theDuke Energy Foundation in 2019, and lower state income tax expense, partially offset by lower returns on investments, higher loss experience related to captive insurance claims, the declaration of preferred stock dividends, and lower earnings on the NMC investment. The following is a detailed discussion of the variance drivers by line item. Operating Expenses. The decrease was primarily due to the deferral of 2018 corporate allocated severance costs due to theDuke Energy Carolinas andDuke Energy Progress partial settlements in the 2019 North Carolina retail rate case and obligations to theDuke Energy Foundation in 2019, partially offset by higher loss experience related to captive insurance claims and higher franchise tax expense. Other Income and Expenses, net. The variance was primarily due to lower returns on investments that fund certain employee benefit obligations and lower earnings on the NMC investment primarily due to lower pricing. Interest Expense. The variance was primarily due to lower outstanding short-term debt and lower interest rates. Income Tax Benefit. The decrease in the tax benefit was primarily driven by a decrease in pretax losses, partially offset by an increase in state income tax benefits. The ETRs for the years endedDecember 31, 2020 , and 2019, were 33.8% and 29.6%, respectively. The increase in the ETR was primarily due to an increase in state income tax benefits in 2020, in relation to pretax losses. Preferred Dividends. The variance was driven by the declaration of preferred stock dividends on preferred stock issued in late 2019. 51 --------------------------------------------------------------------------------
MD&A DUKE 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) 2020 2019 Variance Operating Revenues$ 7,015 $ 7,395 $ (380) Operating Expenses Fuel used in electric generation and purchased power 1,682 1,804 (122) Operation, maintenance and other 1,743 1,868 (125) Depreciation and amortization 1,462 1,388 74 Property and other taxes 299 292 7 Impairment charges 476 17 459 Total operating expenses 5,662 5,369 293 Gains on Sales of Other Assets and Other, net 1 - 1 Operating Income 1,354 2,026 (672) Other Income and Expenses, net 177 151 26 Interest Expense 487 463 24 Income Before Income Taxes 1,044 1,714 (670) Income Tax Expense 88 311 (223) Net Income$ 956 $ 1,403 $ (447) 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 2020 2019 Residential sales (3.1) % (2.9) % General service sales (6.7) % (0.1) % Industrial sales (8.0) % (1.9) % Wholesale power sales (2.0) % (13.6) % Joint dispatch sales (46.0) % 4.7 % Total sales (5.9) % (2.6) % Average number of customers 1.9 % 2.1 % Year EndedDecember 31, 2020 , as compared to 2019 Operating Revenues. The variance was driven primarily by: •a$151 million decrease in fuel revenues due to lower prices and retail sales volumes; •a$149 million decrease in retail sales due to unfavorable weather in the current year; •a$73 million decrease in rider revenues primarily due to EE programs; and •a$50 million decrease in wholesale revenue primarily driven by the CCR Settlement Agreement filed with the NCUC inJanuary 2021 . Partially offset by: •a$25 million increase due to higher pricing from theSouth Carolina retail rate case, net of a return of EDIT to customers; and •a$22 million increase in weather-normal retail sales volumes. 52 --------------------------------------------------------------------------------
MD&A DUKE ENERGY CAROLINAS Operating Expenses. The variance was driven primarily by: •a$459 million increase in impairment charges primarily driven by the CCR Settlement Agreement filed with the NCUC inJanuary 2021 ; and •a$74 million increase in depreciation and amortization expense primarily due to additional plant in service and new depreciation rates associated with theSouth Carolina rate case. Partially offset by: •a$125 million decrease in operation, maintenance and other expense primarily driven by the deferral of 2018 severance costs due to the partial settlement agreement betweenDuke Energy Carolinas and the Public Staff of the NCUC related to the 2019 North Carolina retail rate case, and cost mitigation efforts, partially offset by higher storm restoration costs; and •a$122 million decrease in fuel used in electric generation and purchased power primarily due to lower retail sales volumes, net of a prior period true up. Other Income and Expenses, net. The variance was primarily due to higher AFUDC equity in the current year. Interest Expense. The variance was primarily due to higher debt outstanding in the current year. Income Tax Expense. The decrease in tax expense was primarily due to a decrease in pretax income and an increase in the amortization of excess deferred taxes. PROGRESS ENERGY Results of Operations Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 10,627 $ 11,202 $ (575) Operating Expenses Fuel used in electric generation and purchased power 3,479 4,024 (545) Operation, maintenance and other 2,479 2,495 (16) Depreciation and amortization 1,818 1,845 (27) Property and other taxes 545 561 (16) Impairment charges 495 (24) 519 Total operating expenses 8,816 8,901 (85) Gains on Sales of Other Assets and Other, net 9 - 9 Operating Income 1,820 2,301 (481) Other Income and Expenses, net 129 141 (12) Interest Expense 790 862 (72) Income Before Income Taxes 1,159 1,580 (421) Income Tax Expense 113 253 (140) Net Income 1,046 1,327 (281) Less: Net Income Attributable to Noncontrolling Interests 1 - 1 Net Income Attributable to Parent $
1,045
