FAIR VALUE MEASUREMENTS

Fair value is the exchange price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The fair value definition focuses on an exit price versus the acquisition cost. Fair value measurements use market data or assumptions market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs may be readily observable, corroborated by market data, or generally unobservable. Valuation techniques maximize the use of observable inputs and minimize use of unobservable inputs. A midmarket pricing convention (the midpoint price between bid and ask prices) is permitted for use as a practical expedient.

Fair value measurements are classified in three levels based on the fair value hierarchy:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market is one in which transactions for an asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.

Level 2 – A fair value measurement utilizing inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly, for an asset or liability. Inputs include (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities and credit spreads. A Level 2 measurement cannot have more than an insignificant portion of its valuation based on unobservable inputs. Instruments in this category include non-exchange-traded derivatives, such as over-the-counter forwards, swaps and options; certain marketable debt securities; and financial instruments traded in less-than-active markets.

Level 3 – Any fair value measurement that includes unobservable inputs for more than an insignificant portion of the valuation. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. Level 3 measurements may include longer-term instruments that extend into periods in which observable inputs are not available.

Not Categorized – Certain investments are not categorized within the Fair Value hierarchy. These investments are measured based on the fair value of the underlying investments but may not be readily redeemable at that fair value.

Fair value accounting guidance permits entities to elect to measure certain financial instruments that are not required to be accounted for at fair value, such as equity method investments or the company’s own debt, at fair value. The Duke Energy Registrants have not elected to record any of these items at fair value.

Transfers between levels represent assets or liabilities that were previously (i) categorized at a higher level for which the inputs to the estimate became less observable or (ii) classified at a lower level for which the inputs became more observable during the period. The Duke Energy Registrant’s policy is to recognize transfers between levels of the fair value hierarchy at the end of the period. There were no transfers between levels during the three and six months ended June 30, 2017 and 2016.

Valuation methods of the primary fair value measurements disclosed below are as follows.

Investments in equity securities

The majority of investments in equity securities are valued using Level 1 measurements. Investments in equity securities are typically valued at the closing price in the principal active market as of the last business day of the quarter. Principal active markets for equity prices include published exchanges such as New York Stock Exchange (NYSE) and Nasdaq Stock Market. Foreign equity prices are translated from their trading currency using the currency exchange rate in effect at the close of the principal active market. There was no after-hours market activity that was required to be reflected in the reported fair value measurements.

Investments in debt securities

Most investments in debt securities are valued using Level 2 measurements because the valuations use interest rate curves and credit spreads applied to the terms of the debt instrument (maturity and coupon interest rate) and consider the counterparty credit rating. If the market for a particular fixed-income security is relatively inactive or illiquid, the measurement is Level 3.

Commodity derivatives

Commodity derivatives with clearinghouses are classified as Level 1. Other commodity derivatives, including Piedmont's gas supply contracts, are primarily valued using internally developed discounted cash flow models that incorporate forward price, adjustments for liquidity (bid-ask spread) and credit or non-performance risk (after reflecting credit enhancements such as collateral), and are discounted to present value. Pricing inputs are derived from published exchange transaction prices and other observable data sources. In the absence of an active market, the last available price may be used. If forward price curves are not observable for the full term of the contract and the unobservable period had more than an insignificant impact on the valuation, the commodity derivative is classified as Level 3. In isolation, increases (decreases) in natural gas forward prices result in favorable (unfavorable) fair value adjustments for gas purchase contracts; and increases (decreases) in electricity forward prices result in unfavorable (favorable) fair value adjustments for electricity sales contracts. Duke Energy regularly evaluates and validates pricing inputs used to estimate the fair value of gas commodity contracts by a market participant price verification procedure. This procedure provides a comparison of internal forward commodity curves to market participant generated curves.

Interest rate derivatives

Most over-the-counter interest rate contract derivatives are valued using financial models that utilize observable inputs for similar instruments and are classified as Level 2. Inputs include forward interest rate curves, notional amounts, interest rates and credit quality of the counterparties.

Other fair value considerations

See Note 2 related to the acquisition of Piedmont in 2016. See Note 11 in Duke Energy's Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the valuation of goodwill and intangible assets.

