ITEM 1A. RISK FACTORS
In addition to other disclosures within this Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations – Matters Impacting Future Results" for each registrant in Item 7, and other documents filed with the SEC from time to time, the following factors should be considered in evaluating Duke Energy and its subsidiaries. Such factors could affect actual results of operations and cause results to differ substantially from those currently expected or sought. Unless otherwise indicated, risk factors discussed below generally relate to risks associated with all of the Duke Energy Registrants. Risks identified at the Subsidiary Registrant level are generally applicable to Duke Energy.
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RISK FACTORS
BUSINESS STRATEGY RISKS
Duke Energy’s future results could be adversely affected if it is unable to implement its business strategy including achieving its carbon emissions reduction goals.
Duke Energy’s results of operations depend, in significant part, on the extent to which it can implement its business strategy successfully. Duke Energy's clean energy transition, which includes achieving net-zero carbon emissions from electricity generation by 2050, modernizing the regulatory construct, transforming the customer experience, and digital transformation, is subject to business, policy, regulatory, technology, economic and competitive uncertainties and contingencies, many of which are beyond its control and may make those goals difficult to achieve.
Federal or state policies could be enacted that restrict the availability of fuels or generation technologies, such as natural gas or nuclear power, that enable Duke Energy to reduce its carbon emissions. Supportive policies may be needed to facilitate the siting and cost recovery of transmission and distribution upgrades needed to accommodate the build out of large volumes of renewables and energy storage. Further, the approval of our state regulators will be necessary for the company to continue to retire existing carbon emitting assets or make investments in new generating capacity. The company may be constrained by the ability to procure resources or labor needed to build new generation at a reasonable price as well as to construct projects on time. In addition, new technologies that are not yet commercially available or are unproven at utility scale will likely be needed including new resources capable of following electric load over long durations such as advanced nuclear, hydrogen and long-duration storage, If these technologies are not developed or are not available at reasonable prices, or if we invest in early stage technologies that are then supplanted by technological breakthroughs, Duke Energy’s ability to achieve a net-zero target by 2050 at a cost-effective price could be at risk.
Achieving our carbon reduction goals will require continued operation of our existing carbon-free technologies including nuclear and renewables. The rapid transition to and expansion of certain low-carbon resources, such as renewables without cost-effective storage, may challenge our ability to meet customer expectations of reliability in a carbon constrained environment. Our nuclear fleet is central to our ability to meet these objectives and customer expectations. We are continuing to seek to renew the operating licenses of the 11 reactors we operate at six nuclear stations for an additional 20 years, extending their operating lives to and beyond midcentury. Failure to receive approval from the NRC for the relicensing of any of these reactors could affect our ability to achieve a net-zero target by 2050.
As a consequence, Duke Energy may not be able to fully implement or realize the anticipated results of its energy transition strategy, which may have an adverse effect on its financial condition.
REGULATORY, LEGISLATIVE AND LEGAL RISKS
The Duke Energy Registrants’ regulated utility revenues, earnings and results of operations are dependent on state legislation and regulation that affect electric generation, electric and natural gas transmission, distribution and related activities, which may limit their ability to recover costs.
The Duke Energy Registrants’ regulated electric and natural gas utility businesses are regulated on a cost-of-service/rate-of-return basis subject to statutes and regulatory commission rules and procedures of North Carolina, South Carolina, Florida, Ohio, Tennessee, Indiana and Kentucky. If the Duke Energy Registrants’ regulated utility earnings exceed the returns established by the state utility commissions, retail electric and natural gas rates may be subject to review and possible reduction by the commissions, which may decrease the Duke Energy Registrants’ earnings. Additionally, if regulatory or legislative bodies do not allow recovery of costs incurred in providing service, or do not do so on a timely basis, the Duke Energy Registrants’ earnings could be negatively impacted. Differences in regulation between jurisdictions with concurrent operations, such as North Carolina and South Carolina in Duke Energy Carolinas' and Duke Energy Progress' service territory, may also result in failure to recover costs.
If legislative and regulatory structures were to evolve in such a way that the Duke Energy Registrants’ exclusive rights to serve their regulated customers were eroded, their earnings could be negatively impacted. Federal and state regulations, laws, commercialization and reduction of costs and other efforts designed to promote and expand the use of EE measures and distributed generation technologies, such as private solar and battery storage, in Duke Energy service territories could reduce recovery of fixed costs in Duke Energy service territories or result in customers leaving the electric distribution system and an increase in customer net energy metering, which allows customers with private solar to receive bill credits for surplus power at the full retail amount. Over time, customer adoption of these technologies could result in Duke Energy not being able to fully recover the costs and investment in generation.
State regulators have approved various mechanisms to stabilize natural gas utility margins, including margin decoupling in North Carolina and rate stabilization in South Carolina. State regulators have approved other margin stabilizing mechanisms that, for example, allow for recovery of margin losses associated with negotiated transactions designed to retain large volume customers that could use alternative fuels or that may otherwise directly access natural gas supply through their own connection to an interstate pipeline. If regulators decided to discontinue the Duke Energy Registrants' use of tariff mechanisms, it would negatively impact results of operations, financial position and cash flows. In addition, regulatory authorities also review whether natural gas costs are prudently incurred and can disallow the recovery of a portion of natural gas costs that the Duke Energy Registrants seek to recover from customers, which would adversely impact earnings.
The rates that the Duke Energy Registrants’ regulated utility businesses are allowed to charge are established by state utility commissions in rate case proceedings, which may limit their ability to recover costs and earn an appropriate return on investment.
The rates that the Duke Energy Registrants’ regulated utility businesses are allowed to charge significantly influences the results of operations, financial position and cash flows of the Duke Energy Registrants. The regulation of the rates that the regulated utility businesses charge customers is determined, in large part, by state utility commissions in rate case proceedings. Negative decisions made by these regulators, or by any court on appeal of a rate case proceeding, have, and in the future could have, a material adverse effect on the Duke Energy Registrants’ results of operations, financial position or cash flows and affect the ability of the Duke Energy Registrants to recover costs and an appropriate return on the significant infrastructure investments being made.
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Deregulation or restructuring in the electric industry may result in increased competition and unrecovered costs that could adversely affect the Duke Energy Registrants’ results of operations, financial position or cash flows and their utility businesses.
Increased competition resulting from deregulation or restructuring legislation could have a significant adverse impact on the Duke Energy Registrants’ results of operations, financial position or cash flows and their utility businesses. If the retail jurisdictions served by the Duke Energy Registrants become subject to deregulation, the impairment of assets, loss of retail customers, lower profit margins or increased costs of capital, and recovery of stranded costs could have a significant adverse financial impact on the Duke Energy Registrants. Stranded costs primarily include the generation assets of the Duke Energy Registrants whose value in a competitive marketplace may be less than their current book value, as well as above-market purchased power commitments from QFs from whom the Duke Energy Registrants are legally obligated to purchase energy at an avoided cost rate under PURPA. The Duke Energy Registrants cannot predict the extent and timing of entry by additional competitors into the electric markets. The Duke Energy Registrants cannot predict if or when they will be subject to changes in legislation or regulation, nor can they predict the impact of these changes on their results of operations, financial position or cash flows.
The Duke Energy Registrants’ businesses are subject to extensive federal regulation and a wide variety of laws and governmental policies, including taxes and environmental regulations, that may change over time in ways that affect operations and costs.
The Duke Energy Registrants are subject to regulations under a wide variety of U.S. federal and state regulations and policies, including by FERC, NRC, EPA and various other federal agencies as well as the North American Electric Reliability Corporation. Regulation affects almost every aspect of the Duke Energy Registrants’ businesses, including, among other things, their ability to: take fundamental business management actions; determine the terms and rates of transmission and distribution services; make acquisitions; issue equity or debt securities; engage in transactions with other subsidiaries and affiliates; and pay dividends upstream to the Duke Energy Registrants. Changes to federal regulations are continuous and ongoing. There can be no assurance that laws, regulations and policies will not be changed in ways that result in material modifications of business models and objectives or affect returns on investment by restricting activities and products, subjecting them to escalating costs, causing delays, or prohibiting them outright.
