DERIVATIVES AND HEDGING

The Duke Energy Registrants use commodity and interest rate contracts to manage commodity price and interest rate risks. The primary use of energy commodity derivatives is to hedge the generation portfolio against changes in the prices of electricity and natural gas. Interest rate swaps are used to manage interest rate risk associated with borrowings.

All derivative instruments not identified as NPNS are recorded at fair value as assets or liabilities on the Condensed Consolidated Balance Sheets. Cash collateral related to derivative instruments executed under master netting agreement is offset against the collateralized derivatives on the balance sheet. The cash impacts of settled derivatives are recorded as operating activities on the Condensed Consolidated Statements of Cash Flows.

Changes in the fair value of derivative instruments that either do not qualify for or have not been designated as hedges are reflected in current earnings or as regulatory assets or liabilities.

FAIR VALUE AND CASH FLOW HEDGES

For a derivative designated as hedging the exposure to variable cash flows of a future transaction, referred to as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings once the future transaction effects earnings. Gains and losses reclassified out of AOCI for the three and six months ended June 30, 2015 and 2014 were immaterial.

Amounts for interest rate contracts are reclassified to earnings as interest expense over the term of the related debt.

At June 30, 2015, there were no open commodity derivative instruments designated as hedges.

COMMODITY PRICE RISK

The Duke Energy Registrants are exposed to the impact of changes in the future prices of electricity, coal and natural gas. Exposure to commodity price risk is influenced by a number of factors including the term of contracts, the liquidity of markets and delivery locations.

Regulated public utilities may have cost-based rate regulations and various other cost recovery mechanisms that result in a limited exposure to market volatility of commodity fuel prices. Financial derivative contracts, where approved by the respective state regulatory commission, can be used to manage the risk of price volatility. Wholesale generating capacity used to sell electricity results in exposure to market volatility in energy-related commodity prices.

Undesignated Contracts

Undesignated contracts may include contracts not designated as a hedge because they are accounted for under Regulated Operations accounting, contracts that do not qualify for hedge accounting, derivatives that do not or no longer qualify for the NPNS scope exception, and de-designated hedge contracts.

Mark-to-market gains or losses on contracts accounted for under Regulated Operations are deferred and recorded as Regulatory Liabilities or Regulatory Assets, respectively. The Subsidiary Registrants utilize cost-tracking mechanisms, commonly referred to as fuel adjustment clauses. These clauses allow for the recovery of fuel and fuel-related costs, including settlements of undesignated derivatives for fuel commodities, and portions of purchased power costs through surcharges on customer rates. The difference between the costs incurred and the surcharge revenues is recorded as an adjustment to Fuel used in electric generation and purchased power – regulated or as Operating Revenues – Regulated electric on the Consolidated Statements of Operations with an offsetting impact on regulatory assets or liabilities. Therefore, due to the regulatory accounting followed by our Regulated Operations for undesignated derivatives, realized and unrealized gains and losses on undesignated derivatives do not have an immediate impact on reported net income.

Mark-to-market gains and losses related to the nonregulated Midwest generation business are recorded in discontinued operations and open positions at April 2, 2015 were included in the sale of the Disposal Group. Refer to Note 2 for further information on the sale of the Disposal Group. Gains and losses on undesignated derivative contracts for nonregulated continuing operations is immaterial, including electric contracts used to hedge renewables generation in Electric Reliability Council of Texas (ERCOT), hedges for a business that is winding down by the end of 2016, and revenues during 2014 for mitigation contracts which were terminated by December 31, 2014.

Undesignated contracts expire as late as 2018.

Volumes

The tables below show information relating to volumes of outstanding commodity derivatives. Amounts disclosed represent the absolute value of notional volumes of commodity contracts excluding NPNS. The Duke Energy Registrants have netted contractual amounts where offsetting purchase and sale contracts exist with identical delivery locations and times of delivery. Where all commodity positions are perfectly offset, no quantities are shown.