DUKE ENERGY

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets. Derivative amounts in the tables below for all Duke Energy Registrants exclude cash collateral, which is disclosed in Note 9. See Note 10 for additional information related to investments by major security type for the Duke Energy Registrants.



	June 30, 2017
(in millions)	Total Fair Value			Level 1			Level 2			Level 3			Not categorized
NDTF equity securities	$	4,422		$	4,345		$	—		$	—		$	77
NDTF debt securities	2,170			593			1,577			—			—
Other trading and AFS equity securities	112			112			—			—			—
Other trading and AFS debt securities	245			63			182			—			—
Derivative assets	95			4			37			54			—
Total assets	7,044			5,117			1,796			54			77
Derivative liabilities	(227		)	(1		)	(81		)	(145		)	—
Net assets (liabilities)	$	6,817		$	5,116		$	1,715		$	(91	)	$	77



	December 31, 2016
(in millions)	Total Fair Value			Level 1			Level 2			Level 3			Not categorized
NDTF equity securities	$	4,106		$	4,029		$	—		$	—		$	77
NDTF debt securities	2,078			632			1,446			—			—
Other trading and AFS equity securities	104			104			—			—			—
Other trading and AFS debt securities	266			75			186			5			—
Derivative assets	162			5			136			21			—
Total assets	6,716			4,845			1,768			26			77
Derivative liabilities	(252		)	(2		)	(63		)	(187		)	—
Net assets (liabilities)	$	6,464		$	4,843		$	1,705		$	(161	)	$	77

The following tables provide reconciliations of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements. Amounts included in earnings for derivatives are primarily included in Cost of natural gas on the Duke Energy Registrants' Condensed Consolidated Statements of Operations and Comprehensive Income. Amounts included in changes of net assets on the Duke Energy Registrants' Condensed Consolidated Balance Sheets are included in regulatory assets or liabilities. All derivative assets and liabilities are presented on a net basis.



	Three Months Ended June 30, 2017									Three Months Ended June 30, 2016
(in millions)	Investments			Derivatives (net)			Total			Investments		Derivatives (net)			Total
Balance at beginning of period	$	5		$	(135	)	$	(130	)	$	4	$	2		$	6
Total pretax realized or unrealized gains included in comprehensive income	1			—			1			—		—			—
Purchases, sales, issuances and settlements:
Purchases	—			55			55			—		34			34
Sales	(6		)	—			(6		)	—		—			—
Settlements	—			(9		)	(9		)	—		(6		)	(6		)
Total (losses) gains included on the Condensed Consolidated Balance Sheet	—			(2		)	(2		)	—		4			4
Balance at end of period	$	—		$	(91	)	$	(91	)	$	4	$	34		$	38



	Six Months Ended June 30, 2017									Six Months Ended June 30, 2016
(in millions)	Investments			Derivatives (net)			Total			Investments			Derivatives (net)			Total
Balance at beginning of period	$	5		$	(166	)	$	(161	)	$	5		$	10		$	15
Total pretax realized or unrealized gains included in comprehensive income	1			—			1			—			—			—
Purchases, sales, issuances and settlements:
Purchases	—			55			55			—			34			34
Sales	(6		)	—			(6		)	(1		)	—			(1		)
Settlements	—			(18		)	(18		)	—			(13		)	(13		)
Total gains included on the Condensed Consolidated Balance Sheet	—			38			38			—			3			3
Balance at end of period	$	—		$	(91	)	$	(91	)	$	4		$	34		$	38

DUKE ENERGY CAROLINAS

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets.