The Duke Energy Registrants are subject to numerous environmental laws and regulations requiring significant capital expenditures that can increase the cost of operations, and which may impact or limit business plans, or cause exposure to environmental liabilities.
The Duke Energy Registrants are subject to numerous environmental laws and regulations affecting many aspects of their present and future operations, including CCRs, air emissions, water quality, wastewater discharges, solid waste and hazardous waste. These laws and regulations can result in increased capital, operating and other costs. These laws and regulations generally require the Duke Energy Registrants to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Compliance with environmental laws and regulations can require significant expenditures, including expenditures for cleanup costs and damages arising from contaminated properties. Failure to comply with environmental regulations may result in the imposition of fines, penalties and injunctive measures affecting operating assets. The steps the Duke Energy Registrants could be required to take to ensure their facilities are in compliance could be prohibitively expensive. As a result, the Duke Energy Registrants may be required to shut down or alter the operation of their facilities, which may cause the Duke Energy Registrants to incur losses. Further, the Duke Energy Registrants may not be successful in recovering capital and operating costs incurred to comply with new environmental regulations through existing regulatory rate structures and their contracts with customers. Also, the Duke Energy Registrants may not be able to obtain or maintain from time to time all required environmental regulatory approvals for their operating assets or development projects. Delays in obtaining any required environmental regulatory approvals, failure to obtain and comply with them or changes in environmental laws or regulations to more stringent compliance levels could result in additional costs of operation for existing facilities or development of new facilities being prevented, delayed or subject to additional costs. Although it is not expected that the costs to comply with current environmental regulations will have a material adverse effect on the Duke Energy Registrants’ results of operations, financial position and cash flows due to regulatory cost recovery, the Duke Energy Registrants are at risk that the costs of complying with environmental regulations in the future will have such an effect.
The EPA has enacted or proposed federal regulations governing the management of cooling water intake structures, wastewater and CO2 emissions. New state legislation could impose carbon reduction goals that are more aggressive than the company's plans. These regulations may require the Duke Energy Registrants to make additional capital expenditures and increase operating and maintenance costs.
The Duke Energy Registrants' operations, capital expenditures and financial results may be affected by regulatory changes related to the impacts of global climate change.
There is continued concern, and increasing activism, both nationally and internationally, about climate change. The EPA and state regulators have, and may adopt and implement, additional regulations to restrict emissions of GHGs to address global climate change. Certain local and state jurisdictions have also enacted laws to restrict or prevent new natural gas infrastructure. Increased regulation of GHG emissions could impose significant additional costs on the Duke Energy Registrants' electric and natural gas operations, their suppliers and customers and affect demand for energy conservation and renewable products, which could impact both our electric and natural gas businesses. Regulatory changes could also result in generation facilities to be retired earlier than planned to meet our net-zero 2050 goal. Though we would plan to seek cost recovery for investments related to GHG emissions reductions through regulatory rate structures, changes in the regulatory climate could result in the delay in or failure to fully recover such costs and investment in generation.
OPERATIONAL RISKS
The Duke Energy Registrants’ results of operations may be negatively affected by overall market, economic and other conditions that are beyond their control.
Sustained downturns or sluggishness in the economy generally affect the markets in which the Duke Energy Registrants operate and negatively influence operations. Declines in demand for electricity or natural gas as a result of economic downturns in the Duke Energy Registrants’ regulated service territories will reduce overall sales and lessen cash flows, especially as industrial customers reduce production and, therefore, consumption of electricity and the use of natural gas. Although the Duke Energy Registrants’ regulated electric and natural gas businesses are subject to regulated allowable rates of return and recovery of certain costs, such as fuel and purchased natural gas costs, under periodic adjustment clauses, overall declines in electricity or natural gas sold as a result of economic downturn or recession could reduce revenues and cash flows, thereby diminishing results of operations.
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A continuation of adverse economic conditions including economic downturn or high commodity prices could also negatively impact the financial stability of certain of our customers and result in their inability to pay for electric and natural gas services. This could lead to increased bad debt expense and higher allowance for doubtful account reserves for the Duke Energy Registrants and result in delayed or unrecovered operating costs and lower financial results. Additionally, prolonged economic downturns that negatively impact the Duke Energy Registrants’ results of operations and cash flows could result in future material impairment charges to write-down the carrying value of certain assets, including goodwill, to their respective fair values. The Duke Energy Registrants also monitor the impacts of inflation on the procurement of goods and services and seek to minimize its effects in future periods through pricing strategies, productivity improvements, and cost reductions. Rapidly rising prices as a result of inflation or other factors may impact the ability of the company to recover costs timely or execute on its business strategy including the achievement of growth objectives.
The Duke Energy Registrants sell electricity into the spot market or other competitive power markets on a contractual basis. With respect to such transactions, the Duke Energy Registrants are not guaranteed any rate of return on their capital investments through mandated rates, and revenues and results of operations are likely to depend, in large part, upon prevailing market prices. These market prices may fluctuate substantially over relatively short periods of time and could negatively impact the company's ability to accurately forecast the financial impact or reduce the Duke Energy Registrants’ revenues and margins, thereby diminishing results of operations.
Factors that could impact sales volumes, generation of electricity and market prices at which the Duke Energy Registrants are able to sell electricity and natural gas are as follows:
•weather conditions, including abnormally mild winter or summer weather that cause lower energy or natural gas usage for heating or cooling purposes, as applicable, and periods of low rainfall that decrease the ability to operate facilities in an economical manner;
•supply of and demand for energy commodities;
•transmission or transportation constraints or inefficiencies that impact nonregulated energy operations;
•availability of purchased power;
•availability of competitively priced alternative energy sources, which are preferred by some customers over electricity produced from coal, nuclear or natural gas plants, and customer usage of energy-efficient equipment that reduces energy demand;
•natural gas, crude oil and refined products production levels and prices;
•ability to procure satisfactory levels of inventory, including materials, supplies, and fuel such as coal, natural gas and uranium; and
•capacity and transmission service into, or out of, the Duke Energy Registrants’ markets.
Natural disasters or operational accidents may adversely affect the Duke Energy Registrants’ operating results.
Natural disasters or operational accidents within the company or industry (such as forest fires, earthquakes, hurricanes or natural gas transmission pipeline explosions) could have direct or indirect impacts to the Duke Energy Registrants or to key contractors and suppliers. Further, the generation of electricity and the transportation and storage of natural gas involve inherent operating risks that may result in accidents involving serious injury or loss of life, environmental damage or property damage. Such events could impact the Duke Energy Registrants through changes to policies, laws and regulations whose compliance costs have a significant impact on the Duke Energy Registrants’ results of operations, financial position and cash flows. In addition, if a serious operational accident were to occur, existing insurance policies may not cover all of the potential exposures or the actual amount of loss incurred, including potential litigation awards. Any losses not covered by insurance, or any increases in the cost of applicable insurance as a result of such accident, could have a material adverse effect on the results of operations, financial position, cash flows and reputation of the Duke Energy Registrants.
The reputation and financial condition of the Duke Energy Registrants could be negatively impacted due to their obligations to comply with federal and state regulations, laws, and other legal requirements that govern the operations, assessments, storage, closure, remediation, disposal and monitoring relating to CCR, the high costs and new rate impacts associated with implementing these new CCR-related requirements and the strategies and methods necessary to implement these requirements in compliance with these legal obligations.
As a result of electricity produced for decades at coal-fired power plants, the Duke Energy Registrants manage large amounts of CCR that are primarily stored in dry storage within landfills or combined with water in surface impoundments, all in compliance with applicable regulatory requirements. A CCR-related operational incident could have a material adverse impact on the reputation and results of operations, financial position and cash flows of the Duke Energy Registrants.