	June 30, 2015
	Duke Energy	Duke Energy Carolinas	Progress Energy	Duke Energy Progress	Duke Energy Florida	Duke Energy Ohio	Duke Energy Indiana
Electricity (gigawatt-hours)	75	—	—	—	—	—	18
Natural gas (millions of decatherms)	360	63	297	109	188	—	—



	December 31, 2014
	Duke Energy	Duke Energy Carolinas	Progress Energy	Duke Energy Progress	Duke Energy Florida	Duke Energy Ohio	Duke Energy Indiana
Electricity (gigawatt-hours)^(a)(b)	25,370	—	—	—	—	19,141	—
Natural gas (millions of decatherms)^(a)	676	35	328	116	212	313	—


(a)	Amounts at Duke Energy Ohio include volumes related to the nonregulated Midwest generation business sold during the second quarter of 2015. Refer to Note 2 for further information on the sale.


(b)	Amounts at Duke Energy Ohio include intercompany positions that eliminate at Duke Energy.

INTEREST RATE RISK

The Duke Energy Registrants are exposed to changes in interest rates as a result of their issuance or anticipated issuance of variable-rate and fixed-rate debt and commercial paper. Interest rate risk is managed by limiting variable-rate exposures to a percentage of total debt and by monitoring changes in interest rates. To manage risk associated with changes in interest rates, the Duke Energy Registrants may enter into interest rate swaps, U.S. Treasury lock agreements and other financial contracts. In anticipation of certain fixed-rate debt issuances, a series of forward starting interest rate swaps may be executed to lock in components of current market interest rates. These instruments are later terminated prior to or upon the issuance of the corresponding debt. Pretax gains or losses recognized from inception to termination of the hedges are amortized as a component of interest expense over the life of the debt.

Duke’s interest rate swaps for its Regulated Utilities operations employ Regulated Operations accounting. Regulated Operations accounting records the Mark-to-Market on the swaps as Regulatory Assets or Regulatory Liabilities. The accrual of interest on the swaps is recorded as Interest Expense. Regulatory assets and liabilities are amortized consistent with the treatment of the related costs in the ratemaking process.

The following table shows notional amounts for derivatives related to interest rate risk.



	June 30, 2015										December 31, 2014
(in millions)	Duke Energy		Progress Energy		Duke Energy Progress		Duke Energy Florida		Duke Energy Ohio		Duke Energy		Progress Energy		Duke Energy Florida		Duke Energy Ohio
Cash flow hedges^(a)	$	714	$	—	$	—	$	—	$	—	$	750	$	—	$	—	$	—
Undesignated contracts^(b)	527		500		250		250		27		277		250		250		27
Total notional amount	$	1,241	$	500	$	250	$	250	$	27	$	1,027	$	250	$	250	$	27


(a)	Duke Energy includes amounts related to consolidated Variable Interest Entities (VIEs) of $509 million and $541 million at June 30, 2015 and December 31, 2014, respectively.


(b)	In January 2015, Duke Energy Progress executed fixed-to-floating rate swaps. The swaps were issued to economically convert $250 million of fixed rate first mortgage bonds due September 15, 2021, to floating rate with an initial rate of approximately 1.75 percent.

LOCATION AND FAIR VALUE OF DERIVATIVE ASSETS AND LIABILITIES RECOGNIZED IN THE CONDENSED CONSOLIDATED BALANCE SHEETS

The following tables show the fair value of derivatives and the line items in the Condensed Consolidated Balance Sheets where they are reported. Although derivatives subject to master netting arrangements are netted on the Condensed Consolidated Balance Sheets, the fair values presented below are shown gross and cash collateral on the derivatives has not been netted against the fair values shown.



Derivative Assets	June 30, 2015
(in millions)	Duke Energy		Duke Energy Carolinas		Progress Energy		Duke Energy Progress		Duke Energy Florida		Duke Energy Ohio		Duke Energy Indiana
Commodity Contracts
Not Designated as Hedging Instruments
Current Assets: Other	$	27	$	—	$	—	$	—	$	—	$	5	$	18
Investments and Other Assets: Other	1		—		—		—		—		—		—
Current Liabilities: Other	4		1		3		—		3		—		—
Deferred Credits and Other Liabilities: Other	4		—		4		—		4		—		—
Total Derivative Assets – Commodity Contracts	$	36	$	1	$	7	$	—	$	7	$	5	$	18
Interest Rate Contracts
Designated as Hedging Instruments
Investments and Other Assets: Other	$	9	$	—	$	—	$	—	$	—	$	—	$	—
Not Designated as Hedging Instruments
Current Assets: Other	6		—		5		2		3		—		—
Total Derivative Assets – Interest Rate Contracts	$	15	$	—	$	5	$	2	$	3	$	—	$	—
Total Derivative Assets	$	51	$	1	$	12	$	2	$	10	$	5	$	18