	June 30, 2017
(in millions)	Total Fair Value			Level 1		Level 2			Level 3		Not categorized
NDTF equity securities	$	2,441		$	2,364	$	—		$	—	$	77
NDTF debt securities	1,049			141		908			—		—
Derivative assets	8			—		8			—		—
Total assets	3,498			2,505		916			—		77
Derivative liabilities	(26		)	—		(26		)	—		—
Net assets	$	3,472		$	2,505	$	890		$	—	$	77



	December 31, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Level 3		Not categorized
NDTF equity securities	$	2,245		$	2,168	$	—		$	—	$	77
NDTF debt securities	1,013			178		835			—		—
Other AFS debt securities	3			—		—			3		—
Derivative assets	33			—		33			—		—
Total assets	3,294			2,346		868			3		77
Derivative liabilities	(16		)	—		(16		)	—		—
Net assets	$	3,278		$	2,346	$	852		$	3	$	77

The following table provides a reconciliation of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Investments
	Three Months Ended June 30,					Six Months Ended June 30,
(in millions)	2017			2016		2017			2016
Balance at beginning of period	3			$	3	$	3		3
Total pretax realized or unrealized gains included in comprehensive income	1			—		1			—
Purchases, sales, issuances and settlements:
Sales	(4		)	—		(4		)	—
Balance at end of period	$	—		$	3	$	—		$	3

PROGRESS ENERGY

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets.



	June 30, 2017								December 31, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Total Fair Value			Level 1		Level 2
NDTF equity securities	$	1,981		$	1,981	$	—		$	1,861		$	1,861	$	—
NDTF debt securities	1,121			452		669			1,065			454		611
Other AFS debt securities	59			12		47			65			21		44
Derivative assets	15			—		15			85			—		85
Total assets	3,176			2,445		731			3,076			2,336		740
Derivative liabilities	(35		)	—		(35		)	(25		)	—		(25		)
Net assets	$	3,141		$	2,445	$	696		$	3,051		$	2,336	$	715

DUKE ENERGY PROGRESS

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets.



	June 30, 2017								December 31, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Total Fair Value			Level 1		Level 2
NDTF equity securities	$	1,607		$	1,607	$	—		$	1,505		$	1,505	$	—
NDTF debt securities and other	772			226		546			708			207		501
Other AFS debt securities and other	1			1		—			1			1		—
Derivative assets	8			—		8			46			—		46
Total assets	2,388			1,834		554			2,260			1,713		547
Derivative liabilities	(8		)	—		(8		)	(7		)	—		(7		)
Net assets	$	2,380		$	1,834	$	546		$	2,253		$	1,713	$	540

DUKE ENERGY FLORIDA

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets.



	June 30, 2017								December 31, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Total Fair Value			Level 1		Level 2
NDTF equity securities	$	374		$	374	$	—		$	356		$	356	$	—
NDTF debt securities and other	349			226		123			357			247		110
Other AFS debt securities and other	48			1		47			48			4		44
Derivative assets	6			—		6			39			—		39
Total assets	777			601		176			800			607		193
Derivative liabilities	(20		)	—		(20		)	(12		)	—		(12		)
Net assets	$	757		$	601	$	156		$	788		$	607	$	181

DUKE ENERGY OHIO

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets.



	June 30, 2017								December 31, 2016
(in millions)	Total Fair Value			Level 2			Level 3		Total Fair Value			Level 2			Level 3
Derivative assets	$	3		$	—		$	3	$	5		$	—		$	5
Derivative liabilities	(5		)	(5		)	—		(6		)	(6		)	—
Net (liabilities) assets	$	(2	)	$	(5	)	$	3	$	(1	)	$	(6	)	$	5

The following table provides a reconciliation of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended June 30,					Six Months Ended June 30,
(in millions)	2017			2016		2017			2016
Balance at beginning of period	$	1		$	—	$	5		$	3
Purchases, sales, issuances and settlements:
Purchases	3			5		3			5
Settlements	(1		)	—		(2		)	(2		)
Total losses included on the Condensed Consolidated Balance Sheet	—			—		(3		)	(1		)
Balance at end of period	$	3		$	5	$	3		$	5

DUKE ENERGY INDIANA

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets.