During 2015, EPA regulations were enacted related to the management of CCR from power plants. These regulations classify CCR as nonhazardous waste under the RCRA and apply to electric generating sites with new and existing landfills and, new and existing surface impoundments, and establish requirements regarding landfill design, structural integrity design and assessment criteria for surface impoundments, groundwater monitoring, protection and remedial procedures and other operational and reporting procedures for the disposal and management of CCR. In addition to the federal regulations, CCR landfills and surface impoundments will continue to be regulated by existing state laws, regulations and permits, as well as additional legal requirements that may be imposed in the future, such as the settlement reached with the NCDEQ to excavate seven of the nine remaining coal ash basins in North Carolina, and partially excavate the remaining two, and the EPA's January 11, 2022, issuance of a letter interpreting the CCR Rule, including its applicability and closure provisions. These federal and state laws, regulations and other legal requirements may require or result in additional expenditures, including increased operating and maintenance costs, which could affect the results of operations, financial position and cash flows of the Duke Energy Registrants. The Duke Energy Registrants will continue to seek full cost recovery for expenditures through the normal ratemaking process with state and federal utility commissions, who permit recovery in rates of necessary and prudently incurred costs associated with the Duke Energy Registrants’ regulated operations, and through other wholesale contracts with terms that contemplate recovery of such costs, although there is no guarantee of full cost recovery. In addition, the timing for and amount of recovery of such costs could have a material adverse impact on Duke Energy's cash flows.
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The Duke Energy Registrants have recognized significant AROs related to these CCR-related requirements. Closure activities began in 2015 at the four sites specified as high priority by the Coal Ash Act and at the W.S. Lee Steam Station site in South Carolina in connection with other legal requirements. Excavation at these sites involves movement of CCR materials to off-site locations for use as structural fill, to appropriately engineered off-site or on-site lined landfills or conversion of the ash for beneficial use. Duke Energy has completed excavation of coal ash at the four high-priority North Carolina sites. At other sites, planning and closure methods have been studied and factored into the estimated retirement and management costs, and closure activities have commenced. As the closure and CCR management work progresses and final closure plans and corrective action measures are developed and approved at each site, the scope and complexity of work and the amount of CCR material could be greater than estimates and could, therefore, materially increase compliance expenditures and rate impacts.
The Duke Energy Registrants’ results of operations, financial position and cash flows may be negatively affected by a lack of growth or slower growth in the number of customers, or decline in customer demand or number of customers.
Growth in customer accounts and growth of customer usage each directly influence demand for electricity and natural gas and the need for additional power generation and delivery facilities. Customer growth and customer usage are affected by several factors outside the control of the Duke Energy Registrants, such as mandated EE measures, demand-side management goals, distributed generation resources and economic and demographic conditions, such as inflation and interest rate volatility, population changes, job and income growth, housing starts, new business formation and the overall level of economic activity.
In addition, certain regulatory and legislative bodies have passed legislation implementing the extension of certain tax credits to be used toward the costs of residential solar installation or have introduced or are considering requirements and/or incentives to reduce energy consumption by certain dates in response to concerns related to climate change. Additionally, technological advances driven by federal laws mandating new levels of EE in end-use electric and natural gas devices or other improvements in or applications of technology could lead to declines in per capita energy consumption.
Advances in distributed generation technologies that produce power, including fuel cells, microturbines, wind turbines and solar cells, may reduce the cost of alternative methods of producing power to a level competitive with central power station electric production utilized by the Duke Energy Registrants. In addition, the electrification of buildings and appliances currently relying on natural gas could reduce the number of customers in our natural gas distribution business.
Some or all of these factors could result in a lack of growth or decline in customer demand for electricity or number of customers and may cause the failure of the Duke Energy Registrants to fully realize anticipated benefits from significant capital investments and expenditures, which could have a material adverse effect on their results of operations, financial position and cash flows.
Furthermore, the Duke Energy Registrants currently have EE riders in place to recover the cost of EE programs in North Carolina, South Carolina, Florida, Indiana, Ohio and Kentucky. Should the Duke Energy Registrants be required to invest in conservation measures that result in reduced sales from effective conservation, regulatory lag in adjusting rates for the impact of these measures could have a negative financial impact.
The Duke Energy Registrants future results of operations may be impacted by changing expectations and demands including heightened emphasis on environmental, social and governance concerns.
Duke Energy’s ability to execute its strategy and achieve anticipated financial outcomes are influenced by the expectations of our customers, regulators, investors, and stakeholders. Those expectations are based in part on the core fundamentals of reliability and affordability but are also increasingly focused on our ability to meet rapidly changing demands for new and varied products, services and offerings. Additionally, the risks of global climate change continues to shape our customers’ sustainability goals and energy needs as well as the investment and financing criteria of investors. Failure to meet these increasing expectations or to adequately address the risks and external pressures from regulators, customers, investors and other stakeholders may impact Duke Energy’s reputation and affect its ability to achieve favorable outcomes in future rate cases and the results of operations for the Duke Energy Registrants. Furthermore, the increasing use of social media may accelerate and increase the potential scope of negative publicity we might receive and could increase the negative impact on our reputation, business, results of operations, and financial condition.
As it relates to electric generation, a diversified fleet with increasingly clean generation resources may facilitate more efficient financing and lower costs. Conversely, jurisdictions utilizing more carbon-intensive generation such as coal may experience difficulty attracting certain investors and obtaining the most economical financing terms available. Furthermore, with this heightened emphasis on environmental, social, and governance concerns, and climate change in particular, there is an increased risk of litigation, activism, and legislation from groups both in support of and opposed to various environmental, social and governance initiatives, which could cause delays and increase the costs of our clean energy transition.
The Duke Energy Registrants’ operating results may fluctuate on a seasonal and quarterly basis and can be negatively affected by changes in weather conditions and severe weather, including extreme weather conditions and changes in weather patterns from climate change.
Electric power generation and natural gas distribution are generally seasonal businesses. In most parts of the U.S., the demand for power peaks during the warmer summer months, with market prices also typically peaking at that time. In other areas, demand for power peaks during the winter. Demand for natural gas peaks during the winter months. Further, changing frequency or magnitude of extreme weather conditions such as hurricanes, droughts, heat waves, winter storms and severe weather, including from climate change, could cause these seasonal fluctuations to be more pronounced. As a result, the overall operating results of the Duke Energy Registrants’ businesses may fluctuate substantially on a seasonal and quarterly basis and thus make period-to-period comparison less relevant.
Sustained severe drought conditions could impact generation by hydroelectric plants, as well as fossil and nuclear plant operations, as these facilities use water for cooling purposes and for the operation of environmental compliance equipment. Furthermore, destruction caused by severe weather events, such as hurricanes, flooding, tornadoes, severe thunderstorms, snow and ice storms, including from climate change, can result in lost operating revenues due to outages, property damage, including downed transmission and distribution lines, and additional and unexpected expenses to mitigate storm damage. The cost of storm restoration efforts may not be fully recoverable through the regulatory process.
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The Duke Energy Registrants’ sales may decrease if they are unable to gain adequate, reliable and affordable access to transmission assets.
The Duke Energy Registrants depend on transmission and distribution facilities owned and operated by utilities and other energy companies to deliver electricity sold to the wholesale market. In addition, the growth of renewables and energy storage will put strains on existing transmission assets and require transmission and distribution upgrades. The FERC’s power transmission regulations require wholesale electric transmission services to be offered on an open-access, non-discriminatory basis. If transmission is disrupted, or if transmission capacity is inadequate, the Duke Energy Registrants’ ability to sell and deliver products may be hindered.
The different regional power markets have changing regulatory structures, which could affect growth and performance in these regions. In addition, the ISOs who oversee the transmission systems in regional power markets have imposed in the past, and may impose in the future, price limitations and other mechanisms to address volatility in the power markets. These types of price limitations and other mechanisms may adversely impact the profitability of the Duke Energy Registrants’ wholesale power marketing business.
The availability of adequate interstate pipeline transportation capacity and natural gas supply may decrease.
