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 nine months ended September 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 natural 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 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 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 10. See Note 11 for additional information related to investments by major security type for the Duke Energy Registrants.



	September 30, 2017
(in millions)	Total Fair Value			Level 1		Level 2			Level 3			Not Categorized
NDTF equity securities	$	4,627		$	4,549	$	—		$	—		$	78
NDTF debt securities	2,167			617		1,550			—			—
Other trading and AFS equity securities	116			116		—			—			—
Other AFS debt securities	243			59		184			—			—
Derivative assets	69			4		35			30			—
Total assets	7,222			5,345		1,769			30			78
Derivative liabilities	(191		)	—		(68		)	(123		)	—
Net assets (liabilities)	$	7,031		$	5,345	$	1,701		$	(93	)	$	78



	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 September 30, 2017								Three Months Ended September 30, 2016
(in millions)	Investments		Derivatives (net)			Total			Investments		Derivatives (net)			Total
Balance at beginning of period	$	—	$	(91	)	$	(91	)	$	4	$	34		$	38
Purchases, sales, issuances and settlements:
Settlements	—		(12		)	(12		)	—		(9		)	(9		)
Total gains (losses) included on the Condensed Consolidated Balance Sheet	—		10			10			—		(2		)	(2		)
Balance at end of period	$	—	$	(93	)	$	(93	)	$	4	$	23		$	27



	Nine Months Ended September 30, 2017									Nine Months Ended September 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	—			(30		)	(30		)	—			(22		)	(22		)
Total gains included on the Condensed Consolidated Balance Sheet	—			48			48			—			1			1
Balance at end of period	$	—		$	(93	)	$	(93	)	$	4		$	23		$	27

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.



	September 30, 2017
(in millions)	Total Fair Value			Level 1		Level 2			Level 3		Not Categorized
NDTF equity securities	$	2,553		$	2,475	$	—		$	—	$	78
NDTF debt securities	1,060			178		882			—		—
Derivative assets	8			—		8			—		—
Total assets	3,621			2,653		890			—		78
Derivative liabilities	(25		)	—		(25		)	—		—
Net assets	$	3,596		$	2,653	$	865		$	—	$	78



	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 September 30,				Nine Months Ended September 30,
(in millions)	2017		2016		2017			2016
Balance at beginning of period	$	—	$	3	$	3		$	3
Total pretax realized or unrealized gains included in comprehensive income	—		—		1			—
Purchases, sales, issuances and settlements:
Sales	—		—		(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.



	September 30, 2017								December 31, 2016
(in millions)	Total Fair Value			Level 1		Level 2			Total Fair Value			Level 1		Level 2
NDTF equity securities	$	2,074		$	2,074	$	—		$	1,861		$	1,861	$	—
NDTF debt securities	1,107			439		668			1,065			454		611
Other AFS debt securities	58			11		47			65			21		44
Derivative assets	15			1		14			85			—		85
Total assets	3,254			2,525		729			3,076			2,336		740
Derivative liabilities	(22		)	—		(22		)	(25		)	—		(25		)
Net assets	$	3,232		$	2,525	$	707		$	3,051		$	2,336	$	715

DUKE ENERGY PROGRESS