Year EndedDecember 31, 2020 , as compared to 2019 Operating Revenues. The variance was driven primarily by: •a$567 million decrease in fuel revenues driven by lower sales volumes as well as an accelerated refund of fuel costs in response to the COVID-19 pandemic atDuke Energy Florida and lower fuel prices, volumes and native load transfer sales in the current year atDuke Energy Progress ; •a$169 million decrease in wholesale revenue primarily driven by theDuke Energy Progress' CCR Settlement Agreement filed with the NCUC inJanuary 2021 and decreased volumes atDuke Energy Progress , partially offset by increased demand atDuke Energy Florida ; •a$55 million decrease in rider revenues primarily due to theCrystal River 3 uprate regulatory asset being fully recovered in 2019 atDuke Energy Florida ; •a$31 million decrease in retail sales, net of fuel revenues, due to unfavorable weather atDuke Energy Progress , partially offset by favorable weather in the current year atDuke Energy Florida ; and •a$17 million decrease in weather-normal retail sales volumes. 53 --------------------------------------------------------------------------------
MD&A PROGRESS ENERGY Partially offset by: •a$147 million increase in storm revenues due to Hurricane Dorian collections atDuke Energy Florida ; •a$92 million increase in retail pricing due to base rate adjustments related to annual increases from the 2017 Settlement Agreement and the Solar Base Rate Adjustment atDuke Energy Florida ; and •a$16 million increase due to higher pricing from theSouth Carolina retail rate case, net of a return of EDIT to customers atDuke Energy Progress . Operating Expenses. The variance was driven primarily by: •a$545 million decrease in fuel used in electric generation and purchased power primarily due to lower demand and changes in generation mix atDuke Energy Progress and lower demand and fuel costs atDuke Energy Florida ; •a$27 million decrease in depreciation and amortization expense primarily driven by a decrease in coal ash amortization, partially offset by a higher depreciable base and impacts fromNorth Carolina and theSouth Carolina rate cases atDuke Energy Progress ; •a$16 million decrease in operation, maintenance and other expense atDuke Energy Progress primarily driven by the deferral of 2018 severance costs due to the partial settlement agreement betweenDuke Energy Progress and the Public Staff of the NCUC related to the 2019 North Carolina retail rate case, reduced outage costs and other cost mitigation efforts, partially offset by storm cost amortizations atDuke Energy Florida ; and •a$16 million decrease in property and other taxes driven primarily by lower gross receipts taxes due to decreased fuel revenues atDuke Energy Florida . Partially offset by: •a$519 million increase in impairment charges primarily driven by theDuke Energy Progress' CCR Settlement Agreement filed with the NCUC inJanuary 2021 , and the prior year's impairment reduction related to Citrus County CC atDuke Energy Florida . Interest Expense. The variance was driven primarily by lower interest rates on outstanding debt atDuke Energy Progress . Income Tax Expense. The decrease in tax expense was primarily due to a decrease in pretax income and an increase in the amortization of excess deferred taxes atDuke Energy Progress , partially offset by an increase in pretax income and a decrease in the amortization of excess deferred taxes atDuke Energy Florida .DUKE ENERGY PROGRESS Results of Operations Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 5,422 $ 5,957 $ (535) Operating Expenses Fuel used in electric generation and purchased power 1,743 2,012 (269) Operation, maintenance and other 1,332 1,446 (114) Depreciation and amortization 1,116 1,143 (27) Property and other taxes 167 176 (9) Impairment charges 499 12 487 Total operating expenses 4,857 4,789 68 Gains on Sales of Other Assets and Other, net 8 - 8 Operating Income 573 1,168 (595) Other Income and Expenses, net 75 100 (25) Interest Expense 269 306 (37) Income Before Income Taxes 379 962 (583) Income Tax (Benefit) Expense (36) 157 (193) Net Income$ 415 $ 805 $ (390) 54
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MD&A DUKE ENERGY PROGRESS 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 2020 2019 Residential sales (3.2) % (4.0) % General service sales (7.4) % (1.6) % Industrial sales (3.9) % 0.6 % Wholesale power sales (9.1) % (1.5) % Joint dispatch sales 9.9 % (0.8) % Total sales (4.6) % (1.4) % Average number of customers 1.8 % 1.3 % Year EndedDecember 31, 2020 , as compared to 2019 Operating Revenues. The variance was driven primarily by: •a$272 million decrease in fuel cost recovery driven by lower fuel prices and volumes as well as less native load transfer sales in the current year; •a$180 million decrease in wholesale revenue primarily driven by the CCR Settlement Agreement filed with the NCUC inJanuary 2021 , and decreased volumes, partially offset by increased capacity rates; •a$77 million decrease in retail sales due to unfavorable weather; and •a$10 million decrease in weather-normal retail sales volumes. Partially Offset by: •a$16 million increase due to higher pricing from theSouth Carolina retail rate case, net of a return of EDIT to customers. Operating Expenses. The variance was driven primarily by: •a$487 million increase in impairment charges primarily driven by the CCR Settlement Agreement filed with the NCUC inJanuary 2021 . Partially Offset by: •a$269 million decrease in fuel used in electric generation and purchased power primarily due to lower demand and changes in generation mix; •a$114 million decrease in operation, maintenance and other expense primarily driven by the deferral of 2018 severance costs due to the partial settlement agreement betweenDuke Energy Progress and the Public Staff of the NCUC related to the 2019 North Carolina retail rate case, reduced outage costs and other costs mitigation efforts; and •a$27 million decrease in depreciation and amortization expense primarily driven by a decrease in coal ash amortization, partially offset by a higher depreciable base and impacts from theSouth Carolina rate cases. Other Income and Expenses, net. The variance was primarily due to lower AFUDC equity in the current year. Interest Expense. The variance was driven primarily by lower interest rates on outstanding debt. Income Tax (Benefit) Expense. The decrease in tax expense was primarily due to a decrease in pretax income and an increase in the amortization of excess deferred taxes. 