The Duke Energy Registrants purchase almost all of their natural gas supply from interstate sources that must be transported to the applicable service territories. Interstate pipeline companies transport the natural gas to the Duke Energy Registrants' systems under firm service agreements that are designed to meet the requirements of their core markets. A significant disruption to interstate pipelines capacity or reduction in natural gas supply due to events including, but not limited to, operational failures or disruptions, hurricanes, tornadoes, floods, freeze off of natural gas wells, terrorist or cyberattacks or other acts of war or legislative or regulatory actions or requirements, including remediation related to integrity inspections or regulations and laws enacted to address climate change, could reduce the normal interstate supply of natural gas and thereby reduce earnings. Moreover, if additional natural gas infrastructure, including, but not limited to, exploration and drilling rigs and platforms, processing and gathering systems, offshore pipelines, interstate pipelines and storage, cannot be built at a pace that meets demand, then growth opportunities could be limited.
Fluctuations in commodity prices or availability may adversely affect various aspects of the Duke Energy Registrants’ operations as well as their results of operations, financial position and cash flows.
The Duke Energy Registrants are exposed to the effects of market fluctuations in the price of natural gas, coal, fuel oil, nuclear fuel, electricity and other energy-related commodities as a result of their ownership of energy-related assets. Fuel costs are recovered primarily through cost recovery clauses, subject to the approval of state utility commissions.
Additionally, the Duke Energy Registrants are exposed to risk that counterparties will not be able to fulfill their obligations. Disruption in the delivery of fuel, including disruptions as a result of, among other things, bankruptcies, transportation delays, weather, labor relations, force majeure events or environmental regulations affecting any of these fuel suppliers, could limit the Duke Energy Registrants' ability to operate their facilities. Should counterparties fail to perform, the Duke Energy Registrants might be forced to replace the underlying commitment at prevailing market prices possibly resulting in losses in addition to the amounts, if any, already paid to the counterparties.
Certain of the Duke Energy Registrants’ hedge agreements may result in the receipt of, or posting of, collateral with counterparties, depending on the daily market-based calculation of financial exposure of the derivative positions. Fluctuations in commodity prices that lead to the return of collateral received and/or the posting of collateral with counterparties could negatively impact liquidity. Downgrades in the Duke Energy Registrants’ credit ratings could lead to additional collateral posting requirements. The Duke Energy Registrants continually monitor derivative positions in relation to market price activity.
Cyberattacks and data security breaches could adversely affect the Duke Energy Registrants' businesses.
Cybersecurity risks have increased in recent years as a result of the proliferation of new technologies and the increased sophistication, magnitude and frequency of cyberattacks and data security breaches. Duke Energy relies on the continued operation of sophisticated digital information technology systems and network infrastructure, which are part of an interconnected regional grid. Additionally, connectivity to the internet continues to increase through grid modernization and other operational excellence initiatives. Because of the critical nature of the infrastructure, increased connectivity to the internet and technology systems’ inherent vulnerability to disability or failures due to hacking, viruses, acts of war or terrorism or other types of data security breaches, the Duke Energy Registrants face a heightened risk of cyberattack from foreign or domestic sources and have been subject, and will likely continue to be subject, to attempts to gain unauthorized access to information and/or information systems or to disrupt utility operations through computer viruses and phishing attempts either directly or indirectly through its material vendors or related third parties. In the event of a significant cybersecurity breach on either the Duke Energy Registrants or with one of our material vendors or related third parties, the Duke Energy Registrants could (i) have business operations disrupted, including the disruption of the operation of our natural gas and electric assets and the power grid, theft of confidential company, employee, retiree, shareholder, vendor or customer information, and general business systems and process interruption or compromise, including preventing the Duke Energy Registrants from servicing customers, collecting revenues or the recording, processing and/or reporting financial information correctly, (ii) experience substantial loss of revenues, repair and restoration costs, penalties and costs for lack of compliance with relevant regulations, implementation costs for additional security measures to avert future cyberattacks and other financial loss and (iii) be subject to increased regulation, litigation and reputational damage. While Duke Energy maintains insurance relating to cybersecurity events, such insurance is subject to a number of exclusions and may be insufficient to offset any losses, costs or damage experienced. Also, the market for cybersecurity insurance is relatively new and coverage available for cybersecurity events is evolving as the industry matures.
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The Duke Energy Registrants are subject to standards enacted by the North American Electric Reliability Corporation and enforced by FERC regarding protection of the physical and cybersecurity of critical infrastructure assets required for operating North America's bulk electric system. The Duke Energy Registrants are also subject to regulations set by the Nuclear Regulatory Commission regarding the protection of digital computer and communication systems and networks required for the operation of nuclear power plants. The Duke Energy Registrants that operate designated critical pipelines that transport natural gas are also subject to security directives issued by the Department of Homeland Security's Transportation Security Administration (TSA) requiring such registrants to implement specific cybersecurity mitigation measures. While the Duke Energy Registrants believe they are in compliance with, or, in the case of recent TSA security directives, are in the process of implementing such standards and regulations, the Duke Energy Registrants have from time to time been, and may in the future be, found to be in violation of such standards and regulations. In addition, compliance with or changes in the applicable standards and regulations may subject the Duke Energy Registrants to higher operating costs and/or increased capital expenditures as well as substantial fines for non-compliance.
The Duke Energy Registrants’ operations have been and may be affected by pandemic health events, including COVID-19, in ways listed below and in ways the Duke Energy Registrants cannot predict at this time.
The COVID-19 pandemic and efforts to respond to it have resulted in widespread adverse consequences on the global economy and on the Duke Energy Registrants’ customers, third-party vendors, and other parties with whom we do business. If the COVID-19 pandemic or other health epidemics and outbreaks that may occur are significantly prolonged, it could impact the Duke Energy Registrants' business strategy, results of operations, financial position and cash flows in the future as a result of delays in rate cases or other legal proceedings, an inability to obtain labor or equipment necessary for the construction of large capital projects, an inability to procure satisfactory levels of fuels or other necessary equipment for the continued production of electricity and delivery of natural gas, and the health and availability of our critical personnel and their ability to perform business functions.
Duke Energy Ohio’s and Duke Energy Indiana’s membership in an RTO presents risks that could have a material adverse effect on their results of operations, financial position and cash flows.
The rules governing the various regional power markets may change, which could affect Duke Energy Ohio’s and Duke Energy Indiana’s costs and/or revenues. To the degree Duke Energy Ohio and Duke Energy Indiana incur significant additional fees and increased costs to participate in an RTO, their results of operations may be impacted. Duke Energy Ohio and Duke Energy Indiana may be allocated a portion of the cost of transmission facilities built by others due to changes in RTO transmission rate design. Duke Energy Ohio and Duke Energy Indiana may be required to expand their transmission system according to decisions made by an RTO rather than their own internal planning process. In addition, RTOs have been developing rules associated with the allocation and methodology of assigning costs associated with improved transmission reliability, reduced transmission congestion and firm transmission rights that may have a financial impact on the results of operations, financial position and cash flows of Duke Energy Ohio and Duke Energy Indiana.
As members of an RTO, Duke Energy Ohio and Duke Energy Indiana are subject to certain additional risks, including those associated with the allocation among RTO members, of losses caused by unreimbursed defaults of other participants in the RTO markets and those associated with complaint cases filed against an RTO that may seek refunds of revenues previously earned by RTO members.
The Duke Energy Registrants may not recover costs incurred to begin construction on projects that are canceled.
Duke Energy’s long-term strategy requires the construction of new projects, either wholly owned or partially owned, which involve a number of risks, including construction delays, delays in or failure to receive required regulatory approvals and/or sitting or environmental permits, nonperformance by equipment and other third-party suppliers, and increases in equipment and labor costs. To limit the risks of these construction projects, the Duke Energy Registrants enter into equipment purchase orders and construction contracts and incur engineering and design service costs in advance of receiving necessary regulatory approvals and/or siting or environmental permits. If any of these projects are canceled for any reason, including failure to receive necessary regulatory approvals and/or siting or environmental permits, significant cancellation penalties under the equipment purchase orders and construction contracts could occur. In addition, if any construction work or investments have been recorded as an asset, an impairment may need to be recorded in the event the project is canceled.
The Duke Energy Registrants are subject to risks associated with their ability to obtain adequate insurance at acceptable costs.
