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Variable Interest Entities
9 Months Ended
Sep. 30, 2017
Variable Interest Entities [Abstract]  
Variable Interest Entities
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 re-evaluation, 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 the consolidated 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 nine months ended September 30, 2017, and the year ended December 31, 2016, or is expected to be provided in the future, that was not previously contractually required.
Receivables Financing – DERF / DEPR / DEFR
Duke Energy Receivables Finance Company, LLC (DERF), Duke Energy Progress Receivables, LLC (DEPR) and Duke Energy Florida Receivables, LLC (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 Condensed 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 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 Condensed 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 typically 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 consolidates CRC as it makes these decisions. Neither Duke Energy Ohio nor Duke Energy Indiana consolidate CRC.
Receivables Financing – Credit Facilities
The following table summarizes the amounts and expiration dates of the credit facilities described above.
 
Duke Energy
 
 
 
Duke Energy

 
Duke Energy

 
Duke Energy

 
 
 
Carolinas

 
Progress

 
Florida

(in millions)
CRC

 
DERF

 
DEPR

 
DEFR

Expiration date
December 2018

 
December 2018

 
February 2019

 
April 2019

Credit facility amount
$
325

 
$
425

 
$
300

 
$
225

Amounts borrowed at September 30, 2017
325

 
425

 
300

 
225

Amounts borrowed at December 31, 2016
325

 
425

 
300

 
225


Nuclear Asset-Recovery Bonds – DEFPF
Duke Energy Florida Project Finance, LLC (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 June 2016, DEFPF issued $1,294 million of 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.
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 Condensed Consolidated Balance Sheets.
(in millions)
September 30, 2017

December 31, 2016

Receivables of VIEs
$
6

$
6

Current Assets: Regulatory assets
51

50

Current Assets: Other
20

53

Other Noncurrent Assets: Regulatory assets
1,101

1,142

Current Liabilities: Other
3

17

Current maturities of long-term debt
53

62

Long-Term Debt
1,164

1,217


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. The activities that most significantly impact the economic performance of these renewable energy facilities were decisions associated with siting, negotiating PPAs, engineering, procurement and construction and decisions associated with ongoing operations and maintenance-related activities. Duke Energy consolidates the entities as it is responsible for all of these decisions. The table below presents material balances reported on Duke Energy's Condensed Consolidated Balance Sheets related to renewables VIEs.
(in millions)
September 30, 2017

December 31, 2016

Current Assets: Other
$
399

$
223

Property, plant and equipment, cost
3,923

3,419

Accumulated depreciation and amortization
(556
)
(453
)
Current maturities of long-term debt
162

198

Long-Term Debt
1,780

1,097

Deferred income taxes
223

275

Other Noncurrent Liabilities: Other
247

252


NON-CONSOLIDATED VIEs
The following tables summarize the impact of non-consolidated VIEs on the Condensed Consolidated Balance Sheets.
 
September 30, 2017
 
Duke Energy
 
Duke

 
Duke

 
Pipeline

 
Commercial

 
Other

 
 
 
Energy

 
Energy

(in millions)
Investments

 
Renewables

 
VIEs(a)

 
Total

 
Ohio

 
Indiana

Receivables from affiliated companies
$

 
$

 
$

 
$

 
$
46

 
$
75

Investments in equity method unconsolidated affiliates
895

 
172

 
39

 
1,106

 

 

Other noncurrent assets
18

 

 

 
18

 

 

Total assets
$
913

 
$
172

 
$
39

 
$
1,124

 
$
46

 
$
75

Other current liabilities

 

 
3

 
3

 

 

Deferred income taxes
29

 

 

 
29

 

 

Other noncurrent liabilities

 

 
12

 
12

 

 

Total liabilities
$
29

 
$

 
$
15

 
$
44

 
$

 
$

Net assets
$
884

 
$
172

 
$
24

 
$
1,080

 
$
46

 
$
75


(a)
Duke Energy holds a 50 percent equity interest in Duke-American Transmission Company, LLC (DATC). As of December 31, 2016, DATC was considered a VIE due to having insufficient equity to finance its own activities without subordinated financial support. However, DATC has sufficient equity to finance its own activities as of September 30, 2017, and, therefore, is no longer considered a VIE. Duke Energy's investment in DATC was $45 million at September 30, 2017.
 
