DERIVATIVES AND HEDGING

The Duke Energy Registrants use commodity and interest rate contracts to manage commodity price risk and interest rate risk. The primary use of 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 arrangements is offset against the collateralized derivatives on the Condensed Consolidated Balance Sheets. The cash impacts of settled derivatives are recorded as operating activities on the Condensed Consolidated Statements of Cash Flows.

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.

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 affects earnings. Amounts for interest rate contracts are reclassified to earnings as interest expense over the term of the related debt. Gains and losses reclassified out of Accumulated other comprehensive income (AOCI) for the three and nine months ended September 30, 2016, were not material. Duke Energy's interest rate derivatives designated as hedges include interest rate swaps used to hedge existing debt within the International Energy and Renewables' businesses.

Undesignated Contracts

Undesignated contracts include contracts not designated as a hedge because they are accounted for under regulatory accounting and contracts that do not qualify for hedge accounting.

Duke Energy’s interest rate swaps for its Regulated Utilities operations employ regulatory accounting. With regulatory accounting, the mark-to-market gains or losses on the swaps are deferred as regulatory liabilities or regulatory assets, respectively. Regulatory assets and liabilities are amortized consistent with the treatment of the related costs in the ratemaking process. The accrual of interest on the swaps is recorded as Interest Expense.

In August 2016, Duke Energy unwound $1.4 billion of forward-starting interest rate swaps associated with the Piedmont acquisition financing described in Note 6, Debt and Credit Facilities. The swaps were considered undesignated as they did not qualify for hedge accounting. Losses on the swaps of $22 million and $190 million are included within Interest Expense on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016, respectively. See Note 2 for additional information related to the Piedmont acquisition.

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



	September 30, 2016
			Duke				Duke		Duke		Duke
	Duke		Energy		Progress		Energy		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida		Ohio
Cash flow hedges^(a)	$	990	$	—	$	—	$	—	$	—	$	—
Undesignated contracts	927		400		500		250		250		27
Total notional amount	$	1,917	$	400	$	500	$	250	$	250	$	27



	December 31, 2015
			Duke				Duke		Duke		Duke
	Duke		Energy		Progress		Energy		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida		Ohio
Cash flow hedges^(a)	$	700	$	—	$	—	$	—	$	—	$	—
Undesignated contracts	1,827		400		500		250		250		27
Total notional amount	$	2,527	$	400	$	500	$	250	$	250	$	27


(a)	Duke Energy includes amounts related to consolidated VIEs of $789 million and $497 million as of September 30, 2016 and December 31, 2015, respectively. In August 2016, Duke Energy entered into $326 million of interest rate swaps related to the solar facilities financing described in Note 6, including $103 million of 4-year swaps and $223 million of 18-year swaps.

COMMODITY PRICE RISK

The Duke Energy Registrants are exposed to the impact of changes in the prices of electricity purchased and sold in bulk power markets and coal and natural gas purchases. Exposure to commodity price risk is influenced by a number of factors including the term of contracts, the liquidity of markets and delivery locations. For the Subsidiary Registrants, bulk power electricity and coal and natural gas purchases flow through fuel adjustment clauses, formula based contracts or other cost sharing mechanisms. Differences between the costs included in rates and the incurred costs, including undesignated derivative contracts, are largely deferred as regulatory assets or regulatory liabilities.

Volumes

The tables below show 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.

September 30, 2016

Duke

Energy

Progress

Energy

Carolinas

Energy

Progress

Florida

Ohio

Indiana

Electricity (gigawatt-hours)

—

Natural gas (millions of decatherms)

375

292

116

176

—

December 31, 2015

Duke

Energy

Progress

Energy

Carolinas

Energy

Progress

Florida

Ohio

Indiana

Electricity (gigawatt-hours)

—

Natural gas (millions of decatherms)

398

332

117

215

—

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

The following tables show the fair value and balance sheet location of derivative instruments. 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	September 30, 2016
			Duke				Duke		Duke		Duke		Duke
	Duke		Energy		Progress		Energy		Energy		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida		Ohio		Indiana
Commodity Contracts
Not Designated as Hedging Instruments
Current	$	40	$	5	$	12	$	7	$	5	$	3	$	20
Noncurrent	13		5		8		4		4		—		—
Total Derivative Assets – Commodity Contracts	$	53	$	10	$	20	$	11	$	9	$	3	$	20
Interest Rate Contracts
Designated as Hedging Instruments
Noncurrent	$	2	$	—	$	—	$	—	$	—	$	—	$	—
Not Designated as Hedging Instruments
Current	4		—		4		1		3		—		—
Noncurrent	7		—		7		3		4		—		—
Total Derivative Assets – Interest Rate Contracts	$	13	$	—	$	11	$	4	$	7	$	—	$	—
Total Derivative Assets	$	66	$	10	$	31	$	15	$	16	$	3	$	20



