VARIABLE INTEREST ENTITIES

A VIE is an entity that is evaluated for consolidation using more than a simple analysis of voting control. The analysis to determine whether an entity is a VIE considers contracts with an entity, credit support for an entity, the adequacy of the equity investment of an entity and the relationship of voting power to the amount of equity invested in an entity. This analysis is performed either upon the creation of a legal entity or upon the occurrence of an event requiring reevaluation, such as a significant change in an entity’s assets or activities. A qualitative analysis of control determines the party that consolidates a VIE. This assessment is based on (i) what party has the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) what party has rights to receive benefits or is obligated to absorb losses that could potentially be significant to the VIE. The analysis of the party that consolidates a VIE is a continual reassessment.

CONSOLIDATED VIEs

The obligations of these VIEs discussed in the following paragraphs are nonrecourse to the Duke Energy Registrants. The registrants have no requirement to provide liquidity to, purchase assets of or guarantee performance of these VIEs unless noted in the following paragraphs.

No financial support was provided to any of the consolidated VIEs during the years ended December 31, 2018, 2017 and 2016, or is expected to be provided in the future, that was not previously contractually required.

Receivables Financing – DERF/DEPR/DEFR

DERF, DEPR and DEFR are bankruptcy remote, special purpose subsidiaries of Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida, respectively. DERF, DEPR and DEFR are wholly owned limited liability companies with separate legal existence from their parent companies and their assets are not generally available to creditors of their parent companies. On a revolving basis, DERF, DEPR and DEFR buy certain accounts receivable arising from the sale of electricity and related services from their parent companies.

DERF, DEPR and DEFR borrow amounts under credit facilities to buy these receivables. Borrowing availability from the credit facilities is limited to the amount of qualified receivables purchased. The sole source of funds to satisfy the related debt obligations is cash collections from the receivables. Amounts borrowed under the credit facilities are reflected on the Consolidated Balance Sheets as Long-Term Debt.

The most significant activity that impacts the economic performance of DERF, DEPR and DEFR are the decisions made to manage delinquent receivables. Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida are considered the primary beneficiaries and consolidate DERF, DEPR and DEFR, respectively, as they make those decisions.

Receivables Financing – CRC

CRC is a bankruptcy remote, special purpose entity indirectly owned by Duke Energy. On a revolving basis, CRC buys certain accounts receivable arising from the sale of electricity, natural gas and related services from Duke Energy Ohio and Duke Energy Indiana. CRC borrows amounts under a credit facility to buy the receivables from Duke Energy Ohio and Duke Energy Indiana. Borrowing availability from the credit facility is limited to the amount of qualified receivables sold to CRC. The sole source of funds to satisfy the related debt obligation is cash collections from the receivables. Amounts borrowed under the credit facility are reflected on Duke Energy's Consolidated Balance Sheets as Long-Term Debt.

The proceeds Duke Energy Ohio and Duke Energy Indiana receive from the sale of receivables to CRC are approximately 75 percent cash and 25 percent in the form of a subordinated note from CRC. The subordinated note is a retained interest in the receivables sold. Depending on collection experience, additional equity infusions to CRC may be required by Duke Energy to maintain a minimum equity balance of $3 million.

CRC is considered a VIE because (i) equity capitalization is insufficient to support its operations, (ii) power to direct the activities that most significantly impact the economic performance of the entity are not performed by the equity holder and (iii) deficiencies in net worth of CRC are funded by Duke Energy. The most significant activities that impact the economic performance of CRC are decisions made to manage delinquent receivables. Duke Energy is considered the primary beneficiary and consolidates CRC as it makes these decisions. Neither Duke Energy Ohio nor Duke Energy Indiana consolidate CRC.

Receivables Financing – Credit Facilities

The following table outlines amounts and expiration dates of the credit facilities described above.



