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 which 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 nine months ended September 30, 2016 and 2015.

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 Nasdaq Composite (NASDAQ) and New York Stock Exchange (NYSE). 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 are primarily valued using internally developed discounted cash flow models which 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 natural 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 natural 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 which 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.

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 table below exclude cash collateral which is disclosed in Note 10. See Note 11 for additional information related to investments by major security type.



	September 30, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Level 3		Not categorized
Nuclear decommissioning trust fund equity securities	$	3,949		$	3,871	$	—		$	—	$	78
Nuclear decommissioning trust fund debt securities	2,169			664		1,505			—		—
Other available-for-sale equity securities	104			104		—			—		—
Other available-for-sale debt securities	297			74		219			4		—
Derivative assets	66			—		43			23		—
Total assets	6,585			4,713		1,767			27		78
Derivative liabilities	(246		)	—		(246		)	—		—
Net assets	$	6,339		$	4,713	$	1,521		$	27	$	78



	December 31, 2015
(in millions)	Total Fair Value			Level 1		Level 2			Level 3		Not categorized
Nuclear decommissioning trust fund equity securities	$	3,590		$	3,418	$	—		$	—	$	172
Nuclear decommissioning trust fund debt securities	2,227			672		1,555			—		—
Other available-for-sale equity securities	95			95		—			—		—
Other available-for-sale debt securities	302			75		222			5		—
Derivative assets	26			—		16			10		—
Total assets	6,240			4,260		1,793			15		172
Derivative liabilities	(419		)	—		(419		)	—		—
Net assets	$	5,821		$	4,260	$	1,374		$	15	$	172

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 Operating Revenues.



	Three Months Ended September 30, 2016
(in millions)	Investments		Derivatives (net)			Total
Balance at beginning of period	$	4	$	34		$	38
Purchases, sales, issuances and settlements:
Settlements	—		(9		)	(9		)
Total losses included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	—		(2		)	(2		)
Balance at end of period	$	4	$	23		$	27



	Three Months Ended September 30, 2015
(in millions)	Investments		Derivatives (net)			Total
Balance at beginning of period	$	5	$	23		$	28
Purchases, sales, issuances and settlements:
Settlements	—		(6		)	(6		)
Balance at end of period	$	5	$	17		$	22



	Nine Months Ended September 30, 2016
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	5		$	10		$	15
Purchases, sales, issuances and settlements:
Purchases	—			34			34
Sales	(1		)	—			(1		)
Settlements	—			(22		)	(22		)
Total gains included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	—			1			1
Balance at end of period	$	4		$	23		$	27



	Nine Months Ended September 30, 2015
(in millions)	Investments		Derivatives (net)			Total
Balance at beginning of period	$	5	$	(1	)	$	4
Total pretax realized or unrealized gains included in earnings	—		18			18
Purchases, sales, issuances and settlements:
Purchases	—		24			24
Settlements	—		(28		)	(28		)
Total gains included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	—		4			4
Balance at end of period	$	5	$	17		$	22

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. Derivative amounts in the table below exclude cash collateral, which is disclosed in Note 10. See Note 11 for additional information related to investments by major security type.



	September 30, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Level 3		Not categorized
Nuclear decommissioning trust fund equity securities	$	2,170		$	2,092	$	—		$	—	$	78
Nuclear decommissioning trust fund debt securities	1,060			184		876			—		—
Other available-for-sale debt securities	3			—		—			3		—
Derivative assets	10			—		10			—		—
Total assets	3,243			2,276		886			3		78
Derivative liabilities	(99		)	—		(99		)	—		—
Net assets	$	3,144		$	2,276	$	787		$	3	$	78



	December 31, 2015
(in millions)	Total Fair Value			Level 1		Level 2			Level 3		Not categorized
Nuclear decommissioning trust fund equity securities	$	2,094		$	1,922	$	—		$	—	$	172
Nuclear decommissioning trust fund debt securities	944			246		698			—		—
Other available-for-sale debt securities	3			—		—			3		—
Total assets	3,041			2,168		698			3		172
Derivative liabilities	(45		)	—		(45		)	—		—
Net assets	$	2,996		$	2,168	$	653		$	3	$	172

There was no change to the Level 3 balance during the three and nine months ended September 30, 2016 and September 30, 2015.

