DUKE ENERGY CORPORATION Management's Discussion and Analysis includes financial information prepared in accordance with GAAP in theU.S. , as well as certain non-GAAP financial measures such as adjusted earnings and adjusted EPS discussed below. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies. The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations is separately filed byDuke Energy Corporation and its subsidiaries.Duke Energy Carolinas, LLC ,Progress Energy, Inc. ,Duke Energy Progress, LLC ,Duke Energy Florida, LLC ,Duke Energy Ohio, Inc. ,Duke Energy Indiana, LLC andPiedmont Natural Gas Company, Inc. However, none of the registrants make any representation as to information related solely to Duke Energy or the subsidiary registrants of Duke Energy other than itself. Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes for the years endedDecember 31, 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 to Duke Energy Corporation (GAAP
Reported Earnings) were impacted by: regulatory settlements related to coal ash
cost recovery in Electric Utilities and Infrastructure; the cancellation of the
ACP pipeline in Gas 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
In October 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
In July 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
eastern North 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 in Robeson 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 our North Carolina rate
cases for both Duke Energy Carolinas and Duke Energy Progress and achieved a
partial settlement with the North Carolina Public Staff and ten other
intervening parties. In January 2021 , Duke Energy Carolinas and Duke 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 in Indiana (our first rate base request
in 15 years) and Kentucky (electric). We have a multiyear rate plan in Florida
and in January 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 2020 Atlantic 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 on December 31, 2019 , Duke Energy Carolinas
and Duke Energy Progress agreed to excavate seven of the nine remaining coal ash
basins in North 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.
In January 2021 , Duke Energy Carolinas and Duke 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 and Duke Energy Carolinas and Duke Energy Progress took a
charge of approximately $500 million each.
In 2019, Duke Energy Carolinas and Duke Energy Progress received orders from the
PSCSC denying recovery of certain coal ash costs. Duke Energy Carolinas and Duke
Energy Progress have appealed these decisions to the South 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 ENERGY
Duke 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, the Hoosier Environmental Council filed a
petition challenging the Indiana Department of Environmental Management's
partial approval of Duke 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 Costs
Duke Energy Carolinas , Duke Energy Progress and Duke 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 of Duke Energy Carolinas and
Duke 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 Florida Panhandle in recorded history. In September 2019 , Hurricane Dorian
impacted Duke Energy Progress and Duke Energy Florida's service territories. In
2020, Duke Energy Carolinas and Duke 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. In
January 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 Costs
Duke 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 and Duke Energy Progress have petitioned for deferral of future
grid improvement costs in their 2019 rate cases. Partial settlements filed with
the NCUC in July 2020 included the allowance for deferral for certain grid
projects placed in service from June 2020 through December 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 and Duke 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
in Ohio with a deadline to complete the MGP environmental investigation and
remediation work prior to December 31, 2016 . This deadline was subsequently
extended to December 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 in Duke Energy Indiana
In January 2021 , Duke Energy entered into a definitive agreement providing for
the sale of a 19.9% minority interest in Duke 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 the FERC and completion of
review by the Committee on Foreign Investments in the 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 the Electric 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."
In February 2021 , a severe winter storm impacted certain Commercial Renewables
assets in Texas . Extreme weather conditions limited the ability for these solar
and wind facilities to generate and sell electricity into the Electric
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
to Duke 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 to Constitution .
•Regulatory Settlements represents charges related to Duke Energy Carolinas' and
Duke 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 the Duke Energy Carolinas and the Duke 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 in Constitution .
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
--------------------------------------------------------------------------------
MD&A DUKE ENERGY
Year Ended December 31, 2020 , as compared to 2019
GAAP Reported EPS was $1.72 for the year ended December 31, 2020 , compared to
$5.06 for the year ended December 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 ended December 31, 2020 , compared to $5.06 for the year ended December 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 Ended December 31, 2020 , as compared to 2019
Electric 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 at Duke 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 in January 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 the Crystal River 3 uprate regulatory asset in 2019 at Duke 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 the Indiana retail rate
case, net of rider revenues;
•a $92 million increase in retail pricing due to Duke 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 from South 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 in January 2021 ;
•a $117 million increase in depreciation and amortization expense primarily due
to additional plant in service and new depreciation rates from the Indiana
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 ended December 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 Ended December 31, 2020 , as compared to 2019
Gas 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 to North 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 to Belews 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 ended December 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 for Duke 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 Ended December 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 in January 2021 .