Derivative Liabilities	September 30, 2016
			Duke				Duke		Duke		Duke		Duke
	Duke		Energy		Progress		Energy		Energy		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida		Ohio		Indiana
Commodity Contracts
Not Designated as Hedging Instruments
Current	$	67	$	5	$	62	$	9	$	53	$	—	$	—
Noncurrent	21		2		19		3		11		—		—
Total Derivative Liabilities – Commodity Contracts	$	88	$	7	$	81	$	12	$	64	$	—	$	—
Interest Rate Contracts
Designated as Hedging Instruments
Current	$	12	$	—	$	—	$	—	$	—	$	—	$	—
Noncurrent	46		—		—		—		—		—		—
Not Designated as Hedging Instruments
Current	1		—		—		—		—		1		—
Noncurrent	99		92		—		—		—		7		—
Total Derivative Liabilities – Interest Rate Contracts	$	158	$	92	$	—	$	—	$	—	$	8	$	—
Total Derivative Liabilities	$	246	$	99	$	81	$	12	$	64	$	8	$	—



Derivative Assets	December 31, 2015
			Duke				Duke		Duke		Duke		Duke
	Duke		Energy		Progress		Energy		Energy		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida		Ohio		Indiana
Commodity Contracts
Not Designated as Hedging Instruments
Current	$	12	$	—	$	1	$	—	$	1	$	3	$	7
Noncurrent	4		—		4		—		4		—		—
Total Derivative Assets – Commodity Contracts	$	16	$	—	$	5	$	—	$	5	$	3	$	7
Interest Rate Contracts
Designated as Hedging Instruments
Noncurrent	$	4	$	—	$	—	$	—	$	—	$	—	$	—
Not Designated as Hedging Instruments
Current	6		—		6		2		2		—		—
Total Derivative Assets – Interest Rate Contracts	$	10	$	—	$	6	$	2	$	2	$	—	$	—
Total Derivative Assets	$	26	$	—	$	11	$	2	$	7	$	3	$	7



Derivative Liabilities	December 31, 2015
			Duke				Duke		Duke		Duke		Duke
	Duke		Energy		Progress		Energy		Energy		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida		Ohio		Indiana
Commodity Contracts
Not Designated as Hedging Instruments
Current	$	256	$	32	$	222	$	77	$	145	$	—	$	—
Noncurrent	100		8		92		16		71		—		—
Total Derivative Liabilities – Commodity Contracts	$	356	$	40	$	314	$	93	$	216	$	—	$	—
Interest Rate Contracts
Designated as Hedging Instruments
Current	$	11	$	—	$	—	$	—	$	—	$	—	$	—
Noncurrent	33		—		—		—		—		—		—
Not Designated as Hedging Instruments
Current	4		—		3		—		—		1		—
Noncurrent	15		5		5		5		—		6		—
Total Derivative Liabilities – Interest Rate Contracts	$	63	$	5	$	8	$	5	$	—	$	7	$	—
Total Derivative Liabilities	$	419	$	45	$	322	$	98	$	216	$	7	$	—

OFFSETTING ASSETS AND LIABILITIES

The following tables present the line items on the Condensed Consolidated Balance Sheets where derivatives are reported. Substantially all of Duke Energy's outstanding derivative contracts are subject to enforceable master netting arrangements. The Gross amounts offset in the tables below show the effect of these netting arrangements on financial position, and include collateral posted to offset the net position. The amounts shown are 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	September 30, 2016
				Duke						Duke			Duke			Duke		Duke
	Duke			Energy			Progress			Energy			Energy			Energy		Energy
(in millions)	Energy			Carolinas			Energy			Progress			Florida			Ohio		Indiana
Current
Gross amounts recognized	$	44		$	5		$	16		$	8		$	8		$	3	$	20
Gross amounts offset	(10		)	(3		)	(7		)	(4		)	(3		)	—		—
Net amounts presented in Current Assets: Other	$	34		$	2		$	9		$	4		$	5		$	3	$	20
Noncurrent
Gross amounts recognized	$	22		$	5		$	15		$	7		$	8		$	—	$	—
Gross amounts offset	(7		)	(2		)	(5		)	(2		)	(3		)	—		—
Net amounts presented in Investments and Other Assets: Other	$	15		$	3		$	10		$	5		$	5		$	—	$	—



