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.

The 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 1 and 2 during the three and nine months ended September 30, 2014 and 2013. Transfers out of Level 3 during the three and nine months ended September 30, 2014 are the result of forward commodity prices becoming observable due to the passage of time.

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 and 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 equity securities that are Level 2 or 3 are typically ownership interests in commingled investment funds.

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 fair 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 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 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 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.

Goodwill, Long-lived Assets and Assets Held for Sale

See Note 8 for a discussion of the valuation of goodwill and long-lived assets and Note 2 related to the Midwest Generation Disposal Group.

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, 2014
(in millions)	Total Fair Value			Level 1			Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	3,824		$	3,649		$	3		$	172
Nuclear decommissioning trust fund debt securities	1,550			388			1,162			—
Other trading and available-for-sale equity securities	96			96			—			—
Other trading and available-for-sale debt securities	284			31			238			15
Derivative assets	85			6			45			34
Total assets	5,839			4,170			1,448			221
Derivative liabilities	(428		)	(119		)	(253		)	(56		)
Net assets	$	5,411		$	4,051		$	1,195		$	165



	December 31, 2013
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	3,579		$	3,495	$	57		$	27
Nuclear decommissioning trust fund debt securities	1,553			402		1,100			51
Other trading and available-for-sale equity securities	102			91		11			—
Other trading and available-for-sale debt securities	333			36		277			20
Derivative assets	145			33		70			42
Total assets	5,712			4,057		1,515			140
Derivative liabilities	(321		)	11		(303		)	(29		)
Net assets	$	5,391		$	4,068	$	1,212		$	111

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, 2014
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	188		$	22		$	210
Total pretax realized or unrealized gains (losses) included in earnings	—			(33		)	(33		)
Purchases, sales, issuances and settlements:
Purchases	13			(1		)	12
Sales	(13		)	—			(13		)
Issuances	—			1			1
Transfers out of Level 3 due to observability of inputs	—			(1		)	(1		)
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	4			(10		)	(6		)
Balance at end of period	$	192		$	(22	)	$	170
Pretax amounts included in the Condensed Consolidated Statements of Comprehensive Income related to Level 3 measurements outstanding	$	—		$	(49	)	$	(49	)



	Three Months Ended September 30, 2013
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	97		$	(87	)	$	10
Total pretax realized or unrealized gains (losses) included in earnings	—			13			13
Total pretax gains included in other comprehensive income	1			—			1
Purchases, sales, issuances and settlements:
Purchases	2			—			2
Sales	(2		)	—			(2		)
Issuances	—			4			4
Settlements	(2		)	(3		)	(5		)
Transfers out of Level 3 due to observability of inputs	—			34			34
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	1			1			2
Balance at end of period	$	97		$	(38	)	$	59



	Nine Months Ended September 30, 2014
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	98		$	13		$	111
Total pretax realized or unrealized gains (losses) included in earnings	—			(21		)	(21		)
Purchases, sales, issuances and settlements:
Purchases	29			50			79
Sales	(15		)	—			(15		)
Settlements	—			(45		)	(45		)
Transfers out of Level 3 due to observability of inputs	68			(4		)	64
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	12			(15		)	(3		)
Balance at end of period	$	192		$	(22	)	$	170
Pretax amounts included in the Condensed Consolidated Statements of Comprehensive Income related to Level 3 measurements outstanding	$	—		$	(49	)	$	(49	)



	Nine Months Ended September 30, 2013
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	98		$	(85	)	$	13
Total pretax realized or unrealized gains (losses) included in earnings	—			(8		)	(8		)
Total pretax gains included in other comprehensive income	(1		)	—			(1		)
Purchases, sales, issuances and settlements:
Purchases	5			21			26
Sales	(5		)	—			(5		)
Issuances	—			9			9
Settlements	(3		)	(5		)	(8		)
Transfers out of Level 3 due to observability of inputs	—			34			34
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	3			(4		)	(1		)
Balance at end of period	$	97		$	(38	)	$	59