The financial condition of some insurance companies, actual or threatened physical or cyberattacks, and natural disasters, among other things, could have disruptive effects on insurance markets. The availability of insurance covering risks that the Duke Energy Registrants and their respective competitors typically insure against may decrease, and the insurance that the Duke Energy Registrants are able to obtain may have higher deductibles, higher premiums, and more restrictive policy terms. Further, the insurance policies may not cover all of the potential exposures or the actual amount of loss incurred. Any losses not covered by insurance, or any increases in the cost of applicable insurance, could adversely affect the results of operations, financial position or cash flows of the affected Duke Energy Registrant.
Our business could be negatively affected as a result of actions of activist shareholders.
While we strive to maintain constructive communications with our shareholders, activist shareholders may, from time to time, engage in proxy solicitations or advance shareholder proposals, or otherwise attempt to affect changes and assert influence on our Board and management. Perceived uncertainties as to the future direction or governance of the company may cause concern to our current or potential regulators, vendors or strategic partners, or make it more difficult to execute on our strategy or to attract and retain qualified personnel, which may have a material impact on our business and operating results.
In addition, actions such as those described above could cause fluctuations in the trading price of our common stock, based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
29
RISK FACTORS
NUCLEAR GENERATION RISKS
Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida may incur substantial costs and liabilities due to their ownership and operation of nuclear generating facilities.
Ownership interests in and operation of nuclear stations by Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida subject them to various risks. These risks include, among other things: the potential harmful effects on the environment and human health resulting from the current or past operation of nuclear facilities and the storage, handling and disposal of radioactive materials; limitations on the amounts and types of insurance commercially available to cover losses that might arise in connection with nuclear operations; and uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.
Ownership and operation of nuclear generation facilities requires compliance with licensing and safety-related requirements imposed by the NRC. In the event of non-compliance, the NRC may increase regulatory oversight, impose fines or shut down a unit depending upon its assessment of the severity of the situation. Revised security and safety requirements promulgated by the NRC, which could be prompted by, among other things, events within or outside of the control of Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida, such as a serious nuclear incident at a facility owned by a third party, could necessitate substantial capital and other expenditures, as well as assessments to cover third-party losses. In addition, if a serious nuclear incident were to occur, it could have a material adverse effect on the results of operations, financial position, cash flows and reputation of the Duke Energy Registrants.
LIQUIDITY, CAPITAL REQUIREMENTS AND COMMON STOCK RISKS
The Duke Energy Registrants rely on access to short-term borrowings and longer-term debt and equity markets to finance their capital requirements and support their liquidity needs. Access to those markets can be adversely affected by a number of conditions, many of which are beyond the Duke Energy Registrants’ control.
The Duke Energy Registrants’ businesses are significantly financed through issuances of debt and equity. The maturity and repayment profile of debt used to finance investments often does not correlate to cash flows from their assets. Accordingly, as a source of liquidity for capital requirements not satisfied by the cash flows from their operations and to fund investments originally financed through debt instruments with disparate maturities, the Duke Energy Registrants rely on access to short-term money markets as well as longer-term capital markets. The Subsidiary Registrants also rely on access to short-term intercompany borrowings. If the Duke Energy Registrants are not able to access debt or equity at competitive rates or at all, the ability to finance their operations and implement their strategy and business plan as scheduled could be adversely affected. An inability to access debt and equity may limit the Duke Energy Registrants’ ability to pursue improvements or acquisitions that they may otherwise rely on for future growth.
Market disruptions may increase the cost of borrowing or adversely affect the ability to access one or more financial markets. Such disruptions could include: economic downturns, unfavorable capital market conditions, market prices for natural gas and coal, geopolitical risks, actual or threatened terrorist attacks, or the overall health of the energy industry. Additionally, rapidly rising interest rates could impact the ability to affordably finance the capital plan or increase rates to customers and could have an impact on our ability to execute on our clean energy transition. The availability of credit under Duke Energy’s Master Credit Facility depends upon the ability of the banks providing commitments under the facility to provide funds when their obligations to do so arise. Systemic risk of the banking system and the financial markets could prevent a bank from meeting its obligations under the facility agreement.
Duke Energy maintains a revolving credit facility to provide backup for its commercial paper program and letters of credit to support variable rate demand tax-exempt bonds that may be put to the Duke Energy Registrant issuer at the option of the holder. The facility includes borrowing sublimits for the Duke Energy Registrants, each of whom is a party to the credit facility, and financial covenants that limit the amount of debt that can be outstanding as a percentage of the total capital for the specific entity. Failure to maintain these covenants at a particular entity could preclude Duke Energy from issuing commercial paper or the Duke Energy Registrants from issuing letters of credit or borrowing under the Master Credit Facility.
The Duke Energy Registrants must meet credit quality standards and there is no assurance they will maintain investment grade credit ratings. If the Duke Energy Registrants are unable to maintain investment grade credit ratings, they would be required under credit agreements to provide collateral in the form of letters of credit or cash, which may materially adversely affect their liquidity.
Each of the Duke Energy Registrants’ senior long-term debt issuances is currently rated investment grade by various rating agencies. The Duke Energy Registrants cannot ensure their senior long-term debt will be rated investment grade in the future.
If the rating agencies were to rate the Duke Energy Registrants below investment grade, borrowing costs would increase, perhaps significantly. In addition, the potential pool of investors and funding sources would likely decrease. Further, if the short-term debt rating were to fall, access to the commercial paper market could be significantly limited.
A downgrade below investment grade could also require the posting of additional collateral in the form of letters of credit or cash under various credit, commodity and capacity agreements and trigger termination clauses in some interest rate derivative agreements, which would require cash payments. All of these events would likely reduce the Duke Energy Registrants’ liquidity and profitability and could have a material effect on their results of operations, financial position and cash flows.
Non-compliance with debt covenants or conditions could adversely affect the Duke Energy Registrants’ ability to execute future borrowings.
The Duke Energy Registrants’ debt and credit agreements contain various financial and other covenants. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements.
30
RISK FACTORS
Market performance and other changes may decrease the value of the NDTF investments of Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida, which then could require significant additional funding.
Ownership and operation of nuclear generation facilities also requires the maintenance of funded trusts that are intended to pay for the decommissioning costs of the respective nuclear power plants. The performance of the capital markets affects the values of the assets held in trust to satisfy these future obligations. Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida have significant obligations in this area and hold significant assets in these trusts. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below projected rates of return. Although a number of factors impact funding requirements, a decline in the market value of the assets may increase the funding requirements of the obligations for decommissioning nuclear plants. If Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida are unable to successfully manage their NDTF assets, their results of operations, financial position and cash flows could be negatively affected.
Poor investment performance of the Duke Energy pension plan holdings and other factors impacting pension plan costs could unfavorably impact the Duke Energy Registrants’ liquidity and results of operations.
The costs of providing non-contributory defined benefit pension plans are dependent upon a number of factors, such as the rates of return on plan assets, discount rates, the level of interest rates used to measure the required minimum funding levels of the plans, future government regulation and required or voluntary contributions made to the plans. The Subsidiary Registrants are allocated their proportionate share of the cost and obligations related to these plans. Without sustained growth in the pension investments over time to increase the value of plan assets and, depending upon the other factors impacting costs as listed above, Duke Energy could be required to fund its plans with significant amounts of cash. Such cash funding obligations, and the Subsidiary Registrants’ proportionate share of such cash funding obligations, could have a material adverse impact on the Duke Energy Registrants’ results of operations, financial position and cash flows.
Duke Energy is a holding company and depends on the cash flows from its subsidiaries to meet its financial obligations.
Because Duke Energy is a holding company with no operations or cash flows of its own, its ability to meet its financial obligations, including making interest and principal payments on outstanding indebtedness and to pay dividends on its common stock, is primarily dependent on the net income and cash flows of its subsidiaries and the ability of those subsidiaries to pay upstream dividends or to repay borrowed funds. Prior to funding Duke Energy, its subsidiaries have regulatory restrictions and financial obligations that must be satisfied. These subsidiaries are separate legal entities and have no obligation to provide Duke Energy with funds. In addition, Duke Energy may provide capital contributions or debt financing to its subsidiaries under certain circumstances, which would reduce the funds available to meet its financial obligations, including making interest and principal payments on outstanding indebtedness and to pay dividends on Duke Energy’s common stock.