55 -------------------------------------------------------------------------------- MD&A DUKE ENERGY FLORIDA DUKE ENERGY FLORIDA Results of Operations Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 5,188 $ 5,231 $ (43) Operating Expenses Fuel used in electric generation and purchased power 1,737 2,012 (275) Operation, maintenance and other 1,131 1,034 97 Depreciation and amortization 702 702 - Property and other taxes 381 392 (11) Impairment charges (4) (36) 32 Total operating expenses 3,947 4,104 (157) Gains on Sales of Other Assets and Other, net 1 - 1 Operating Income 1,242 1,127 115 Other Income and Expenses, net 53 48 5 Interest Expense 326 328 (2) Income Before Income Taxes 969 847 122 Income Tax Expense 198 155 43 Net Income$ 771 $ 692 $ 79 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 2020 2019 Residential sales 3.3 % 0.7 % General service sales (5.3) % 0.3 % Industrial sales 6.2 % (4.6) % Wholesale power sales (1.7) % 28.8 % Total sales 0.8 % 1.5 % Average number of customers 1.8 % 1.6 % Year EndedDecember 31, 2020 , as compared to 2019 Operating Revenues. The variance was driven primarily by: •a$295 million decrease in fuel revenues driven by lower sales volumes as well as an accelerated refund of fuel costs to customers in response to the COVID-19 pandemic; •a$55 million decrease in rider revenues primarily due to full recovery of theCrystal River 3 uprate regulatory asset in 2019; and •a$7 million decrease in weather-normal retail sales volumes. Partially offset by: •a$147 million increase in storm revenues due to recovery of Hurricane Dorian costs; •a$92 million increase in retail pricing due to base rate adjustments related to annual increases from the 2017 Settlement Agreement and the Solar Base Rate Adjustment; •a$46 million increase in retail sales, net of fuel revenues, due to favorable weather in the current year; •an$18 million increase in other revenues primarily due to increased transmission revenues and lighting equipment rentals, partially offset by lower late payment and service charge revenues due to a moratorium during the COVID-19 pandemic; and •an$11 million increase in wholesale power revenues, net of fuel, primarily due to increased capacity charges. Operating Expenses. The variance was driven primarily by: •a$275 million decrease in fuel used in electric generation and purchased power primarily due to lower fuel costs; and •an$11 million decrease in property and other taxes driven by lower gross receipts taxes due to decreased fuel revenues. 56 --------------------------------------------------------------------------------
MD&A DUKE ENERGY FLORIDA Partially offset by: •a$97 million increase in operation, maintenance and other expense primarily due to storm cost amortizations; and •a$32 million increase in impairment charges primarily due to the prior year's impairment reduction related to Citrus County CC. Income Tax Expense. The increase in tax expense was primarily due to an increase in pretax income and a decrease in the amortization of excess deferred taxes.DUKE ENERGY OHIO Results of Operations Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues Regulated electric$ 1,405 $ 1,456 $ (51) Regulated natural gas 453 484 (31) Total operating revenues 1,858 1,940 (82) Operating Expenses Fuel used in electric generation and purchased power - regulated 339 388 (49) Cost of natural gas 73 95 (22) Operation, maintenance and other 463 520 (57) Depreciation and amortization 278 265 13 Property and other taxes 324 308 16 Total operating expenses 1,477 1,576 (99) Operating Income 381 364 17 Other Income and Expenses, net 16 24 (8) Interest Expense 102 109 (7) Income from Continuing Operations Before Income Taxes 295 279 16 Income Tax Expense from Continuing Operations 43 40 3 Income from Continuing Operations 252 239 13 Loss from Discontinued Operations, net of tax - (1) 1 Net Income$ 252 $ 238 $ 14 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 2020 2019 2020 2019 Residential sales (1.9) % (3.9) % (5.7) % (3.7) % General service sales (7.7) % (1.9) % (8.4) % (1.2) % Industrial sales (6.6) % (2.1) % (4.1) % (0.4) % Wholesale electric power sales (21.3) % (4.9) % n/a n/a Other natural gas sales n/a n/a (2.2) % 0.7 % Total sales (5.0) % (2.4) % (5.5) % (1.7) % Average number of customers 1.3 % 0.7 % 1.1 % 0.7 % Year EndedDecember 31, 2020 , as compared to 2019 Operating Revenues. The variance was driven primarily by: •a$61 million decrease in fuel related revenues primarily due to lower prices and decreased volumes; •a$22 million decrease in retail revenue riders, primarily due to lower EE program revenues, volume impacts of the Distribution Decoupling rider, suspension of the MGP rider and higher taxes returned to customers via the Tax Cuts and Job Acts rider, partially offset by an increase in theDistribution Capital Investment rider due to increased capital investment; •a$15 million decrease in revenues due to unfavorable weather in the current year; •an$11 million decrease in other revenues due to lower OVEC sales into PJM; 57 --------------------------------------------------------------------------------