	Duke Energy
			Duke Energy		Duke Energy		Duke Energy
			Carolinas		Progress		Florida
	CRC		DERF		DEPR		DEFR
Expiration date	December 2020		December 2020		February 2021		April 2021
Credit facility amount (in millions)	$	325	$	450	$	300	$	225
Amounts borrowed at December 31, 2018	325		450		300		225
Amounts borrowed at December 31, 2017	325		450		300		225
Restricted Receivables at December 31, 2018	564		699		547		357
Restricted Receivables at December 31, 2017	545		640		459		317

Nuclear Asset-Recovery Bonds – DEFPF

DEFPF is a bankruptcy remote, wholly owned special purpose subsidiary of Duke Energy Florida. DEFPF was formed in 2016 for the sole purpose of issuing nuclear asset-recovery bonds to finance Duke Energy Florida's unrecovered regulatory asset related to Crystal River Unit 3.

In 2016, DEFPF issued senior secured bonds and used the proceeds to acquire nuclear asset-recovery property from Duke Energy Florida. The nuclear asset-recovery property acquired includes the right to impose, bill, collect and adjust a non-bypassable nuclear asset-recovery charge from all Duke Energy Florida retail customers until the bonds are paid in full and all financing costs have been recovered. The nuclear asset-recovery bonds are secured by the nuclear asset-recovery property and cash collections from the nuclear asset-recovery charges are the sole source of funds to satisfy the debt obligation. The bondholders have no recourse to Duke Energy Florida. For additional information see Notes 4 and 6.

DEFPF is considered a VIE primarily because the equity capitalization is insufficient to support its operations. Duke Energy Florida has the power to direct the significant activities of the VIE as described above and therefore Duke Energy Florida is considered the primary beneficiary and consolidates DEFPF.

The following table summarizes the impact of DEFPF on Duke Energy Florida's Consolidated Balance Sheets.



(in millions)	December 31, 2018		December 31, 2017
Receivables of VIEs	$	5	$	4
Regulatory Assets: Current	52		51
Current Assets: Other	39		40
Other Noncurrent Assets: Regulatory assets	1,041		1,091
Current Liabilities: Other	10		10
Current maturities of long-term debt	53		53
Long-Term Debt	1,111		1,164

Commercial Renewables

Certain of Duke Energy’s renewable energy facilities are VIEs due to Duke Energy issuing guarantees for debt service and operations and maintenance reserves in support of debt financings. Assets are restricted and cannot be pledged as collateral or sold to third parties without prior approval of debt holders. Additionally, Duke Energy has VIEs associated with tax equity arrangements entered into with third–party investors in order to finance the cost of solar energy systems eligible for tax credits. The activities that most significantly impacted the economic performance of these renewable energy facilities were decisions associated with siting, negotiating PPAs and EPC agreements, and decisions associated with ongoing operations and maintenance-related activities. Duke Energy is considered the primary beneficiary and consolidates the entities as it is responsible for all of these decisions.

The table below presents material balances reported on Duke Energy's Consolidated Balance Sheets related to renewables VIEs.



(in millions)	December 31, 2018			December 31, 2017
Current Assets: Other	$	123		$	174
Property, plant and equipment, cost	4,007			3,923
Accumulated depreciation and amortization	(698		)	(591		)
Other Noncurrent Assets: Other	261			50
Current maturities of long-term debt	174			170
Long-Term Debt	1,587			1,700
Other Noncurrent Liabilities: Deferred income taxes	—			(148		)
Other Noncurrent Liabilities: Asset Retirement Obligations	106			83
Other Noncurrent Liabilities: Other	212			241

NON-CONSOLIDATED VIEs

The following tables summarize the impact of non-consolidated VIEs on the Consolidated Balance Sheets.



	December 31, 2018
	Duke Energy										Duke		Duke
	Pipeline			Commercial		Other					Energy		Energy
(in millions)	Investments			Renewables		VIEs		Total			Ohio		Indiana
Receivables from affiliated companies	$	—		$	—	$	—	$	—		$	93	$	118
Investments in equity method unconsolidated affiliates	822			190		48		1,060			—		—
Total assets	$	822		$	190	$	48	$	1,060		$	93	$	118
Taxes accrued	(1		)	—		—		(1		)	—		—
Other current liabilities	—			—		4		4			—		—
Deferred income taxes	21			—		—		21			—		—
Other noncurrent liabilities	—			—		12		12			—		—
Total liabilities	$	20		$	—	$	16	$	36		$	—	$	—
Net assets	$	802		$	190	$	32	$	1,024		$	93	$	118