Derivative Liabilities	June 30, 2015
(in millions)	Duke Energy		Duke Energy Carolinas		Progress Energy		Duke Energy Progress		Duke Energy Florida		Duke Energy Ohio		Duke Energy Indiana
Commodity Contracts
Not Designated as Hedging Instruments
Current Liabilities: Other	$	233	$	15	$	213	$	74	$	139	$	—	$	—
Deferred Credits and Other Liabilities: Other	78		4		73		13		55		—		—
Total Derivative Liabilities – Commodity Contracts	$	311	$	19	$	286	$	87	$	194	$	—	$	—
Interest Rate Contracts
Designated as Hedging Instruments
Current Liabilities: Other	$	13	$	—	$	—	$	—	$	—	$	—	$	—
Deferred Credits and Other Liabilities: Other	28		—		—		—		—				—
Not Designated as Hedging Instruments
Current Liabilities: Other	1		—		—		—		—		1		—
Deferred Credits and Other Liabilities: Other	16		—		10		9		1		5		—
Total Derivative Liabilities – Interest Rate Contracts	$	58	$	—	$	10	$	9	$	1	$	6	$	—
Total Derivative Liabilities	$	369	$	19	$	296	$	96	$	195	$	6	$	—



Derivative Assets	December 31, 2014
(in millions)	Duke Energy		Duke Energy Carolinas		Progress Energy		Duke Energy Progress		Duke Energy Florida		Duke Energy Ohio		Duke Energy Indiana
Commodity Contracts
Not Designated as Hedging Instruments
Current Assets: Other	$	18	$	—	$	—	$	—	$	—	$	1	$	14
Current Assets: Assets held for sale	15		—		—		—		—		28		—
Investments and Other Assets: Other	3		—		—		—		—		—		—
Investments and Other Assets: Assets held for sale	15		—		—		—		—		26		—
Current Liabilities: Other	1		—		—		—		—		—		—
Current Liabilities: Assets held for sale	174		—		—		—		—		175		—
Deferred Credits and Other Liabilities: Other	2		—		—		—		—		—		—
Deferred Credits and Other Liabilities: Assets held for sale	111		—		—		—		—		111		—
Total Derivative Assets – Commodity Contracts	$	339	$	—	$	—	$	—	$	—	$	341	$	14
Interest Rate Contracts
Designated as Hedging Instruments
Investments and Other Assets: Other	10		—		—		—		—		—		—
Not Designated as Hedging Instruments
Current Assets: Other	2		—		2		—		2		—		—
Total Derivative Assets – Interest Rate Contracts	$	12	$	—	$	2	$	—	$	2	$	—	$	—
Total Derivative Assets	$	351	$	—	$	2	$	—	$	2	$	341	$	14



Derivative Liabilities	December 31, 2014
(in millions)	Duke Energy		Duke Energy Carolinas		Progress Energy		Duke Energy Progress		Duke Energy Florida		Duke Energy Ohio		Duke Energy Indiana
Commodity Contracts
Designated as Hedging Instruments
Current Liabilities: Other	$	—	$	—	$	1	$	1	$	—	$	—	$	—
Not Designated as Hedging Instruments
Current Assets: Assets held for sale	—		—		—		—		—		4		—
Investments and Other Assets: Assets held for sale	—		—		—		—		—		4		—
Current Liabilities: Other	307		14		288		108		180		—		—
Current Liabilities: Assets held for sale	253		—		—		—		—		252		—
Deferred Credits and Other Liabilities: Other	91		5		80		23		57		—		—
Deferred Credits and Other Liabilities: Assets held for sale	208		—		—		—		—		207		—
Total Derivative Liabilities – Commodity Contracts	$	859	$	19	$	369	$	132	$	237	$	467	$	—
Interest Rate Contracts
Designated as Hedging Instruments
Current Liabilities: Other	$	13	$	—	$	—	$	—	$	—	$	—	$	—
Deferred Credits and Other Liabilities: Other	29		—		—		—		—		—		—
Not Designated as Hedging Instruments
Current Liabilities: Other	1		—		—		—		—		1		—
Deferred Credits and Other Liabilities: Other	7		—		2		—		2		5		—
Total Derivative Liabilities – Interest Rate Contracts	$	50	$	—	$	2	$	—	$	2	$	6	$	—
Total Derivative Liabilities	$	909	$	19	$	371	$	132	$	239	$	473	$	—

OFFSETTING ASSETS AND LIABILITIES

The following tables show the balance sheet location of derivative contracts subject to enforceable master netting agreements and include collateral posted to offset the net position. This disclosure is intended to enable users to evaluate the effect of netting arrangements on financial position. The amounts shown were calculated by counterparty. Accounts receivable or accounts payable may also be available to offset exposures in the event of bankruptcy. These amounts are not included in the tables below.



