Investments In Debt And Equity Securities

16. Investments in Debt and Equity Securities

The Duke Energy Registrants classify their investments in debt and equity securities into two categories trading and available-for-sale. Investments in debt and equity securities held in grantor trusts associated with certain deferred compensation plans and certain other investments are classified as trading securities and are reported at fair value in the Consolidated Balance Sheets with net realized and unrealized gains and losses included in earnings each period. All other investments in debt and equity securities are classified as available-for-sale securities, which are also reported at fair value on the Consolidated Balance Sheets with unrealized gains and losses excluded from earnings and reported either as a regulatory asset or liability, as discussed further below, or as a component of other comprehensive income until realized.

Trading Securities. Duke Energy holds investments in debt and equity securities in grantor trusts that are associated with certain deferred compensation plans. At December 31, 2011 and 2010, the fair value of these investments was $32 million and $29 million, respectively. Additionally, at December 31, 2010 Duke Energy held Windstream Corp. equity securities, which were received as proceeds from the sale of Duke Energy's equity investment in Q-Comm during the fourth quarter of 2010 (see Note 2). The fair value of these securities at December 31, 2010 was $87 million. Duke Energy subsequently sold these securities in the first quarter of 2011. Proceeds received from the sale of Windstream equity securities are reflected in Net proceeds from the sale of equity investments and other assets, and sales of and collections on notes receivable in the Duke Energy Consolidated Statement of Cash Flows.

Available for Sale Securities. Duke Energy's available-for-sale securities are primarily comprised of investments held in the NDTF at Duke Energy Carolinas, investments in a grantor trust at Duke Energy Indiana related to other post-retirement benefit plans as required by the IURC, Duke Energy captive insurance investment portfolio, Duke Energy foreign operations investment portfolio, and investments of Duke Energy and Duke Energy Carolinas in auction rate debt securities.

The investments within the Duke Energy Carolinas NDTF and the Duke Energy Indiana grantor trust are managed by independent investment managers with discretion to buy, sell and invest pursuant to the objectives set forth by the trust agreements. Therefore, Duke Energy Carolinas and Duke Energy Indiana have limited oversight of the day-to-day management of these investments. Since day-to-day investment decisions, including buy and sell decisions, are made by the investment manager, the ability to hold investments in unrealized loss positions is outside the control of Duke Energy Carolinas and Duke Energy Indiana. Accordingly, all unrealized losses associated with equity securities within the Duke Energy Carolinas NDTF and the Duke Energy Indiana grantor trust are considered other-than-temporary and are recognized immediately when the fair value of individual investments is less than the cost basis of the investment. Pursuant to regulatory accounting, substantially all unrealized losses associated with investments in debt and equity securities within the Duke Energy Carolinas NDTF or the Duke Energy Indiana grantor trust are deferred as a regulatory asset, thus there is no immediate impact on the earnings of Duke Energy Carolinas and Duke Energy Indiana as a result of any other-than-temporary impairments that would otherwise be required to be recognized in earnings.

For investments in debt and equity securities held in the captive insurance investment portfolio and investments in auction rate debt securities, unrealized gains and losses are included in other comprehensive income until realized, unless it is determined that the carrying value of an investment is other-than-temporarily impaired, at which time the write-down to fair value may be included in earnings based on the criteria discussed below.

For available-for-sale securities outside of the Duke Energy Carolinas NDTF and the Duke Energy Indiana grantor trust, which are discussed separately above, Duke Energy analyzes all investment holdings each reporting period to determine whether a decline in fair value should be considered other-than-temporary. Criteria used to evaluate whether an impairment associated with equity securities is other-than-temporary includes, but is not limited to, the length of time over which the market value has been lower than the cost basis of the investment, the percentage decline compared to the cost of the investment and management's intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. If a decline in fair value is determined to be other-than-temporary, the investment is written down to its fair value through a charge to earnings.