GENERAL RISKS
The failure of Duke Energy information technology systems, or the failure to enhance existing information technology systems and implement new technology, could adversely affect the Duke Energy Registrants’ businesses.
Duke Energy’s operations are dependent upon the proper functioning of its internal systems, including the information technology systems that support our underlying business processes. Any significant failure or malfunction of such information technology systems may result in disruptions of our operations. In the ordinary course of business, we rely on information technology systems, including the internet and third-party hosted services, to support a variety of business processes and activities and to store sensitive data, including (i) intellectual property, (ii) proprietary business information, (iii) personally identifiable information of our customers, employees, retirees and shareholders and (iv) data with respect to invoicing and the collection of payments, accounting, procurement, and supply chain activities. Our information technology systems are dependent upon global communications and cloud service providers, as well as their respective vendors, many of whom have at some point experienced significant system failures and outages in the past and may experience such failures and outages in the future. These providers’ systems are susceptible to cybersecurity and data breaches, outages from fire, floods, power loss, telecommunications failures, break-ins and similar events. Failure to prevent or mitigate data loss from system failures or outages could materially affect the results of operations, financial position and cash flows of the Duke Energy Registrants.
In addition to maintaining our current information technology systems, Duke Energy believes the digital transformation of its business is key to driving internal efficiencies as well as providing additional capabilities to customers. Duke Energy’s information technology systems are critical to cost-effective, reliable daily operations and our ability to effectively serve our customers. We expect our customers to continue to demand more sophisticated technology-driven solutions and we must enhance or replace our information technology systems in response. This involves significant development and implementation costs to keep pace with changing technologies and customer demand. If we fail to successfully implement critical technology, or if it does not provide the anticipated benefits or meet customer demands, such failure could materially adversely affect our business strategy as well as impact the results of operations, financial position and cash flows of the Duke Energy Registrants.
Potential terrorist activities, or military or other actions, could adversely affect the Duke Energy Registrants’ businesses.
The continued threat of terrorism and the impact of retaliatory military and other action by the U.S. and its allies may lead to increased political, economic and financial market instability and volatility in prices for natural gas and oil, which may have material adverse effects in ways the Duke Energy Registrants cannot predict at this time. In addition, future acts of terrorism and possible reprisals as a consequence of action by the U.S. and its allies could be directed against companies operating in the U.S. Information technology systems, transportation systems for our fuel sources including natural gas pipelines, transmission and distribution and generation facilities such as nuclear plants could be potential targets of terrorist activities or harmful activities by individuals or groups that could have a material adverse effect on Duke Energy Registrants' businesses. In particular, the Duke Energy Registrants may experience increased capital and operating costs to implement increased security for their information technology systems, transmission and distribution and generation facilities, including nuclear power plants under the NRC’s design basis threat requirements. These increased costs could include additional physical plant security and security personnel or additional capability following a terrorist incident.
31
RISK FACTORS
Failure to attract and retain an appropriately qualified workforce could unfavorably impact the Duke Energy Registrants’ results of operations.
Certain events, such as an aging workforce, mismatch of skill set or complement to future needs, or unavailability of contract resources may lead to operating challenges and increased costs. The challenges include lack of resources, loss of knowledge base and the lengthy time required for skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, may increase. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to new employees, or future availability and cost of contract labor may adversely affect the ability to manage and operate the business, especially considering the workforce needs associated with nuclear generation facilities and new skills required to operate a modernized, technology-enabled power grid. If the Duke Energy Registrants are unable to successfully attract and retain an appropriately qualified workforce, their results of operations, financial position and cash flows could be negatively affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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PROPERTIES
ITEM 2. PROPERTIES
ELECTRIC UTILITIES AND INFRASTRUCTURE
The following table provides information related to the EU&I's generation stations as of December 31, 2022. The MW displayed in the table below are based on summer capacity. Ownership interest in all facilities is 100% unless otherwise indicated.
Owned MW
Facility Plant Type Primary Fuel Location Capacity
Duke Energy Carolinas
Oconee Nuclear Uranium SC 2,554
McGuire Nuclear Uranium NC 2,316
Catawba(a) Nuclear Uranium SC 445
Belews Creek Fossil Coal/Gas NC 2,220
Marshall Fossil Coal/Gas NC 2,058
J.E. Rogers Fossil Coal/Gas NC 1,388
Lincoln Combustion Turbine (CT) Fossil Gas/Oil NC 1,161
Allen Fossil Coal NC 421
Rockingham CT Fossil Gas/Oil NC 825
W.S. Lee Combined Cycle (CC)(b) Fossil Gas SC 686
Buck CC Fossil Gas NC 668
Dan River CC Fossil Gas NC 662
Mill Creek CT Fossil Gas/Oil SC 563
W.S. Lee CT Fossil Gas/Oil SC 84
Clemson CHP Fossil Gas SC 13
Bad Creek Hydro Water SC 1,520
Jocassee Hydro Water SC 780
Cowans Ford Hydro Water NC 324
Keowee Hydro Water SC 152
Other small facilities (19 plants) Hydro Water NC/SC 581
Distributed generation Renewable Solar NC 71
Total Duke Energy Carolinas 19,492
Owned MW
Facility Plant Type Primary Fuel Location Capacity
Duke Energy Progress
Brunswick Nuclear Uranium NC 1,870
Harris Nuclear Uranium NC 964
Robinson Nuclear Uranium SC 759
Roxboro Fossil Coal NC 2,439
Smith CC Fossil Gas/Oil NC 1,083
H.F. Lee CC Fossil Gas/Oil NC 888
Wayne County CT Fossil Gas/Oil NC 822
Smith CT Fossil Gas/Oil NC 772
Mayo Fossil Coal NC 704
L.V. Sutton CC Fossil Gas/Oil NC 607
Asheville CC Fossil Gas/Oil NC 476
Asheville CT Fossil Gas/Oil NC 320
Darlington CT Fossil Gas/Oil SC 234
Weatherspoon CT Fossil Gas/Oil NC 124
L.V. Sutton CT Fossil Gas/Oil NC 84
Blewett CT Fossil Oil NC 52
Walters Hydro Water NC 112
Other small facilities (3) Hydro Water NC 116
Distributed generation Renewable Solar NC 35
Asheville – Rock Hill Battery Renewable Storage NC 2
Hot Springs Microgrid Renewable Storage NC 1
Total Duke Energy Progress 12,464
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PROPERTIES
Owned MW
Facility Plant Type Primary Fuel Location Capacity
Duke Energy Florida
Hines CC Fossil Gas/Oil FL 2,061
Citrus County CC Fossil Gas FL 1,610
Crystal River Fossil Coal FL 1,410
Bartow CC Fossil Gas/Oil FL 1,112
Anclote Fossil Gas FL 1,013
Intercession City CT Fossil Gas/Oil FL 940
Osprey CC Fossil Gas/Oil FL 576
DeBary CT Fossil Gas/Oil FL 524
Tiger Bay CC Fossil Gas/Oil FL 199
Bayboro CT Fossil Oil FL 171
Bartow CT Fossil Gas/Oil FL 168
Suwannee River CT Fossil Gas FL 145
University of Florida CoGen CT Fossil Gas FL 44
Distributed generation Renewable Solar FL 485
Trenton Battery Renewable Storage FL 11
Micanopy Energy Storage Renewable Storage FL 8
Jennings Battery Renewable Storage FL 5.5
Cape San Blas Battery Renewable Storage FL 5.5
Total Duke Energy Florida 10,488
Owned MW
Facility Plant Type Primary Fuel Location Capacity
Duke Energy Ohio
East Bend Fossil Coal KY 600
Woodsdale CT Fossil Gas/Propane OH 476
Beckjord Battery Storage Renewable Storage OH 4
Total Duke Energy Ohio 1,080
Owned MW
Facility Plant Type Primary Fuel Location Capacity
Duke Energy Indiana
Gibson(c) Fossil Coal IN 2,822
Cayuga(d) Fossil Coal/Oil IN 1,005
Edwardsport Fossil Coal IN 595
Madison CT Fossil Gas OH 566
Wheatland CT Fossil Gas IN 444
Vermillion CT(e) Fossil Gas IN 360
Noblesville CC Fossil Gas/Oil IN 264
Henry County CT Fossil Gas/Oil IN 126
Cayuga CT Fossil Gas/Oil IN 84
Purdue CHP Fossil Gas IN 12
Markland Hydro Water IN 54
Distributed generation Renewable Solar IN 11
Camp Atterbury Battery Renewable Storage IN 1
Nabb Battery Renewable Storage IN 1
Crane Battery Renewable Storage IN 1
Total Duke Energy Indiana 6,346
34
PROPERTIES
Owned MW
Totals by Type Capacity
Total Electric Utilities 49,870
Totals by Plant Type
Total Electric Utilities 49,870
(a)Jointly owned with North Carolina Municipal Power Agency Number 1, NCEMC and PMPA. Duke Energy Carolinas' ownership is 19.25% of the facility.