Derivative Assets	June 30, 2015
(in millions)	Duke Energy			Duke Energy Carolinas			Progress Energy			Duke Energy Progress		Duke Energy Florida			Duke Energy Ohio		Duke Energy Indiana
Current^(a)
Gross amounts recognized	$	37		$	1		$	8		$	2	$	6		$	5	$	18
Gross amounts offset	(5		)	(1		)	(3		)	—		(3		)	—		—
Net amounts subject to master netting	32			—			5			2		3			5		18
Amounts not subject to master netting	—			—			—			—		—			—		—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	32		$	—		$	5		$	2	$	3		$	5	$	18
Non-Current^(b)
Gross amounts recognized	$	14		$	—		$	4		$	—	$	4		$	—	$	—
Gross amounts offset	(4		)	—			(4		)	—		(4		)	—		—
Net amounts subject to master netting	10			—			—			—		—			—		—
Amounts not subject to master netting	—			—			—			—		—			—		—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	10		$	—		$	—		$	—	$	—		$	—	$	—


(a)	Amounts for Duke Energy Registrants, except Duke Energy and Duke Energy Ohio, are included in Other within Current Assets on the Condensed Consolidated Balance Sheets.


(b)	Amounts for Duke Energy Registrants are included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets.



Derivative Liabilities	June 30, 2015
(in millions)	Duke Energy			Duke Energy Carolinas			Progress Energy			Duke Energy Progress		Duke Energy Florida			Duke Energy Ohio		Duke Energy Indiana
Current^(c)
Gross amounts recognized	$	247		$	15		$	213		$	74	$	139		$	1	$	—
Gross amounts offset	(19		)	(1		)	(17		)	—		(17		)	—		—
Net amounts subject to master netting	228			14			196			74		122			1		—
Amounts not subject to master netting	—			—			—			—		—			—		—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	228		$	14		$	196		$	74	$	122		$	1	$	—
Non-Current^(d)
Gross amounts recognized	$	117		$	4		$	78		$	22	$	56		$	5	$	—
Gross amounts offset	(9		)	—			(9		)	—		(9		)	—		—
Net amounts subject to master netting	108			4			69			22		47			5		—
Amounts not subject to master netting	5			—			5			—		—			—		—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	113		$	4		$	74		$	22	$	47		$	5	$	—


(c)	Amounts for Duke Energy Registrants are included in Other within Current Liabilities on the Condensed Consolidated Balance Sheets.


(d)	Amounts for Duke Energy Registrants are included in Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.



Derivative Assets	December 31, 2014
(in millions)	Duke Energy			Duke Energy Carolinas		Progress Energy			Duke Energy Progress		Duke Energy Florida			Duke Energy Ohio			Duke Energy Indiana
Current^(a)
Gross amounts recognized	$	210		$	—	$	2		$	—	$	2		$	204		$	14
Gross amounts offset	(153		)	—		(2		)	—		(2		)	(179		)	—
Net amounts subject to master netting	57			—		—			—		—			25			14
Amounts not subject to master netting	—			—		—			—		—			—			—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	57		$	—	$	—		$	—	$	—		$	25		$	14
Non-Current^(b)
Gross amounts recognized	$	136		$	—	$	—		$	—	$	—		$	137		$	—
Gross amounts offset	(88		)	—		—			—		—			(114		)	—
Net amounts subject to master netting	48			—		—			—		—			23			—
Amounts not subject to master netting	5			—		—			—		—			—			—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	53		$	—	$	—		$	—	$	—		$	23		$	—


(a)	Amounts for Duke Energy Registrants, except Duke Energy and Duke Energy Ohio, are included in Other within Current Assets on the Condensed Consolidated Balance Sheets. Amounts for Duke Energy and Duke Energy Ohio are included in Other and Assets held for sale within Current Assets on the Condensed Consolidated Balance Sheets.