MD&A DUKE ENERGY OHIO •a$5 million decrease in bulk power marketing sales, and •a$4 million decrease in weather-normal sales volumes. Partially offset by: •a$23 million increase in retail pricing primarily due to rate case impacts inKentucky ; and •an$18 million increase in PJM transmission revenues as a result of increased capital spend. Operating Expenses. The variance was driven primarily by: •a$71 million decrease in fuel expense, primarily driven by lower fuel prices, decreased volumes and lower OVEC costs; and •a$57 million decrease in operations, maintenance and other expense primarily due to a new customer program and other deferrals, the timing of EE programs and outage costs, lower employee benefit expenses and lower vegetation and pole maintenance costs. Partially offset by: •a$16 million increase in property and other taxes primarily due to higher property taxes due to increased plant in service, partially offset by lower franchise and other taxes; and •a$13 million increase in depreciation and amortization primarily driven by an increase in distribution plant, partially offset by lower amortization due to the suspension of the MGP rider inOhio and environmental surcharge mechanism amortization of deferred coal ash pond ARO.DUKE ENERGY INDIANA Results of Operations Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 2,795 $ 3,004 $ (209) Operating Expenses Fuel used in electric generation and purchased power 767 935 (168) Operation, maintenance and other 762 790 (28) Depreciation and amortization 569 525 44 Property and other taxes 81 69 12 Total operating expenses 2,179 2,319 (140) Operating Income 616 685 (69) Other Income and Expenses, net 37 41 (4) Interest Expense 161 156 5 Income Before Income Taxes 492 570 (78) Income Tax Expense 84 134 (50) Net Income$ 408 $ 436 $ (28) 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 2020 2019 Residential sales (2.7) % (3.9) % General service sales (7.0) % (2.2) % Industrial sales (7.6) % (2.6) % Wholesale power sales 3.8 % (27.7) % Total sales (4.3) % (6.8) % Average number of customers 1.4 % 1.2 % Year EndedDecember 31, 2020 , as compared to 2019 Operating Revenues. The variance was driven primarily by: •a$193 million decrease in rider revenues primarily due to lower sales volumes and credit adjustment rider refunds; •a$179 million decrease in fuel revenues primarily due to lower fuel cost recovery driven by customer demand and fuel prices; •a$20 million decrease in weather-normal retail sales volumes driven by lower nonresidential customer demand; 58 --------------------------------------------------------------------------------
MD&A DUKE ENERGY INDIANA •a$16 million decrease in retail sales due to unfavorable weather in the current year; and •a$10 million decrease in wholesale revenues primarily related to the true up of wholesale transmission revenues and lower rates in the current year. Partially offset by: •a$214 million increase primarily due to higher pricing from theIndiana retail rate case, net of certain rider revenues. Operating Expenses. The variance was driven primarily by: •a$168 million decrease in fuel used in electric generation and purchased power expense primarily due to lower purchased power expense, lower amortization of deferred fuel costs and lower coal and natural gas costs; and •a$28 million decrease in operation, maintenance and other primarily due to lower storm restoration costs, training costs, employee related costs and a new customer program deferral. Partially offset by: •a$44 million increase in depreciation and amortization primarily due to a change in depreciation rates from theIndiana retail rate case and additional plant in service; and •a$12 million increase in property and other taxes primarily due to additional plant in service and property tax true ups for prior periods. Income Tax Expense. The decrease in income tax expense was primarily due to an increase in the amortization of excess deferred taxes and a decrease in pretax income. PIEDMONT Results of Operations Years Ended December 31, (in millions) 2020 2019 Variance Operating Revenues$ 1,297 $ 1,381 $ (84) Operating Expenses Cost of natural gas 386 532 (146) Operation, maintenance and other 322 328 (6) Depreciation and amortization 180 172 8 Property and other taxes 53 45 8 Impairment charges 7 - 7 Total operating expenses 948 1,077 (129) Operating Income 349 304 45 Equity in earnings of unconsolidated affiliates 9 8 1 Other income and expenses, net 51 20 31 Total other income and expenses 60 28 32 Interest Expense 118 87 31 Income Before Income Taxes 291 245 46 Income Tax Expense 18 43 (25) Net Income$ 273 $ 202 $ 71 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 2020 2019 Residential deliveries (3.5) % (8.0) % Commercial deliveries (9.1) % (4.6) % Industrial deliveries (2.9) % 1.7 % Power generation deliveries (3.7) % (11.8) % For resale (9.7) % 4.8 % Total throughput deliveries (4.1) % (8.2) % Secondary market volumes (9.1) % (0.5) % Average number of customers 2.3 % 1.4 % The margin decoupling mechanism adjusts for variations in residential and commercial use per customer, including those due to weather and conservation. The weather normalization adjustment 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. 59 --------------------------------------------------------------------------------