	December 31, 2017
	Duke Energy										Duke		Duke
	Pipeline			Commercial		Other					Energy		Energy
(in millions)	Investments			Renewables		VIEs		Total			Ohio		Indiana
Receivables from affiliated companies	$	—		$	—	$	—	$	—		$	87	$	106
Investments in equity method unconsolidated affiliates	697			180		42		919			—		—
Other noncurrent assets	17			—		—		17			—		—
Total assets	$	714		$	180	$	42	$	936		$	87	$	106
Taxes accrued	(29		)	—		—		(29		)	—		—
Other current liabilities	—			—		4		4			—		—
Deferred income taxes	42			—		—		42			—		—
Other noncurrent liabilities	—			—		12		12			—		—
Total liabilities	$	13		$	—	$	16	$	29		$	—	$	—
Net assets	$	701		$	180	$	26	$	907		$	87	$	106

The Duke Energy Registrants are not aware of any situations where the maximum exposure to loss significantly exceeds the carrying values shown above except for the power purchase agreement with OVEC, which is discussed below, and various guarantees, including Duke Energy's guarantee agreement to support its share of the ACP revolving credit facility. Duke Energy's maximum exposure to loss under the terms of the guarantee is $677 million as of December 31, 2018. For more information on various guarantees, refer to Note 7.

Pipeline Investments

Duke Energy has investments in various joint ventures with pipeline projects currently under construction. These entities are considered VIEs due to having insufficient equity to finance their own activities without subordinated financial support. Duke Energy does not have the power to direct the activities that most significantly impact the economic performance, the obligation to absorb losses or the right to receive benefits of these VIEs and therefore does not consolidate these entities.

The table below presents Duke Energy's ownership interest and investment balance in these joint ventures.



			Investment Amount (in millions)
	Ownership		December 31,		December 31,
Entity Name	Interest		2018		2017
ACP	47	%	$	797	$	397
Sabal Trail^(a)	7.5	%	—		219
Constitution^(b)	24	%	25		81
Total			$	822	$	697

(a)

At December 31, 2017, Sabal Trail was considered a VIE due to having insufficient equity to finance their own activities without subordinated financial support. However, Sabal Trail is now a fully operational, well capitalized entity. As a result, Sabal Trail has sufficient equity to finance its own activities, and therefore, is no longer considered a VIE. Duke Energy's investment in Sabal Trail was $112 million at December 31, 2018.


(b)	During the year ended December 31, 2018, Duke Energy recorded an OTTI of $55 million related to Constitution within Equity in earnings of unconsolidated affiliates on Duke Energy's Consolidated Statements of Income. See Note 4 for additional information.

Commercial Renewables

Duke Energy has investments in various renewable energy project entities. Some of these entities are VIEs due to Duke Energy issuing guarantees for debt service and operations and maintenance reserves in support of debt financings. Duke Energy does not consolidate these VIEs because power to direct and control key activities is shared jointly by Duke Energy and other owners.

Pioneer

Duke Energy holds a 50 percent equity interest in Pioneer. Pioneer is considered a VIE due to having insufficient equity to finance their own activities without subordinated financial support. The activities that most significantly impact Pioneer's economic performance are decisions related to the development of new transmission facilities. The power to direct these activities is jointly and equally shared by Duke Energy and the other joint venture partner, American Electric Power; therefore, Duke Energy does not consolidate Pioneer.

OVEC

Duke Energy Ohio’s 9 percent ownership interest in OVEC is considered a non-consolidated VIE due to having insufficient equity to finance its activities without subordinated financial support. The activities that most significantly impact OVEC's economic performance include fuel strategy and supply activities and decisions associated with ongoing operations and maintenance-related activities. Duke Energy Ohio does not have the unilateral power to direct these activities, and therefore, does not consolidate OVEC.