With respect to investments in debt securities, under the accounting guidance for other-than-temporary impairment, if the entity does not have an intent to sell the security and it is not more likely than not that management will be required to sell the debt security before the recovery of its cost basis, the impairment write-down to fair value would be recorded as a component of other comprehensive income, except for when it is determined that a credit loss exists. In determining whether a credit loss exists, management considers, among other things, the length of time and the extent to which the fair value has been less than the amortized cost basis, changes in the financial condition of the issuer of the security, or in the case of an asset backed security, the financial condition of the underlying loan obligors, consideration of underlying collateral and guarantees of amounts by government entities, ability of the issuer of the security to make scheduled interest or principal payments and any changes to the rating of the security by rating agencies. If it is determined that a credit loss exists, the amount of impairment write-down to fair value would be split between the credit loss, which would be recognized in earnings, and the amount attributable to all other factors, which would be recognized in other comprehensive income. Since management believes, based on consideration of the criteria above, that no credit loss exists as of December 31, 2011 and 2010, and management does not have the intent to sell such investments in auction rate debt securities and the investments in debt securities within its captive insurance investment portfolio, and foreign operations investment portfolio, and it is not more likely than not that management will be required to sell these securities before the anticipated recovery of their cost basis, management concluded that there were no other-than-temporary impairments necessary as of December 31, 2011 and 2010. Accordingly, all changes in the market value of investments in auction rate debt securities, captive insurance investments, and foreign operation investments were reflected as a component of other comprehensive income in 2011 and 2010. See Note 15 for additional information related to fair value measurements for investments in auction rate debt securities.

Management will continue to monitor the carrying value of its entire portfolio of investments in the future to determine if any additional other-than-temporary impairment losses should be recorded.

Investments in debt and equity securities are classified as either short-term investments or long-term investments based on management's intent and ability to sell these securities, taking into consideration liquidity factors in the current markets with respect to certain short-term investments that have historically provided for a high degree of liquidity, such as investments in auction rate debt securities.

Short-term investments. During the year ended December 31, 2011, Duke Energy purchased $190 million of corporate debt securities using excess cash from its foreign operations. These investments are classified as Short-Term Investments on the balance sheet and are available for current operations of Duke Energy's foreign business. During the year ended December 31, 2011, Duke Energy received proceeds on sales of auction rate securities of approximately $59 million (par value). During the year ended December 31 2010, there were no purchases or sales of short-term investments.

Long-term investments. Duke Energy classifies its investments in debt and equity securities held in the Duke Energy Carolinas NDTF (see Note 15 for further information), the Duke Energy Indiana grantor trust and the captive insurance investment portfolio as long term. Additionally, Duke Energy has classified $71 million carrying value ($89 million par value) and $118 million carrying value ($149 million par value) of investments in auction rate debt securities as long-term at December 31, 2011 and 2010, respectively, due to market illiquidity factors as a result of continued failed auctions. All of these investments are classified as available-for-sale and, therefore, are reflected on the Consolidated Balance Sheets at estimated fair value based on either quoted market prices or management's best estimate of fair value based on expected future cash flow using appropriate risk-adjusted discount rates. Since management does not intend to use these investments in current operations, these investments are classified as long term.

The cost of securities is determined using the specific identification method.

The estimated fair values of investments classified as available-for-sale are as follows (in millions):

Duke Energy


	December 31, 2011							December 31, 2010
	Gross Unrealized Holding Gains^(a)		Gross Unrealized Holding Losses^(a)			Estimated Fair Value		Gross Unrealized Holding Gains^(a)		Gross Unrealized Holding Losses^(a)			Estimated Fair Value
Short-term Investments	$		$			$	190	$		$			$

Total short-term investments	$		$			$	190	$		$			$

Equity Securities	$	448	$	(18	)	$	1,397	$	481	$	(16	)	$	1,435
Corporate Debt Securities		9		(3	)		256		12		(3	)		270
Municipal Bonds		3					79		1		(9	)		69
U.S. Government Bonds		17					327		10		(1	)		235
Auction Rate Debt Securities				(17	)		71				(31	)		118
Other		6		(4	)		229		11		(5	)		274

Total long-term investments	$	483	$	(42	)	$	2,359	$	515	$	(65	)	$	2,401

(a)

The table above includes unrealized gains and losses of $473 million and $22 million, respectively, at December 31, 2011 and unrealized gains and losses of $505 million and $32 million, respectively, at December 31, 2010 associated with investments held in the Duke Energy Carolinas NDTF. Additionally, the table above includes unrealized gains of $6 million and $1 million of unrealized losses at December 31, 2011, and unrealized gains of $6 million and an insignificant amount of unrealized losses, at December 31, 2010 associated with investments held in the Duke Energy Indiana grantor trust. As discussed above, unrealized losses on investments within the NDTF and Duke Energy Indiana grantor trust are deferred as a regulatory asset pursuant to regulatory accounting treatment.

For the years ended December 31, 2011 and 2009, a pre-tax gain of $6 million and $7 million, respectively were reclassified out of AOCI into earnings. There were no reclassifications out of AOCI into earnings for the year ended December 31, 2010.

Debt securities held at December 31, 2011, which excludes auction rate securities based on the stated maturity date, mature as follows: $141 million in less than one year, $318 million in one to five years, $240 million in six to 10 years and $381 million thereafter.