(b)Jointly owned with NCEMC. Duke Energy Carolinas' ownership is 87.27% of the facility.
(c)Duke Energy Indiana owns and operates Gibson Station Units 1 through 4 and is a joint owner of unit 5 with WVPA and IMPA. Duke Energy Indiana operates unit 5 and owns 50.05%.
(d)Includes Cayuga Internal Combustion.
(e)Jointly owned with WVPA. Duke Energy Indiana's ownership is 62.5% of the facility.
The following table provides information related to EU&I's electric transmission and distribution properties as of December 31, 2022.
Duke Duke Duke Duke Duke
Duke Energy Energy Energy Energy Energy
Energy Carolinas Progress Florida Ohio Indiana
Electric Transmission Lines
Electric Distribution Lines
Substantially all of EU&I's electric plant in service is mortgaged under indentures relating to Duke Energy Carolinas’, Duke Energy Progress', Duke Energy Florida's, Duke Energy Ohio’s and Duke Energy Indiana’s various series of First Mortgage Bonds.
GAS UTILITIES AND INFRASTRUCTURE
GU&I owns transmission pipelines and distribution mains that are generally underground, located near public streets and highways, or on property owned by others for which Duke Energy Ohio and Piedmont have obtained the necessary legal rights to place and operate facilities on such property located within the GU&I service territories. The following table provides information related to GU&I's natural gas distribution.
Duke
Duke Energy
Energy Ohio Piedmont
Miles of natural gas distribution and transmission pipelines 35,200 7,600 27,600
OTHER
Duke Energy owns approximately 7.1 million square feet and leases approximately 2.7 million square feet of corporate, regional and district office space spread throughout its service territories. See Note 11, "Property, Plant and Equipment," for further information.
35
LEGAL PROCEEDINGS AND MINE SAFETY DISCLOSURES
ITEM 3. LEGAL PROCEEDINGS
MTBE Litigation
On December 15, 2017, the state of Maryland filed suit in Baltimore City Circuit Court against Duke Energy Merchants and other defendants alleging contamination of state waters by MTBE leaking from gasoline storage tanks and is seeking an unspecified amount of monetary damages. MTBE is a gasoline additive intended to increase the oxygen levels in gasoline and make it burn cleaner. The case was removed from Baltimore City Circuit Court to federal District Court. Initial motions to dismiss filed by the defendants were denied by the court on September 4, 2019, and the matter is now in discovery. On December 18, 2020, the plaintiff and defendants selected 50 focus sites, none of which have any ties to Duke Energy Merchants. Discovery will be specific to those sites. At this time, Duke Energy Merchants has not engaged in settlement negotiations with the plaintiff and the plaintiff has not reached a settlement agreement with any defendant. Duke Energy cannot predict the outcome of this matter.
In addition, the Duke Energy Registrants are, from time to time, parties to various lawsuits and regulatory proceedings in the ordinary course of their business. For information regarding legal proceedings, including regulatory and environmental matters, see Note 4, “Regulatory Matters,” and Note 5, “Commitments and Contingencies,” to the Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
This is not applicable for any of the Duke Energy Registrants.
36
SECURITIES INFORMATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of Duke Energy is listed and traded on the NYSE (ticker symbol DUK). As of January 31, 2023, there were 127,329 Duke Energy common stockholders of record. For information on dividends, see the "Dividend Payments" section of Management's Discussion and Analysis.
There is no market for the common equity securities of the Subsidiary Registrants, all of which are directly or indirectly owned by Duke Energy. See Note 2, "Dispositions," to the Consolidated Financial Statements for information on the investment of a minority interest in Duke Energy Indiana.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 of Part III within this Annual Report for information regarding Securities Authorized for Issuance Under Equity Compensation Plans.
Issuer Purchases of Equity Securities for Fourth Quarter 2022
There were no repurchases of equity securities during the fourth quarter of 2022.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Stock Performance Graph
The following performance graph compares the cumulative TSR from Duke Energy Corporation common stock, as compared with the Standard & Poor's 500 Stock Index (S&P 500) and the Philadelphia Utility Index for the past five years. The graph assumes an initial investment of $100 on December 31, 2017, in Duke Energy common stock, in the S&P 500 and in the Philadelphia Utility Index and that all dividends were reinvested. The stockholder return shown below for the five-year historical period may not be indicative of future performance.
NYSE CEO Certification
Duke Energy has filed the certification of its Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
This is not applicable for any of the Duke Energy Registrants.
37
MD&A DUKE ENERGY
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis includes financial information prepared in accordance with GAAP in the U.S., as well as certain non-GAAP financial measures such as adjusted earnings and adjusted EPS discussed below. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.
The following combined Management’s Discussion and Analysis of Financial Condition and Results of Operations is separately filed by Duke Energy Corporation and its subsidiaries. Duke Energy Carolinas, LLC, Progress Energy, Inc., Duke Energy Progress, LLC, Duke Energy Florida, LLC, Duke Energy Ohio, Inc., Duke Energy Indiana, LLC and Piedmont Natural Gas Company, Inc. However, none of the registrants make any representation as to information related solely to Duke Energy or the subsidiary registrants of Duke Energy other than itself.
Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes for the years ended December 31, 2022, 2021 and 2020.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in Duke Energy's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 24, 2022, for a discussion of variance drivers for the year ended December 31, 2021, as compared to December 31, 2020.
DUKE ENERGY
Duke Energy is an energy company headquartered in Charlotte, North Carolina. Duke Energy operates in the U.S. primarily through its direct and indirect subsidiaries, Duke Energy Carolinas, Duke Energy Progress, Duke Energy Florida, Duke Energy Ohio, Duke Energy Indiana and Piedmont. When discussing Duke Energy’s consolidated financial information, it necessarily includes the results of the Subsidiary Registrants, which along with Duke Energy, are collectively referred to as the Duke Energy Registrants.
Executive Overview
At Duke Energy, we remain focused on continuing to advance our clean energy transition while maintaining affordability and reliability for our customers and delivering on our commitments to our communities, employees, investors, and other stakeholders. The fundamentals of our business are strong and allow us to deliver growth in earnings and dividends in a low-risk, predictable and transparent way. In 2022, we continued to make progress, navigating rising interest rates, volatile commodity prices and other macroeconomic headwinds while meeting our near-term financial commitments, executing on our strategic priorities, responding to severe weather and external events, and continuing to provide the safe and reliable service that our communities depend on.
In 2022, we announced the sale of our commercial renewables business, filed the Carbon Plan with the NCUC, and continued to engage with the communities in our jurisdictions. We also continue to make the investments necessary to support our ongoing clean energy transition and a business portfolio that delivers a reliable and growing dividend, with 2022 representing the 96th consecutive year Duke Energy paid a cash dividend on its common stock.
Financial Results
(a)See Results of Operations below for Duke Energy’s definition of adjusted earnings and adjusted EPS as well as a reconciliation of this non-GAAP financial measure to net income available to Duke Energy and net income available to Duke Energy per basic share.