As a counterparty to an ICPA, Duke Energy Ohio has a contractual arrangement to receive entitlements to capacity and energy from OVEC’s power plants through June 2040 commensurate with its power participation ratio, which is equivalent to Duke Energy Ohio's ownership interest. Costs, including fuel, operating expenses, fixed costs, debt amortization, and interest expense, are allocated to counterparties to the ICPA based on their power participation ratio. The value of the ICPA is subject to variability due to fluctuation in power prices and changes in OVEC's cost of business. On March 31, 2018, FES, a subsidiary of FirstEnergy and an ICPA counterparty with a power participation ratio of 4.85 percent, filed for Chapter 11 bankruptcy, which could increase costs allocated to the counterparties. On July 31, 2018, the bankruptcy court rejected the FES ICPA, which means OVEC is an unsecured creditor in the FES bankruptcy proceeding. Duke Energy Ohio cannot predict the impact of the bankruptcy filing on its OVEC interests. In addition, certain proposed environmental rulemaking could result in future increased OVEC cost allocations. See Note 4 for additional information.

CRC

See discussion under Consolidated VIEs for additional information related to CRC.

Amounts included in Receivables from affiliated companies in the above table for Duke Energy Ohio and Duke Energy Indiana reflect their retained interest in receivables sold to CRC. These subordinated notes held by Duke Energy Ohio and Duke Energy Indiana are stated at fair value. Carrying values of retained interests are determined by allocating carrying value of the receivables between assets sold and interests retained based on relative fair value. The allocated bases of the subordinated notes are not materially different than their face value because (i) the receivables generally turnover in less than two months, (ii) credit losses are reasonably predictable due to the broad customer base and lack of significant concentration and (iii) the equity in CRC is subordinate to all retained interests and thus would absorb losses first. The hypothetical effect on fair value of the retained interests assuming both a 10 percent and a 20 percent unfavorable variation in credit losses or discount rates is not material due to the short turnover of receivables and historically low credit loss history. Interest accrues to Duke Energy Ohio and Duke Energy Indiana on the retained interests using the acceptable yield method. This method generally approximates the stated rate on the notes since the allocated basis and the face value are nearly equivalent. An impairment charge is recorded against the carrying value of both retained interests and purchased beneficial interest whenever it is determined that an OTTI has occurred.

Key assumptions used in estimating fair value are detailed in the following table.



	Duke Energy Ohio				Duke Energy Indiana
	2018		2017		2018		2017
Anticipated credit loss ratio	0.5	%	0.5	%	0.3	%	0.3	%
Discount rate	3.0	%	2.1	%	3.0	%	2.1	%
Receivable turnover rate	13.5	%	13.5	%	11.0	%	10.7	%

The following table shows the gross and net receivables sold.



	Duke Energy Ohio				Duke Energy Indiana
(in millions)	2018		2017		2018		2017
Receivables sold	$	269	$	273	$	336	$	312
Less: Retained interests	93		87		118		106
Net receivables sold	$	176	$	186	$	218	$	206

The following table shows sales and cash flows related to receivables sold.



	Duke Energy Ohio						Duke Energy Indiana
	Years Ended December 31,						Years Ended December 31,
(in millions)	2018		2017		2016		2018		2017		2016
Sales
Receivables sold	$	1,987	$	1,879	$	1,926	$	2,842	$	2,711	$	2,635
Loss recognized on sale	13		10		9		16		12		11
Cash Flows
Cash proceeds from receivables sold	1,967		1,865		1,882		2,815		2,694		2,583
Collection fees received	1		1		1		1		1		1
Return received on retained interests	6		3		2		9		7		5

Cash flows from the sales of receivables are reflected within Cash Flows From Operating Activities on Duke Energy Ohio’s and Duke Energy Indiana’s Consolidated Statements of Cash Flows.

Collection fees received in connection with servicing transferred accounts receivable are included in Operation, maintenance and other on Duke Energy Ohio’s and Duke Energy Indiana’s Consolidated Statements of Operations and Comprehensive Income. The loss recognized on sales of receivables is calculated monthly by multiplying receivables sold during the month by the required discount. The required discount is derived monthly utilizing a three-year weighted average formula that considers charge-off history, late charge history and turnover history on the sold receivables, as well as a component for the time value of money. The discount rate, or component for the time value of money, is the prior month-end LIBOR plus a fixed rate of 1.00 percent.