(b)	Amounts for Duke Energy Registrants, except Duke Energy and Duke Energy Ohio, are included in Other within Investments and Other Assets on the Condensed Consolidated Balance Sheets. Amounts for Duke Energy and Duke Energy Ohio are included in Other and Assets held for sale within Investments and Other Assets on the Condensed Consolidated Balance Sheets.



Derivative Liabilities	December 31, 2014
(in millions)	Duke Energy			Duke Energy Carolinas		Progress Energy			Duke Energy Progress		Duke Energy Florida			Duke Energy Ohio			Duke Energy Indiana
Current^(c)
Gross amounts recognized	$	573		$	14	$	289		$	109	$	180		$	257		$	—
Gross amounts offset	(213		)	—		(17		)	—		(17		)	(222		)	—
Net amounts subject to master netting	360			14		272			109		163			35			—
Amounts not subject to master netting	1			—		—			—		—			—			—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	361		$	14	$	272		$	109	$	163		$	35		$	—
Non-Current^(d)
Gross amounts recognized	$	319		$	5	$	82		$	23	$	59		$	216		$	—
Gross amounts offset	(173		)	—		(8		)	—		(8		)	(193		)	—
Net amounts subject to master netting	146			5		74			23		51			23			—
Amounts not subject to master netting	16			—		—			—		—			—			—
Net amounts recognized on the Condensed Consolidated Balance Sheet	$	162		$	5	$	74		$	23	$	51		$	23		$	—


(c)	Amounts for Duke Energy Registrants, except Duke Energy and Duke Energy Ohio, are included in Other within Current Liabilities on the Condensed Consolidated Balance Sheets. Amounts for Duke Energy and Duke Energy Ohio are included in Other and Liabilities associated with assets held for sale within Current Liabilities on the Condensed Consolidated Balance Sheets.

(d)

Amounts for Duke Energy Registrants, except Duke Energy and Duke Energy Ohio, are included in Other within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets. Amounts for Duke Energy and Duke Energy Ohio are included in Other and Liabilities associated with assets held for sale within Deferred Credits and Other Liabilities on the Condensed Consolidated Balance Sheets.

CREDIT RISK

Certain derivative contracts contain contingent credit features. These features may include (i) material adverse change clauses or payment acceleration clauses that could result in immediate payments or (ii) the posting of letters of credit or termination of the derivative contract before maturity if specific events occur, such as a credit rating downgrade below investment grade.

The following tables show information with respect to derivative contracts that are in a net liability position and contain objective credit-risk-related payment provisions. Amounts for Duke Energy Indiana were not material.



	June 30, 2015
(in millions)	Duke Energy		Duke Energy Carolinas		Progress Energy		Duke Energy Progress		Duke Energy Florida		Duke Energy Ohio
Aggregate fair value amounts of derivative instruments in a net liability position	$	289	$	—	$	262	$	94	$	168	$	—
Fair value of collateral already posted	19		—		19		—		19		—
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered	270		—		243		94		149		—



	December 31, 2014
(in millions)	Duke Energy		Duke Energy Carolinas		Progress Energy		Duke Energy Progress		Duke Energy Florida		Duke Energy Ohio
Aggregate fair value amounts of derivative instruments in a net liability position	$	845	$	19	$	370	$	131	$	239	$	456
Fair value of collateral already posted	209		—		23		—		23		186
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered	407		19		347		131		216		41

The Duke Energy Registrants have elected to offset cash collateral and fair values of derivatives. For amounts to be netted, the derivative must be executed with the same counterparty under the same master netting agreement. Amounts disclosed below represent the receivables related to the right to reclaim cash collateral and payables related to the obligation to return cash collateral under master netting arrangements. Amounts for Duke Energy Carolinas and Duke Energy Indiana were not material.



	June 30, 2015		December 31, 2014
(in millions)	Receivables		Receivables
Duke Energy
Amounts offset against net derivative positions	$	19	$	145
Amounts not offset against net derivative positions	—		64
Progress Energy
Amounts offset against net derivative positions	19		23
Duke Energy Florida
Amounts offset against net derivative positions	19		23
Duke Energy Ohio
Amounts offset against net derivative positions	—		122
Amounts not offset against net derivative positions	—		64