MD&A PIEDMONT Year EndedDecember 31, 2020 , as compared to 2019 Operating Revenues. The variance was driven primarily by: •a$146 million decrease due to lower natural gas costs passed through to customers, lower volumes, and decreased off-system sales natural gas costs; •a$47 million decrease due to return of EDIT to customers; and •a$7 million decrease due to NCUC approval related to tax reform accounting from fixed-rate contracts in the prior year. Partially offset by: •an$87 million increase due toNorth Carolina base rate case increases; •a$20 million increase due to North Carolina IMR increases; and •an$18 million increase due to addition ofBelews Creek andMarshall Power Generation capacity contracts. Operating Expenses. The variance was driven primarily by: •a$146 million decrease in cost of natural gas due to lower natural gas prices, lower volumes, and decreased off-system sales natural gas costs. Partially offset by: •an$8 million increase in depreciation and amortization due to additional plant in service and higher depreciation rates, partially offset byBelews Creek and Marshall Power Generation contracts and amortization of EDIT interest expense; and •an$8 million increase in property and other taxes due to prior year property tax true ups. Other Income and Expenses, net. The variance was driven primarily by AFUDC equity and other income related toBelews Creek and Marshall Power Generation contracts. Interest Expense. The variance was driven primarily by interest on tax reform related deferrals being returned to customers and higher debt outstanding in the current year. Income Tax Expense. The decrease in income tax expense was primarily due to an increase in the amortization of excess deferred taxes and an increase in AFUDC Equity, partially offset by an increase in pretax income. 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; 60 --------------------------------------------------------------------------------
MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES •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, 2020 . 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, 2020 , 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. 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 2020 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, 2020 , for each of Duke Energy's reporting units ranged from 5.2% to 5.7%. 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 11 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 2020,Duke Energy Florida , closed an agreement for the accelerated decommissioning of the Crystal River Unit 3 nuclear power station after receiving approval from the NRC and FPSC. The retirement obligations for the decommissioning of Crystal River Unit 3 nuclear power station are measured based on accelerated decommissioning from 2020 continuing through 2027.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 2020, theHoosier Environmental Council filed a Petition for Administrative Review with theIndiana Office of Environmental Adjudication challenging theIndiana Department of Environmental Management's partial approval ofDuke Energy Indiana's ash pond closure plan. Due to these challenges, in 2020,Duke Energy Indiana remeasured and increased the closure estimates for certain coal ash impoundments. For further information, see Notes 3, 4 and 9 to the Consolidated Financial Statements, "Regulatory Matters," "Commitments and Contingencies" and "Asset Retirement Obligations." 61 --------------------------------------------------------------------------------
MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES Long-Lived Asset Impairment Assessments, Excluding Regulated Operations, and Equity Method Investments 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. Investments in affiliates that are not controlled by Duke Energy, but over which it has significant influence, are accounted for using the equity method. Equity method investments are assessed for impairment when conditions exist that indicate that the fair value of the investment is less than book value. It the decline in value is considered to be other than temporary, the investment is written down to its estimated fair value, which establishes a new cost basis in the investment. During 2020, Duke Energy evaluated recoverability of certain renewable merchant plants due to declining market pricing and declining long-term forecasted energy prices, primarily driven by lower forecasted natural gas prices, capital cost of new renewables and increase renewable penetration. It was determined the assets were all recoverable as the carrying value of the assets approximated or exceeded the aggregate estimated future cash flows. For further information, see Notes 2, 10 and 12 to the Consolidated Financial Statements, "Business Segments," "Property, Plant and Equipment" 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 and the assumed discount rate applied to future projected benefit payments. 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. As ofDecember 31, 2020 , Duke Energy assumes pension and other post-retirement plan assets will generate a long-term rate of return of 6.50%. 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 2.60% as ofDecember 31, 2020 . 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, 2020 , 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. 62 --------------------------------------------------------------------------------
MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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 2020 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 2020 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 at