The fair values and gross unrealized losses of available-for-sale debt and equity securities which are in an unrealized loss position for which other-than-temporary impairment losses have not been recorded in the Consolidated Statement of Operations, summarized by investment type and length of time that the securities have been in a continuous loss position, are presented in the table below as of December 31, 2011 and 2010.


	As of December 31, 2011								As of December 31, 2010
	Estimated Fair Value^(a)		Unrealized Loss Position >12 months			Unrealized Loss Position <12 months			Estimated Fair Value^(a)		Unrealized Loss Position >12 months			Unrealized Loss Position <12 months
Equity Securities	$	123		(6	)	$	(12	)	$	85		(11	)	$	(5	)
Corporate Debt Securities		258		(2	)		(1	)		73		(2	)		(2	)
Municipal Bonds		3								42		(8	)		(1	)
U.S. Government Bonds		8								38					(1	)
Auction Rate Debt Securities^(b)		71		(17	)					118		(31	)
Other		121					(4	)		84		(1	)		(3	)

Total long-term investments	$	584	$	(25	)	$	(17	)	$	440	$	(53	)	$	(12	)

(a)

The table above includes fair values of $289 million and $226 million at December 31, 2011 and December 31, 2010, respectively, associated with investments held in the Duke Energy Carolinas NDTF. Additionally, the table above includes fair values of $11 million and $5 million at December 31, 2011 and December 31, 2010, respectively, associated with investments held in the Duke Energy Indiana grantor trust.

(b)	See Note 15 for information about fair value measurements related to investments in auction rate debt securities.

Duke Energy Carolinas


	December 31, 2011							December 31, 2010
	Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Equity Securities	$	443	$	(16	)	$	1,337	$	475	$	(16	)	$	1,365
Corporate Debt Securities		8		(2	)		205		10		(3	)		227
Municipal Bonds		2					51		1		(9	)		43
U.S. Government Bonds		16					306		10					224
Auction Rate Debt Securities				(3	)		12				(3	)		12
Other		4		(4	)		161		9		(4	)		155

Total long-term investments	$	473	$	(25	)	$	2,072	$	505	$	(35	)	$	2,026

Debt securities held at December 31, 2011, which excludes auction rate securities based on the stated maturity date, mature as follows: $65 million in less than one year, $144 million in one to five years, $205 million in six to 10 years and $309 million thereafter.

The fair values and gross unrealized losses of available-for-sale debt and equity securities which are in an unrealized loss position for which other-than-temporary impairment losses have not been recorded in the Consolidated Statement of Operations, summarized by investment type and length of time that the securities have been in a continuous loss position, are presented in the table below as of December 31, 2011 and December 31, 2010.


	As of December 31, 2011								As of December 31, 2010
	Estimated Fair Value		Unrealized Loss Position >12 months			Unrealized Loss Position <12 months			Estimated Fair Value		Unrealized Loss Position >12 months			Unrealized Loss Position <12 months
Equity Securities	$	111		(4	)	$	(12	)	$	79		(11	)	$	(5	)
Corporate Debt Securities		57		(1	)		(1	)		59		(2	)		(1	)
Municipal Bonds										28		(8	)		(1	)
U.S. Government Bonds		8								33
Auction Rate Debt Securities^(a)		12		(3	)					12		(3	)
Other		113		(1	)		(3	)		27		(1	)		(3	)

Total long-term investments	$	301	$	(9	)	$	(16	)	$	238	$	(25	)	$	(10	)

(a)	See Note 15 for information about fair value measurements related to investments in auction rate debt securities.

Duke Energy Indiana


	December 31, 2011							December 31, 2010
	Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses	Estimated Fair Value
Equity Securities	$	5	$	(1	)	$	46	$	6	$	$	47
Municipal Bonds		1					28					26

Total long-term investments	$	6	$	(1	)	$	74	$	6	$	$	73

Debt securities held at December 31, 2011 mature as follows: $1 million in less than one year, $20 million in one to five years, $6 million in six to 10 years and $1 million thereafter.

The fair values and gross unrealized losses of available-for-sale debt and equity securities which are in an unrealized loss position for which other-than-temporary impairment losses have not been recorded in the Consolidated Statement of Operations, summarized by investment type and length of time that the securities have been in a continuous loss position, are presented in the table below as of December 31, 2011 and December 31, 2010.


	As of December 31, 2011						As of December 31, 2010
	Fair Value		Unrealized Loss Position >12 months	Unrealized Loss Position <12 months			Fair Value		Unrealized Loss Position >12 months	Unrealized Loss Position <12 months
Equity Securities	$	8	$	$	(1	)	$		$	$
Municipal Bonds		3						14

Total long-term investments	$	11	$	$	(1	)	$	14	$	$