DUKE ENERGY CAROLINAS



	September 30, 2014
(in millions)	Total Fair Value		Level 1		Level 2		Level 3
Nuclear decommissioning trust fund equity securities	$	2,124	$	1,949	$	3	$	172
Nuclear decommissioning trust fund debt securities	845		150		695		—
Other trading and available-for-sale debt securities	3		—		—		3
Net assets	$	2,972	$	2,099	$	698	$	175



	December 31, 2013
(in millions)	Total Fair Value			Level 1		Level 2		Level 3
Nuclear decommissioning trust fund equity securities	$	1,964		$	1,879	$	58	$	27
Nuclear decommissioning trust fund debt securities	870			168		651		51
Other trading and available-for-sale debt securities	3			—		—		3
Total assets	2,837			2,047		709		81
Derivative liabilities	(2		)	—		—		(2		)
Net assets	$	2,835		$	2,047	$	709	$	79

The following tables provide reconciliations of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Three Months Ended September 30, 2014
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	171		$	(3	)	$	168
Purchases, sales, issuances and settlements:
Purchases	13			—			13
Sales	(13		)	—			(13		)
Settlements	—			3			3
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	4			—			4
Balance at end of period	$	175		$	—		$	175



	Three Months Ended September 30, 2013
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	74		$	(4	)	$	70
Purchases, sales, issuances and settlements:
Purchases	2			—			2
Sales	(2		)	—			(2		)
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	1			—			1
Balance at end of period	$	75		$	(4	)	$	71



	Nine Months Ended September 30, 2014
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	81		$	(2	)	$	79
Purchases, sales, issuances and settlements:
Purchases	29			—			29
Sales	(15		)	—			(15		)
Settlements	—			2			2
Transfers out of Level 3 due to observability of inputs	68			—			68
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	12			—			12
Balance at end of period	$	175		$	—		$	175



	Nine Months Ended September 30, 2013
(in millions)	Investments			Derivatives (net)			Total
Balance at beginning of period	$	72		$	(12	)	$	60
Purchases, sales, issuances and settlements:
Purchases	5			—			5
Sales	(5		)	—			(5		)
Settlements	—			8			8
Total gains (losses) included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	3			—			3
Balance at end of period	$	75		$	(4	)	$	71

PROGRESS ENERGY



	September 30, 2014
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	1,700		$	1,700	$	—		$	—
Nuclear decommissioning trust fund debt securities	705			238		467			—
Other trading and available-for-sale debt securities	58			15		43			—
Total assets	2,463			1,953		510			—
Derivative liabilities	(142		)	—		(142		)	—
Net assets	$	2,321		$	1,953	$	368		$	—



	December 31, 2013
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	1,615		$	1,615	$	—		$	—
Nuclear decommissioning trust fund debt securities	677			233		444			—
Other trading and available-for-sale debt securities	58			19		39			—
Derivative assets	3			—		3			—
Total assets	2,353			1,867		486			—
Derivative liabilities	(187		)	—		(187		)	—
Net assets	$	2,166		$	1,867	$	299		$	—

The following tables provide reconciliations of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2014			2013			2014		2013
Balance at beginning of period	$	—		$	(35	)	$	—	$	(38	)
Purchases, sales, issuances and settlements:
Issuances	—			2			—		10
Transfers out of Level 3 due to observability of inputs	2			34			—		34
Total gains included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	(2		)	(1		)	—		(6		)
Balance at end of period	$	—		$	—		$	—	$	—

DUKE ENERGY PROGRESS



	September 30, 2014
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	1,126		$	1,126	$	—		$	—
Nuclear decommissioning trust fund debt securities	497			155		342			—
Other trading and available-for-sale debt securities	2			2		—			—
Total assets	1,625			1,283		342			—
Derivative liabilities	(45		)	—		(45		)	—
Net assets	$	1,580		$	1,283	$	297		$	—



	December 31, 2013
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	1,069		$	1,069	$	—		$	—
Nuclear decommissioning trust fund debt securities	470			137		333			—
Other trading and available-for-sale debt securities	3			3		—			—
Derivative assets	1			—		1			—
Total assets	1,543			1,209		334			—
Derivative liabilities	(66		)	—		(66		)	—
Net assets	$	1,477		$	1,209	$	268		$	—