(208) 213 (13) 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, 2020 , the health care cost trend rate was 6.25%, trending down to 4.75% by 2028. These plans are closed to new employees. For further information, see Note 22 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 taxpayer through at least 2029. 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 the Tax Act to Duke Energy's cash flows and credit metrics are subject to the regulatory actions of its state commissions and theFERC . See Note 3 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 6 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. DuringMarch 2020 , in response to market volatility and the ongoing economic uncertainty related to COVID-19, Duke Energy took several actions to enhance the company's liquidity position including: •Duke Energy drew down the remaining$500 million of availability under the existing$1 billion Three-Year Revolving Credit Facility. That additional borrowing was subsequently repaid during the second quarter of 2020; and •Duke Energy entered into and borrowed the full amount under a$1.5 billion , 364-day Term Loan Credit Agreement. The Term Loan Credit Agreement contained a provision for additional borrowing capacity of$500 million . Duke Energy exercised the provision and borrowed an additional$188 million , for a total borrowing of approximately$1.7 billion . ByNovember 2020 , Duke Energy repaid the entire borrowing under the 364-day Term Loan. FollowingMarch 2020 , access to credit and equity markets has normalized. In addition to theMarch 2020 financings to address the company's liquidity position, for the year endedDecember 31, 2020 , Duke Energy issued approximately$5.6 billion in debt and raised approximately$2.9 billion of common equity through equity forward agreements and the company's dividend reinvestment and ATM programs. A portion of the proceeds from the equity forward settlements will be used to fully repay Duke Energy's portion of the ACP construction loan of approximately$860 million . Despite the recovery in capital markets, Duke Energy continues to monitor access to credit and equity markets amid the ongoing economic uncertainty related to COVID-19. 63 --------------------------------------------------------------------------------
MD&A LIQUIDITY AND CAPITAL RESOURCES In addition to actions taken by the company, the CARES Act, enacted inMarch 2020 , as an emergency economic stimulus package in response to the COVID-19 pandemic, included provisions providing relief to entities with remaining AMT credit refund allowances. Through the CARES Act, Duke Energy accelerated remaining AMT credit refund allowances and claimed a refund in full for any AMT credit carryforwards. As a result, in the third quarter of 2020, Duke Energy received$572 million related to AMT credit carryforwards and$19 million of interest income. See Note 23 to the Consolidated Financial Statements, "Income Taxes," for additional information. As ofDecember 31, 2020 , Duke Energy had approximately$259 million of cash on hand,$5.6 billion available under its$8 billion Master Credit Facility and$500 million available under the$1 billion Three-Year Revolving Credit Facility. Duke Energy expects to have sufficient liquidity in the form of cash on hand, cash from operations and available credit capacity to support its funding needs. Refer to Notes 6 and 19 to the Consolidated Financial Statements, "Debt and Credit Facilities" and "Stockholders' Equity," respectively, for information regarding Duke Energy's debt and equity issuances, debt maturities and available credit facilities including the Master Credit Facility. Credit Facilities and Registration Statements See Note 6 to the Consolidated Financial Statements, "Debt and Credit Facilities," for further information regarding credit facilities and shelf registration statements available to Duke Energy and the Duke Energy Registrants. CAPITAL EXPENDITURES Duke Energy continues to focus on reducing risk and positioning its business for future success and will invest principally in its strongest business sectors. Duke Energy's projected capital and investment expenditures, including AFUDC debt and capitalized interest, for the next three fiscal years are included in the table below. (in millions) 2021 2022 2023 New generation$ 60 $ 20 $ 85 Regulated renewables 665 710 755 Environmental 795 820 600 Nuclear fuel 425 400 380 Major nuclear 280 270 205 Customer additions 565 555 560
Grid modernization and other transmission and distribution projects
3,460 5,025 4,840 Maintenance and other 2,200 2,650 2,750Total Electric Utilities and Infrastructure 8,450 10,450 10,175 Gas Utilities and Infrastructure 1,250 1,275 1,150 Commercial Renewables and Other 775 1,075 750
Total projected capital and investment expenditures
12,800
DEBT MATURITIES See Note 6 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 2020, Duke Energy paid quarterly cash dividends for the 94th 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 EPS, and expects this trend to continue through 2025. Duke Energy increased the dividend by approximately 2% annually in both 2020 and 2019, and the company remains committed to continued growth of the dividend. Dividend and Other Funding Restrictions of Duke Energy Subsidiaries As discussed in Note 3 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, 2020 , 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. 64 --------------------------------------------------------------------------------