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. Derivative amounts in the table below exclude cash collateral, which is disclosed in Note 10. See Note 11 for additional information related to investments by major security type.



	September 30, 2016
(in millions)	Total Fair Value			Level 1		Level 2
Nuclear decommissioning trust fund equity securities	$	1,779		$	1,779	$	—
Nuclear decommissioning trust fund debt securities	1,109			480		629
Other available-for-sale debt securities	67			20		47
Derivative assets	31			—		31
Total assets	2,986			2,279		707
Derivative liabilities	(81		)	—		(81		)
Net assets	$	2,905		$	2,279	$	626



	December 31, 2015
(in millions)	Total Fair Value			Level 1		Level 2
Nuclear decommissioning trust fund equity securities	$	1,496		$	1,496	$	—
Nuclear decommissioning trust fund debt securities	1,283			426		857
Other available-for-sale debt securities	63			18		45
Derivative assets	11			—		11
Total assets	2,853			1,940		913
Derivative liabilities	(322		)	—		(322		)
Net assets	$	2,531		$	1,940	$	591

DUKE ENERGY PROGRESS



	September 30, 2016
(in millions)	Total Fair Value			Level 1		Level 2
Nuclear decommissioning trust fund equity securities	$	1,438		$	1,438	$	—
Nuclear decommissioning trust fund debt securities and other	739			220		519
Other available-for-sale debt securities and other	1			1		—
Derivative assets	15			—		15
Total assets	2,193			1,659		534
Derivative liabilities	(12		)	—		(12		)
Net assets	$	2,181		$	1,659	$	522



	December 31, 2015
(in millions)	Total Fair Value			Level 1		Level 2
Nuclear decommissioning trust fund equity securities	$	1,178		$	1,178	$	—
Nuclear decommissioning trust fund debt securities and other	860			141		719
Other available-for-sale debt securities and other	1			1		—
Derivative assets	2			—		2
Total assets	2,041			1,320		721
Derivative liabilities	(98		)	—		(98		)
Net assets	$	1,943		$	1,320	$	623

DUKE ENERGY FLORIDA



	September 30, 2016
(in millions)	Total Fair Value			Level 1		Level 2
Nuclear decommissioning trust fund equity securities	$	341		$	341	$	—
Nuclear decommissioning trust fund debt securities and other	370			260		110
Other available-for-sale debt securities and other	49			2		47
Derivative assets	16			—		16
Total assets	776			603		173
Derivative liabilities	(64		)	—		(64		)
Net assets	$	712		$	603	$	109



	December 31, 2015
(in millions)	Total Fair Value			Level 1		Level 2
Nuclear decommissioning trust fund equity securities	$	318		$	318	$	—
Nuclear decommissioning trust fund debt securities and other	423			285		138
Other available-for-sale debt securities and other	51			6		45
Derivative assets	7			—		7
Total assets	799			609		190
Derivative liabilities	(216		)	—		(216		)
Net assets (liabilities)	$	583		$	609	$	(26	)

DUKE ENERGY OHIO



	September 30, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Derivative assets	$	3		$	—	$	—		$	3
Derivative liabilities	(8		)	—		(8		)	—
Net (liabilities) assets	$	(5	)	$	—	$	(8	)	$	3



	December 31, 2015
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Derivative assets	$	3		$	—	$	—		$	3
Derivative liabilities	(7		)	—		(7		)	—
Net (liabilities) assets	$	(4	)	$	—	$	(7	)	$	3