The following tables provide reconciliations of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended September 30,					Nine Months Ended September 30,
(in millions)	2014		2013			2014		2013
Balance at beginning of period	$	—	$	(35	)	$	—	$	(38	)
Purchases, sales, issuances and settlements:
Issuances	—		—			—		9
Settlements	—		2			—		—
Total gains included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	—		(1		)	—		(5		)
Transfers out of Level 3 due to observability of inputs	—		34			—		34
Balance at end of period	$	—	$	—		$	—	$	—

DUKE ENERGY FLORIDA



	September 30, 2014
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	574		$	574	$	—		$	—
Nuclear decommissioning trust fund debt securities and other	208			83		125			—
Other trading and available-for-sale debt securities and other	43			—		43			—
Derivative assets	3			—		3			—
Total assets	828			657		171			—
Derivative liabilities	(97		)	—		(97		)	—
Net assets	$	731		$	657	$	74		$	—



	December 31, 2013
(in millions)	Total Fair Value			Level 1		Level 2			Level 3
Nuclear decommissioning trust fund equity securities	$	546		$	546	$	—		$	—
Nuclear decommissioning trust fund debt securities and other	214			96		118			—
Other trading and available-for-sale debt securities and other	40			2		38			—
Derivative assets	1			—		1			—
Total assets	801			644		157			—
Derivative liabilities	(116		)	—		(116		)	—
Net assets	$	685		$	644	$	41		$	—

DUKE ENERGY OHIO



	September 30, 2014
(in millions)	Total Fair Value			Level 1			Level 2			Level 3
Derivative assets	$	7		$	—		$	3		$	4
Derivative liabilities	(221		)	(114		)	(48		)	(59		)
Net assets (liabilities)	$	(214	)	$	(114	)	$	(45	)	$	(55	)



	December 31, 2013
(in millions)	Total Fair Value			Level 1			Level 2			Level 3
Derivative assets	$	96		$	50		$	21		$	25
Derivative liabilities	(95		)	(1		)	(65		)	(29		)
Net assets (liabilities)	$	1		$	49		$	(44	)	$	(4	)

The following tables provide reconciliations of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2014			2013			2014			2013
Balance at beginning of period	$	(28	)	$	(19	)	$	(4	)	$	(6	)
Total pretax realized or unrealized gains (losses) included in earnings	(24		)	11			(43		)	(4		)
Purchases, sales, issuances and settlements:
Purchases	—			—			1			1
Settlements	(2		)	2			(6		)	—
Total gains included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	(1		)	—			1			3
Transfers out of Level 3 due to observability of inputs	—			—			(4		)	—
Balance at end of period	$	(55	)	$	(6	)	$	(55	)	$	(6	)
Pretax amounts included in the Condensed Consolidated Statements of Operations and Comprehensive Income related to Level 3 measurements outstanding at June 30, 2014							$	(52	)

DUKE ENERGY INDIANA



	September 30, 2014
(in millions)	Total Fair Value		Level 1		Level 2		Level 3
Available-for-sale equity securities	$	69	$	69	$	—	$	—
Available-for-sale debt securities	30		—		30		—
Derivative assets	23		1		—		22
Net assets	$	122	$	70	$	30	$	22



	December 31, 2013
(in millions)	Total Fair Value		Level 1		Level 2		Level 3
Available-for-sale equity securities	$	65	$	65	$	—	$	—
Available-for-sale debt securities	29		—		29		—
Derivative assets	12		—		—		12
Net assets	$	106	$	65	$	29	$	12

The following tables provide reconciliations of beginning and ending balances of assets and liabilities measured at fair value using Level 3 measurements.