MD&A LIQUIDITY AND CAPITAL RESOURCES 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. As part of Duke Energy's continued effort to improve its cash flows from operations and liquidity, Duke Energy works with vendors to improve terms and conditions, including the extension of payment terms. To support this effort, Duke Energy established a supply chain finance program (the "program") in 2020, under which suppliers, at their sole discretion, may sell their receivables from Duke Energy to the participating financial institution. The financial institution administers the program. Duke Energy does not issue any guarantees with respect to the program and does not participate in negotiations between suppliers and the financial institution. Duke Energy does not have an economic interest in the supplier's decision to participate in the program and receives no interest, fees or other benefit from the financial institution based on supplier participation in the program. Suppliers' decisions on which invoices are sold do not impact Duke Energy's payment terms, which are based on commercial terms negotiated between Duke Energy and the supplier regardless of program participation. A significant deterioration in the credit quality of Duke Energy, economic downturn or changes in the financial markets could limit the financial institutions willingness to participate in the program. Duke Energy does not believe such risk would have a material impact on our cash flows from operations or liquidity, as substantially all our payments are made outside the program. 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). 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 2021, Duke Energy anticipates issuing additional securities of$8 billion through debt capital markets. Additionally, Duke Energy may utilize other instruments, including equity-content securities, such as preferred stock. Proceeds will primarily be for the purpose of funding capital expenditures and debt maturities. See to Note 6 to the Consolidated Financial Statements, "Debt and Credit Facilities," for further information regarding significant debt issuances in 2020. Duke Energy's capitalization is balanced between debt and equity as shown in the table below. Projected 2021 Actual 2020 Actual 2019 Equity 44 % 44 % 44 % Debt 56 % 56 % 56 % 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, 2020 , 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. DuringJanuary 2021 , S&P downgraded the issuer credit rating for Duke Energy (Parent) and all of its subsidiaries senior unsecured debt, excluding Progress Energy, from A- to BBB+. Additionally, S&P downgraded the credit rating for Duke Energy (Parent) and Progress Energy senior unsecured debt from BBB+ to BBB. As part of the credit rating report, S&P affirmed their credit rating on senior secured debt forDuke Energy Carolinas ,Duke Energy Progress ,Duke Energy Florida ,Duke Energy Ohio andDuke Energy Indiana , while also affirming the short-term and commercial paper credit ratings. These actions followed aDecember 2020 , report by S&P to revise the credit rating outlook from stable to negative for Duke Energy and all its subsidiaries. As a result of the downgrade, credit rating outlooks returned to stable. Additionally, duringOctober 2020 , Moody's revised their credit rating outlook for Duke Energy (Parent),Duke Energy Carolinas andDuke Energy Progress from stable to negative and inFebruary 2021 , revised the credit rating outlook for these same registrants to review for downgrade. The following table includes Duke Energy and certain subsidiaries' credit ratings and ratings outlook as ofFebruary 2021 . Moody's S&P Duke Energy Corporation Review for Downgrade Stable Issuer Credit Rating Baa1 BBB+ Senior Unsecured Debt Baa1 BBB Commercial Paper P-2 A-2 Duke Energy Carolinas Review for Downgrade Stable Senior Secured Debt Aa2 A Senior Unsecured Debt A1 BBB+ Progress Energy Stable Stable Senior Unsecured Debt Baa1 BBB Duke Energy Progress Review for Downgrade Stable Senior Secured Debt Aa3 A Senior Unsecured Debt A2 BBB+ Duke Energy Florida Stable Stable Senior Secured Debt A1 A Senior Unsecured Debt A3 BBB+ Duke Energy Ohio Stable Stable Senior Secured Debt A2 A Senior Unsecured Debt Baa1 BBB+ Duke Energy Indiana Stable Stable Senior Secured Debt Aa3 A Senior Unsecured Debt A2 BBB+ Duke Energy Kentucky Stable Stable Senior Unsecured Debt Baa1 BBB+ Piedmont Natural Gas Stable Stable Senior Unsecured A3 BBB+ 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) 2020 2019 Cash flows provided by (used in): Operating activities$ 8,856 $ 8,209 Investing activities (10,604) (11,957) Financing activities 1,731 3,730 Net decrease in cash, cash equivalents and restricted cash (17) (18)
Cash, cash equivalents and restricted cash at beginning of period
573 591 Cash, cash equivalents and restricted cash at end of period $
556
66 --------------------------------------------------------------------------------
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) 2020 2019 Variance Net income$ 1,082 $ 3,571 $ (2,489) Non-cash adjustments to net income 8,343 5,737 2,606 Payments for AROs (610) (746) 136 Refund of AMT credit carryforwards 572 573
(1)
Working capital (531) (926)
395
Net cash provided by operating activities
647
The variance was driven primarily by: •a$117 million increase in net income after adjustment for non-cash items primarily due to increases in current year non-cash adjustments, partially offset by decreases in revenues due to lower sales volumes, accelerated refund of fuel costs atDuke Energy Florida in response to the COVID-19 pandemic and lower wholesale revenue driven by the CCR Settlement Agreement; •a$395 million decrease in cash outflows from working capital primarily due to fluctuations in inventory levels, accounts payable levels and lower income taxes paid in the current year; and •a$136 million decrease 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 Ended
(in millions) 2020 2019 Variance
Capital, investment and acquisition expenditures, net of return of investment capital
$ (10,144) $ (11,435) $ 1,291 Debt and equity securities, net (62) (5) (57) Other investing items (398) (517) 119 Net cash used in investing activities $
(10,604)
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 decrease relates primarily to decreases in capital expenditures due to lower overall investments in theElectric Utilities and Infrastructure,Gas Utilities and Infrastructure and Commercial Renewables segments.