Partially offset by:
•a $25 million increase due to higher pricing from the South 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 in January 2021 ; and
•a $74 million increase in depreciation and amortization expense primarily due
to additional plant in service and new depreciation rates associated with the
South 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 between Duke 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
at Duke 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 at Duke Energy Florida ; and
•a $16 million increase due to higher pricing from the South Carolina retail
rate case, net of a return of EDIT to customers at Duke 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 at Duke Energy
Progress and lower demand and fuel costs at Duke 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 from North Carolina and the South Carolina rate
cases at Duke Energy Progress ;
•a $16 million decrease in operation, maintenance and other expense at Duke
Energy Progress primarily driven by the deferral of 2018 severance costs due to
the partial settlement agreement between Duke 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 at Duke Energy Florida ; and
•a $16 million decrease in property and other taxes driven primarily by lower
gross receipts taxes due to decreased fuel revenues at Duke Energy Florida .
Partially offset by:
•a $519 million increase in impairment charges primarily driven by the Duke
Energy Progress' CCR Settlement Agreement filed with the NCUC in January 2021 ,
and the prior year's impairment reduction related to Citrus County CC at Duke
Energy Florida .
Interest Expense. The variance was driven primarily by lower interest rates on
outstanding debt at Duke 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 at
Duke Energy Progress , partially offset by an increase in pretax income and a
decrease in the amortization of excess deferred taxes at Duke 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--------------------------------------------------------------------------------
MD&A DUKE ENERGY PROGRESS
The following table shows the percent changes in GWh sales and average number of
customers for Duke 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 Ended December 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 in January 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 the South 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 in January 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 between Duke 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 the South 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 for Duke 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 Ended December 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 the
Crystal 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 for Duke 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 Ended December 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 the Distribution
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 in
Kentucky ; 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 in Ohio 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 for Duke 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 Ended December 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 the Indiana 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 the Indiana 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 Ended December 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 to North Carolina base rate case increases;
•a $20 million increase due to North Carolina IMR increases; and
•an $18 million increase due to addition of Belews Creek and Marshall 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 by Belews 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 to Belews 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 of August 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 of August 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-year U.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 of August 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 of
August 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 and Duke 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 and
Duke 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 built DOE facility.
Obligations for closure of ash basins are based upon discounted cash flows of
estimated costs for site-specific plans. During 2020, the Hoosier Environmental
Council filed a Petition for Administrative Review with the Indiana Office of
Environmental Adjudication challenging the Indiana Department of Environmental
Management's partial approval of Duke 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 of December 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 future U.S. pension and other post-retirement
obligations using a rate of 2.60% as of December 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 of December 31,
2020 , Duke Energy determined its discount rate for U.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 of December 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 the FERC . 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.
During March 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 . By November 2020 , Duke Energy repaid
the entire borrowing under the 364-day Term Loan.
Following March 2020 , access to credit and equity markets has normalized. In
addition to the March 2020 financings to address the company's liquidity
position, for the year ended December 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 in March
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 of December 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 560Grid modernization and other transmission and distribution projects
3,460 5,025 4,840
Maintenance and other 2,200 2,650 2,750
Total 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 of Electric Utilities and Infrastructure 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 of December 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 Ratings
Moody's Investors Service, Inc. and S&P provide credit ratings for various Duke
Energy Registrants. During January 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 for Duke Energy Carolinas , Duke Energy Progress ,
Duke Energy Florida , Duke Energy Ohio and Duke Energy Indiana , while also
affirming the short-term and commercial paper credit ratings. These actions
followed a December 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, during
October 2020 , Moody's revised their credit rating outlook for Duke Energy
(Parent), Duke Energy Carolinas and Duke Energy Progress from stable to negative
and in February 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 of
February 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 of Spectra Capital through
indemnification agreements entered into as part of the January 2, 2007 , spin-off
of Spectra 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 of
December 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 at December 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.
© Edgar Online, source