	June 30, 2017								December 31, 2016
(in millions)	Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value			Level 1			Level 2		Level 3
Other AFS equity securities	$	87	$	87	$	—	$	—	$	79		$	79		$	—	$	—
Other AFS debt securities and other	31		—		31		—		31			—			31		—
Derivative assets	54		3		—		51		16			—			—		16
Total assets	172		90		31		51		126			79			31		16
Derivative liabilities	—		—		—		—		(2		)	(2		)	—		—
Net assets	$	172	$	90	$	31	$	51	$	124		$	77		$	31	$	16

The following table provides a reconciliation of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2017			2016			2017			2016
Balance at beginning of period	$	9		$	2		$	16		$	7
Purchases, sales, issuances and settlements:
Purchases	52			29			52			29
Settlements	(9		)	(6		)	(16		)	(11		)
Total (losses) gains included on the Condensed Consolidated Balance Sheet	(1		)	4			(1		)	4
Balance at end of period	$	51		$	29		$	51		$	29

PIEDMONT

The following tables provide recorded balances for assets and liabilities measured at fair value on a recurring basis on the Condensed Consolidated Balance Sheets.



	June 30, 2017								December 31, 2016
(in millions)	Total Fair Value			Level 1		Level 3			Total Fair Value			Level 1		Level 3
Other trading equity securities	2			2		—			$	4		$	4	$	—
Other trading debt securities	—			—		—			1			1		—
Derivative assets	2			2		—			3			3		—
Total assets	4			4		—			8			8		—
Derivative liabilities	(145		)	—		(145		)	(187		)	—		(187		)
Net (liabilities) assets	$	(141	)	$	4	$	(145	)	$	(179	)	$	8	$	(187	)

The following table provides a reconciliation of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2017			2016			2017			2016
Balance at beginning of period	$	(145	)	$	(126	)	$	(187	)	$	(149	)
Total (losses) gains and settlements	—			(64		)	42			(41		)
Balance at end of period	$	(145	)	$	(190	)	$	(145	)	$	(190	)

QUANTITATIVE INFORMATION ABOUT UNOBSERVABLE INPUTS

The following table includes quantitative information about the Duke Energy Registrants' derivatives classified as Level 3.



	June 30, 2017
	Fair Value
Investment Type	(in millions)			Valuation Technique	Unobservable Input	Range
Duke Energy Ohio
Financial Transmission Rights (FTRs)	$	3		RTO auction pricing	FTR price – per megawatt-hour (MWh)	$	(5.24	)	-	$	1.82
Duke Energy Indiana
FTRs	51			RTO auction pricing	FTR price – per MWh	(1.65		)	-	6.66
Piedmont
Natural gas contracts	(145		)	Discounted cash flow	Forward natural gas curves – price per million British thermal unit (MMBtu)	2.21			-	3.78
Duke Energy
Total Level 3 derivatives	$	(91	)



	December 31, 2016
	Fair Value
Investment Type	(in millions)			Valuation Technique	Unobservable Input	Range
Duke Energy Ohio
FTRs	$	5		RTO auction pricing	FTR price – per MWh	$	0.77		-	$	3.52
Duke Energy Indiana
FTRs	16			RTO auction pricing	FTR price – per MWh	(0.83		)	-	9.32
Piedmont
Natural gas contracts	(187		)	Discounted cash flow	Forward natural gas curves – price per MMBtu	2.31			-	4.18
Duke Energy
Total Level 3 derivatives	$	(166	)

OTHER FAIR VALUE DISCLOSURES

The fair value and book value of long-term debt, including current maturities, is summarized in the following table. Estimates determined are not necessarily indicative of amounts that could have been settled in current markets. Fair value of long-term debt uses Level 2 measurements.



	June 30, 2017				December 31, 2016
(in millions)	Book Value		Fair Value		Book Value		Fair Value
Duke Energy	$	49,515	$	51,947	$	47,895	$	49,161
Duke Energy Carolinas	9,524		10,657		9,603		10,494
Progress Energy	18,145		20,101		17,541		19,107
Duke Energy Progress	6,760		7,266		7,011		7,357
Duke Energy Florida	6,979		7,753		6,125		6,728
Duke Energy Ohio	1,977		2,155		1,884		2,020
Duke Energy Indiana	3,784		4,379		3,786		4,260
Piedmont	1,946		2,107		1,821		1,933

At both June 30, 2017 and December 31, 2016, fair value of cash and cash equivalents, accounts and notes receivable, accounts payable, notes payable and commercial paper, and nonrecourse notes payable of VIEs are not materially different from their carrying amounts because of the short-term nature of these instruments and/or because the stated rates approximate market rates.