Derivative Liabilities	September 30, 2016
				Duke						Duke			Duke			Duke		Duke
	Duke			Energy			Progress			Energy			Energy			Energy		Energy
(in millions)	Energy			Carolinas			Energy			Progress			Florida			Ohio		Indiana
Current
Gross amounts recognized	$	80		$	5		$	62		$	9		$	53		$	1	$	—
Gross amounts offset	(10		)	(3		)	(7		)	(4		)	(3		)	—		—
Net amounts presented in Current Liabilities: Other	$	70		$	2		$	55		$	5		$	50		$	1	$	—
Noncurrent
Gross amounts recognized	$	166		$	94		$	19		$	3		$	11		$	7	$	—
Gross amounts offset	(7		)	(2		)	(5		)	(2		)	(3		)	—		—
Net amounts presented in Deferred Credits and Other Liabilities: Other	$	159		$	92		$	14		$	1		$	8		$	7	$	—



Derivative Assets	December 31, 2015
				Duke					Duke		Duke			Duke		Duke
	Duke			Energy		Progress			Energy		Energy			Energy		Energy
(in millions)	Energy			Carolinas		Energy			Progress		Florida			Ohio		Indiana
Current
Gross amounts recognized	$	18		$	—	$	7		$	2	$	3		$	3	$	7
Gross amounts offset	(3		)	—		(2		)	—		(2		)	—		—
Net amounts presented in Current Assets: Other	$	15		$	—	$	5		$	2	$	1		$	3	$	7
Noncurrent
Gross amounts recognized	$	8		$	—	$	4		$	—	$	4		$	—	$	—
Gross amounts offset	(4		)	—		(4		)	—		(4		)	—		—
Net amounts presented in Investments and Other Assets: Other	$	4		$	—	$	—		$	—	$	—		$	—	$	—



Derivative Liabilities	December 31, 2015
				Duke					Duke			Duke			Duke		Duke
	Duke			Energy		Progress			Energy			Energy			Energy		Energy
(in millions)	Energy			Carolinas		Energy			Progress			Florida			Ohio		Indiana
Current
Gross amounts recognized	$	271		$	32	$	225		$	77		$	145		$	1	$	—
Gross amounts offset	(22		)	—		(21		)	(1		)	(20		)	—		—
Net amounts presented in Current Liabilities: Other	$	249		$	32	$	204		$	76		$	125		$	1	$	—
Noncurrent
Gross amounts recognized	$	148		$	13	$	97		$	21		$	71		$	6	$	—
Gross amounts offset	(16		)	—		(15		)	—			(15		)	—		—
Net amounts presented in Deferred Credits and Other Liabilities: Other	$	132		$	13	$	82		$	21		$	56		$	6	$	—

OBJECTIVE CREDIT CONTINGENT FEATURES

Certain derivative contracts contain objective credit contingent features. These features include the requirement to post cash collateral or letters of credit 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 Ohio and Duke Energy Indiana were not material.



	September 30, 2016
			Duke				Duke		Duke
	Duke		Energy		Progress		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida
Aggregate fair value of derivatives in a net liability position	$	171	$	99	$	72	$	12	$	60
Fair value of collateral already posted	—		—		—		—		—
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered	171		99		72		12		60



	December 31, 2015
			Duke				Duke		Duke
	Duke		Energy		Progress		Energy		Energy
(in millions)	Energy		Carolinas		Energy		Progress		Florida
Aggregate fair value of derivatives in a net liability position	$	334	$	45	$	290	$	93	$	194
Fair value of collateral already posted	30		—		30		—		30
Additional cash collateral or letters of credit in the event credit-risk-related contingent features were triggered	304		45		260		93		164

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 arrangement. Amounts disclosed below represent the receivables related to the right to reclaim cash collateral under master netting arrangements. All receivables presented below were offset against net derivative positions on the Condensed Consolidated Balance Sheets.



	September 30, 2016		December 31, 2015
(in millions)	Receivables		Receivables
Duke Energy	$	—	$	30
Progress Energy	—		30
Duke Energy Florida	—		30