December 31, 2016
 
Duke Energy
 
Duke

 
Duke

 
 
 
Pipeline

 
Commercial

 
Other

 
 
 
Energy

 
Energy

 
 
(in millions)
Investments

 
Renewables

 
VIEs

 
Total

 
Ohio

 
Indiana

 
Piedmont(a)

Receivables from affiliated companies
$

 
$

 
$

 
$

 
$
82

 
$
101

 
$

Investments in equity method unconsolidated affiliates
487

 
174

 
90

 
751

 

 

 
139

Other noncurrent assets
12

 

 

 
12

 

 

 

Total assets
$
499

 
$
174

 
$
90

 
$
763

 
$
82

 
$
101

 
$
139

Other current liabilities

 

 
3

 
3

 

 

 

Other noncurrent liabilities

 

 
13

 
13

 

 

 
4

Total liabilities
$

 
$

 
$
16

 
$
16

 
$

 
$

 
4

Net assets
$
499

 
$
174

 
$
74

 
$
747

 
$
82

 
$
101

 
$
135


(a)
In April 2017, Piedmont transferred its non-consolidated VIE investments to a wholly owned subsidiary of Duke Energy. See "Pipeline Investments" section below for additional detail.
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, some of which are reflected in the table above as Other noncurrent liabilities. For more information on various guarantees, refer to Note 5.
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 balances in these joint ventures.
 
 
 
VIE Investment Amount (in millions)
 
Ownership
 
September 30,
 
December 31,
Entity Name
Interest
 
2017
 
2016
ACP
47
%
 
$
595

 
$
265

Sabal Trail
7.5
%
 
218

 
140

Constitution
24
%
 
82

 
82

Total
 
 
$
895

 
$
487


At December 31, 2016, Piedmont had a 7 percent ownership interest in ACP and a 24 percent ownership interest in Constitution. In April 2017, Piedmont transferred its ownership interests in ACP and Constitution to a wholly owned subsidiary of Duke Energy at book value.
In October 2017, ACP executed a $3.4 billion revolving credit facility with a stated maturity date of October 2021. Duke Energy entered into a 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 limited to 47 percent of the outstanding borrowings under the credit facility. Through October 2017, ACP has borrowed $570 million against the revolving credit facility.
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.
Other VIEs
Duke Energy holds a 50 percent equity interest in Pioneer Transmission, LLC (Pioneer). Pioneer is considered a VIE due to having insufficient equity to finance its 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 OVEC having insufficient equity to finance its activities without subordinated financial support. As a counterparty to an inter-company power agreement (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, including costs associated with its 2,256 MW of coal-fired generation capacity. Deterioration in the credit quality or bankruptcy of one or more parties to the ICPA could increase the costs of OVEC. In addition, certain proposed environmental rulemaking could result in future increased cost allocations.
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 turn over 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
 
2017

 
2016

 
2017

 
2016

Anticipated credit loss ratio
0.5
%
 
0.5
%
 
0.3
%
 
0.3
%
Discount rate
2.0
%
 
1.5
%
 
2.0
%
 
1.5
%
Receivable turnover rate
13.4
%
 
13.3
%
 
10.7
%
 
10.6
%

The following table shows the gross and net receivables sold.
 
Duke Energy Ohio
 
Duke Energy Indiana
(in millions)
September 30, 2017

 
December 31, 2016

 
September 30, 2017

 
December 31, 2016

Receivables sold
$
209

 
$
267

 
$
304

 
$
306

Less: Retained interests
46

 
82

 
75

 
101

Net receivables sold
$
163

 
$
185

 
$
229

 
$
205


The following table shows sales and cash flows related to receivables sold.
 
Duke Energy Ohio
 
Duke Energy Indiana
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
September 30,
 
September 30,
(in millions)
2017

 
2016

 
2017

 
2016

 
2017

 
2016

 
2017

 
2016

Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receivables sold
$
438

 
$
481

 
$
1,392

 
$
1,442

 
$
720

 
$
722

 
$
2,047

 
$
1,980

Loss recognized on sale
2

 
2

 
7

 
7

 
3

 
3

 
9

 
8

Cash flows
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash proceeds from receivables sold
$
434

 
$
468

 
$
1,421

 
$
1,432

 
$
713

 
$
703

 
$
2,064

 
$
1,958

Collection fees received
1

 
1

 
1

 
1

 

 

 
1

 
1

Return received on retained interests

 
1

 
2

 
2

 
2

 
2

 
5

 
4


Cash flows from sales of receivables are reflected within Operating Activities on Duke Energy Ohio’s and Duke Energy Indiana’s Condensed 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 Condensed 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.