	Derivatives (net)
	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2014			2013			2014			2013
Balance at beginning of period	$	45		$	18		$	12		$	10
Total pretax realized or unrealized gains (losses) included in earnings	(13		)	3			14			5
Purchases, sales, issuances and settlements:
Purchases	—			—			49			20
Settlements	—			(10		)	(38		)	(23		)
Total gains included on the Condensed Consolidated Balance Sheet as regulatory assets or liabilities	(10		)	3			(15		)	2
Balance at end of period	$	22		$	14		$	22		$	14

QUANTITATIVE DISCLOSURES ABOUT UNOBSERVABLE INPUTS

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



	September 30, 2014
Investment Type	Fair Value (in millions)			Valuation Technique	Unobservable Input	Range
Duke Energy
Natural gas contracts	$	(33	)	Discounted cash flow	Forward natural gas curves - price per MMBtu	$	2.45		-	$	4.66
Financial transmission rights (FTRs)	22			RTO auction pricing	FTR price - per MWh	(2.47		)	-	12.92
Electricity contracts	(2		)	Discounted cash flow	Forward electricity curves - price per MWh	25.18			-	59.17
Commodity capacity option contracts	5			Discounted cash flow	Forward capacity option curves - price per MW day	28.60			-	189.25
Reserves	(14		)		Bid-ask spreads, implied volatility, probability of default
Total Level 3 derivatives	$	(22	)
Duke Energy Ohio
Electricity contracts	$	(10	)	Discounted cash flow	Forward electricity curves - price per MWh	25.35			-	59.60
Natural gas contracts	(33		)	Discounted cash flow	Forward natural gas curves - price per MMBtu	2.45			-	4.66
Reserves	(12		)		Bid-ask spreads, implied volatility, probability of default
Total Level 3 derivatives	$	(55	)
Duke Energy Indiana
FTRs	$	22		RTO auction pricing	FTR price - per MWh	(2.47		)	-	12.92



	December 31, 2013
Investment Type	Fair Value (in millions)			Valuation Technique	Unobservable Input	Range
Duke Energy
Natural gas contracts	$	(2	)	Discounted cash flow	Forward natural gas curves - price per MMBtu	$	3.07		-	$	5.37
FERC mitigation power sale agreements	(2		)	Discounted cash flow	Forward electricity curves - price per MWh	25.79			-	52.38
Financial transmission rights (FTRs)	12			RTO auction pricing	FTR price - per MWh	(0.30		)	-	13.80
Electricity contracts	23			Discounted cash flow	Forward electricity curves - price per MWh	20.77			-	58.90
Commodity capacity option contracts	4			Discounted cash flow	Forward capacity option curves - price per MW day	30.40			-	165.10
Reserves	(22		)		Bid-ask spreads, implied volatility, probability of default
Total Level 3 derivatives	$	13
Duke Energy Carolinas
FERC mitigation power sale agreements	$	(2	)	Discounted cash flow	Forward electricity curves - price per MWh	25.79			-	52.38
Duke Energy Ohio
Electricity contracts	$	18		Discounted cash flow	Forward electricity curves - price per MWh	20.77			-	58.90
Natural gas contracts	(2		)	Discounted cash flow	Forward natural gas curves - price per MMBtu	3.07			-	5.37
Reserves	(20		)		Bid-ask spreads, implied volatility, probability of default
Total Level 3 derivatives	$	(4	)
Duke Energy Indiana
FTRs	$	12		RTO auction pricing	FTR price - per MWh	(0.30		)	-	13.80

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, 2014				December 31, 2013
(in millions)	Book Value		Fair Value		Book Value		Fair Value
Duke Energy	$	39,858	$	43,602	$	40,256	$	42,592
Duke Energy Carolinas	8,394		9,426		8,436		9,123
Progress Energy	14,512		16,305		14,115		15,234
Duke Energy Progress	5,716		6,013		5,235		5,323
Duke Energy Florida	5,102		5,867		4,886		5,408
Duke Energy Ohio	1,783		1,967		2,188		2,237
Duke Energy Indiana	3,795		4,356		3,796		4,171

At both September 30, 2014 and December 31, 2013, the fair value of cash and cash equivalents, accounts and notes receivable, accounts payable, notes payable and commercial paper, and non-recourse notes payable of variable interest entities 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.