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 September 30,
(in millions)	2016			2015
Balance at beginning of period	$	5		$	5
Purchases, sales, issuances and settlements:
Purchases	—			5
Sales	—			(5		)
Settlements	(2		)	(1		)
Balance at end of period	$	3		$	4



	Derivatives (net)
	Nine Months Ended September 30,
(in millions)	2016			2015
Balance at beginning of period	$	3		$	(18	)
Total pretax realized or unrealized gains included in earnings	—			21
Purchases, sales, issuances and settlements:
Purchases	5			5
Settlements	(4		)	(4		)
Total losses included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	(1		)	—
Balance at end of period	$	3		$	4

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. Derivative amounts in the table below exclude cash collateral, which is disclosed in Note 10. See Note 11 for additional information related to investments by major security type.



	September 30, 2016
(in millions)	Total Fair Value		Level 1		Level 2		Level 3
Other available-for-sale equity securities	$	77	$	77	$	—	$	—
Other available-for-sale debt securities and other	30		—		30		—
Derivative assets	20		—		—		20
Net assets	$	127	$	77	$	30	$	20



	December 31, 2015
(in millions)	Total Fair Value		Level 1		Level 2		Level 3
Other available-for-sale equity securities	$	71	$	71	$	—	$	—
Other available-for-sale debt securities and other	30		2		28		—
Derivative assets	7		—		—		7
Net assets	$	108	$	73	$	28	$	7

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 September 30,
(in millions)	2016			2015
Balance at beginning of period	$	29		$	17
Purchases, sales, issuances and settlements:
Purchases	—			1
Settlements	(7		)	(6		)
Total losses included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	(2		)	—
Balance at end of period	$	20		$	12



	Derivatives (net)
	Nine Months Ended September 30,
(in millions)	2016			2015
Balance at beginning of period	$	7		$	14
Purchases, sales, issuances and settlements:
Purchases	29			19
Settlements	(18		)	(25		)
Total gains included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	2			4
Balance at end of period	$	20		$	12

QUANTITATIVE INFORMATION ABOUT UNOBSERVABLE INPUTS

The following table includes quantitative information about the Duke Energy Registrants' derivatives classified as Level 3. As of September 30, 2016 and December 31, 2015, all Level 3 derivatives were financial transmission rights (FTRs).



	September 30, 2016
	Fair Value of FTRs
	(in millions)		Valuation Technique	Unobservable Input	Range
Duke Energy	$	23	RTO auction pricing	FTR price – per Megawatt-Hour (MWh)	$	(2.59	)	-	$	8.16
Duke Energy Ohio	3		RTO auction pricing	FTR price – per MWh	0.45			-	2.01
Duke Energy Indiana	20		RTO auction pricing	FTR price – per MWh	(2.59		)	-	8.16



	December 31, 2015
	Fair Value of FTRs
	(in millions)		Valuation Technique	Unobservable Input	Range
Duke Energy	$	10	RTO auction pricing	FTR price – per MWh	$	(0.74	)	-	$	7.29
Duke Energy Ohio	3		RTO auction pricing	FTR price – per MWh	0.67			-	2.53
Duke Energy Indiana	7		RTO auction pricing	FTR price – per MWh	(0.74		)	-	7.29

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.



	September 30, 2016				December 31, 2015
(in millions)	Book Value		Fair Value		Book Value		Fair Value
Duke Energy	$	47,165	$	50,997	$	39,569	$	42,537
Duke Energy Carolinas	9,360		10,799		8,367		9,156
Progress Energy	16,520		19,060		14,464		15,856
Duke Energy Progress	7,011		7,787		6,518		6,757
Duke Energy Florida	6,128		7,127		4,266		4,908
Duke Energy Ohio	1,887		2,128		1,598		1,724
Duke Energy Indiana	3,787		4,538		3,768		4,219

At both September 30, 2016 and December 31, 2015, fair value of cash and cash equivalents, accounts and notes receivable, accounts payable, notes payable and commercial paper, and non-recourse 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.