Years Ended
(in millions) 2020 2019 Variance Electric Utilities and Infrastructure$ 7,629 $ 8,258 $ (629) Gas Utilities and Infrastructure 1,309 1,533 (224) Commercial Renewables 1,075 1,423 (348) Other 264 221 43 Total capital, investment and acquisition expenditures, net of return of investment capital$ 10,277 $ 11,435 $ (1,158) 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) 2020 2019 Variance Issuance of common stock$ 2,745 $ 384 $ 2,361 Issuance of preferred stock - 1,962 (1,962) Issuances of long-term debt, net 1,824 3,615
(1,791)
Notes payable and commercial paper (319) (380)
61
Dividends paid (2,812) (2,668)
(144)
Contributions from noncontrolling interests 426 843
(417)
Other financing items (133) (26)
(107)
Net cash provided by financing activities
67 --------------------------------------------------------------------------------
MD&A LIQUIDITY AND CAPITAL RESOURCES The variance was driven primarily by: •a$1,962 million decrease in proceeds from the issuance of preferred stock; •a$1,791 million net decrease in proceeds from issuances of long-term debt primarily due to timing of issuances and redemptions of long-term debt; and •a$417 million decrease in contributions from noncontrolling interests, primarily due to$415 million related to the sale of a noncontrolling interest in the Commercial Renewables segment in 2019. Partially offset by: •a$2,361 million increase in proceeds from the issuance of common stock, primarily from the settlement of equity forwards. 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 nonperformance risk by third parties for which Duke Energy has issued guarantees. See Note 7 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. Other than the guarantee arrangements discussed above 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 17 to the Consolidated Financial Statements, "Variable Interest Entities." 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, 2020 . Payments Due By Period More than Less than 2-3 years 4-5 years 5 years 1 year (2022 & (2024 & (2026 & (in millions) Total (2021) 2023) 2025) beyond) Long-term debt(a)$ 58,134 $
4,110
33,858 2,099 3,898 3,577 24,284 Finance leases(c) 1,465 186 347 170 762 Operating leases(c) 1,861 229 414 348 870 Purchase obligations:(d) Fuel and purchased power(e)(f) 16,591 3,489 4,248 2,998 5,856 Other purchase obligations(g) 9,916 8,850 974 52 40 Nuclear decommissioning trust annual funding(h) 363 20 40 40 263 Land easements(i) 400 12 24 24 340 Total contractual cash obligations(j)(k)$ 122,588 $
18,995
(a)See Note 6 to the Consolidated Financial Statements, "Debt and Credit Facilities." (b)Interest payments on variable rate debt instruments were calculated usingDecember 31, 2020 , interest rates and holding them constant for the life of the instruments. (c)See Note 5 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. 68 --------------------------------------------------------------------------------
MD&A OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS (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 atDecember 31, 2020 , 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 17 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, plant refurbishments, 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 power stations' relicensing dates. See Note 9 to the Consolidated Financial Statements, "Asset Retirement Obligations." (i)Related to Commercial Renewables wind facilities. (j)Unrecognized tax benefits of$125 million are not reflected in this table as Duke Energy cannot predict when open income tax years will close with completed examinations. See Note 23 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 4 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 4 to the Consolidated Financial Statements, "Commitments and Contingencies"), funding of pension and other post-retirement benefit plans (see Note 22 to the Consolidated Financial Statements, "Employee Benefit Plans"), AROs, including ash management expenditures (see Note 9 to the Consolidated Financial Statements, "Asset Retirement Obligations") and regulatory liabilities (see Note 3 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.
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