38
MD&A DUKE ENERGY
On February 9, 2023, Duke Energy announced 2022 full year reported earnings of $2,563 million, or $3.33 per share and adjusted earnings of $4,060 million, or $5.27 per share. On February 21, 2023, Duke Energy Indiana received an opinion from the Indiana Court of Appeals disallowing recovery of certain coal ash costs. As a result of this opinion, Duke Energy Indiana recognized a pretax charge of approximately $175 million to Impairment of assets and other charges for the year ended December 31, 2022. The 2022 full year reported earnings changed to $2,444 million, or $3.17 per share. There was no change to adjusted earnings or adjusted earnings per share.
Duke Energy's 2022 Net Income Available to Duke Energy Corporation (GAAP Reported Earnings) was impacted primarily by the estimated impairment on the sale of the Commercial Renewables business in the current year. See “Results of Operations” below for a detailed discussion of the consolidated results of operations and a detailed discussion of financial results for each of Duke Energy’s reportable business segments, as well as Other.
2022 Areas of Focus and Accomplishments
Clean Energy Transition. Our industry continues to experience an unprecedented level of change and 2022 was a dynamic year for our company as we navigated macroeconomic headwinds and continued to execute on our strategic priorities and deliver on our vision.
Generating Cleaner Energy
We’re targeting energy generated from coal to represent less than 5% by 2030 and a full exit by 2035, subject to regulatory approvals. We’ve made strong progress to date in reducing carbon emissions from electricity generation (a 44% reduction from 2005) and have committed to do more (at least 50% reduction by 2030 and net-zero by 2050). In October 2022, we announced an additional interim target to reduce carbon emissions from electric generation by 80% by 2040. We also adopted a goal of reducing Scope 2 and certain Scope 3 emissions, including emissions from upstream purchased power and fossil fuel purchases, as well as downstream customer use of natural gas, by 50% by 2035, on the way to net-zero by 2050.
Duke Energy is one of the first utilities to address the totality of its impact – approximately 95% of the company's greenhouse gas emissions are now tied to a measurable net-zero goal. Over the next decade, we expect to deploy over $145 billion of capital into our regulated businesses, driven by clean energy transition investments. These investments will drive substantial economic benefits for the communities we serve and reduce our customer’s exposure to fuel volatility. We’ve filed and refined comprehensive IRPs consistent with this strategy in multiple jurisdictions, allowing us to accelerate coal plant retirements, make needed grid investments to enable renewables and energy storage, and increase resiliency. To partially fund this plan, in December 2022, we closed on the second and final tranche of the approximate $2 billion investment in Duke Energy Indiana by GIC.
In 2022, we were awarded one of two North Carolina offshore wind sites held by the Bureau of Ocean Energy Management. The approximately 55,000-acre site in the Atlantic Ocean east of Wilmington could support up to 1.6 gigawatts of potential offshore wind energy, enough to power nearly 375,000 homes. Securing this contract creates optionality for future offshore wind if the NCUC determines it's part of the least cost path to achieve North Carolina's interim and long-term carbon reduction goals.
As we look beyond 2030, we will need additional tools to continue our progress. We will actively work to advocate for research and development and deployment of carbon-free, dispatchable resources. This includes longer-duration energy storage, advanced nuclear technologies, carbon capture and zero-carbon fuels.
Sale of Commercial Renewables
In November 2022, the Board approved pursuing the sale of our Commercial Renewables business, excluding the offshore wind contract for Carolina Long Bay. Since 2007, we have built a portfolio of approximately 5,000 megawatts of commercial wind, solar and battery projects across the U.S., and established a robust development pipeline. As we look forward to the remainder of this decade and beyond, we have line of sight to significant renewable, grid and other investment opportunities within our faster-growing regulated operations.
Carbon Plan
North Carolina House Bill 951 (HB 951) was passed in 2021 and reflects new state policy that accelerates a clean energy transition for generation serving customers in the Carolinas, including providing a framework for a goal of 70% carbon reduction in electric generation in the state from 2005 levels by 2030 and carbon neutrality by 2050 while continuing to prioritize affordability and reliability for our customers. The legislation established a framework overseen by the NCUC to advance state CO2 emission reductions through the use of least cost planning, including stakeholder involvement, and also introduced modernized recovery mechanisms, including multiyear rate plans (MYRP), that promote more efficient recovery of investments and performance-based regulation (PBR), that align incentives between the company and the state’s energy policy objectives.
In May 2022, we filed a proposed Carbon Plan with the NCUC that outlined potential pathways toward achieving the HB 951 carbon reduction targets while balancing affordability and reliability for our customers. We presented four “portfolios” – a base portfolio of what it would take to achieve 70% carbon reduction by 2030 and other portfolios demonstrating the impact of an extension to the 2030 compliance deadline to allow the introduction of new technologies at a more affordable price. In December 2022, the NCUC issued an order adopting its initial Carbon Plan, which included a set of near-term actions to support meeting the state's carbon reduction goals. This is a constructive outcome that advances our clean energy transition, supporting a diverse, all-of-the-above approach that is essential for long-term resource planning.
Modernizing the Power Grid and Natural Gas Infrastructure
Our grid improvement programs continue to be a key component of our growth strategy. Modernization of the electric grid, including smart meters, storm hardening, self-healing and targeted undergrounding, helps to continue to ensure the system is better prepared for severe weather, improves the system's reliability and flexibility, and provides better information and services for customers. We continue to expand our self-optimizing grid capabilities, and in 2022, smart, self-healing technologies helped to avoid more than 1.4 million customer interruptions across our six-state electric service area, saving customers more than 443 million minutes of lost outage time.
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MD&A DUKE ENERGY
Duke Energy has a demonstrated track record of driving efficiencies and productivity in the business and we continue to leverage new technology, digital tools and data analytics across the business in response to a transforming landscape. In 2022, we filed for approval of a new demand response pilot program expected to launch in 2023 for customers in the Duke Energy Carolinas service area. Pilot incentives will reduce vehicle lease payments for program participants who lease an eligible electric vehicle, including Ford F-150 Lightning trucks. In exchange, customers will allow their electric vehicles to feed energy back to the grid – helping to balance it during peak demand. Also, in August 2022, Duke Energy Florida announced a research and development pilot program to test and evaluate the viability of the new Ford F-150 Lightning all-electric truck's high-capacity batteries as a grid edge resource.
Recognizing the importance of natural gas to our plans, we continue to work toward a net-zero methane emission goal by 2030 related to our natural gas distribution business. In our LDC business, we are making great progress reducing methane emissions through our partnership with Accenture, Microsoft and Avanade to use satellites and build an emissions platform, the addition of other sensors and technologies to find and fix leaks in near real time, and the use of cross compression to avoid releasing natural gas into the atmosphere during certain operational activities. Investments in integrity management of our natural gas infrastructure continue to be of importance to ensure reliable, safe, and increasingly clean delivery of natural gas to our customers.
Response to Macroeconomic Headwinds. In addition to achieving financial results in the upper half of our revised guidance, we continued our cost-management journey with a focus on driving productivity, increasing flexibility and prioritizing spend based on risk and strategic value to our customers and investors. In 2022, to address rising interest rates, increased commodity prices, labor and material inflation, and supply chain constraints, we launched the Workload Reduction Initiative, building on our culture of continuous improvement to identify more ways to reduce operating costs. Including cost reductions from supply chain, we identified approximately $300 million of savings opportunities focused on organization simplification, elimination of work, automation, reducing service levels provided to internal customers, and outsourcing.
Commodity prices have impacted the price of electricity in all of our jurisdictions. We actively worked to manage and maintain prices at lower levels than they otherwise would be in light of increased commodity prices, working with our regulators to extend recovery periods in certain jurisdictions in a way that is manageable for our customers. We also continued our work with our vulnerable customers through increased communications, securing state and federal funding, and providing access to philanthropic support. Additionally, we've created a specialized team that's partnered with agencies across our service territories and has helped connect customers to nearly $300 million in energy assistance funding since 2021.
We successfully navigated supply chain challenges including inflation, longer lead times, and shortages of solar panels and other equipment. We've executed longer supply agreements and proactively secured equipment in early 2022 for hurricane season while placing orders for key needs for our customer delivery organization for 2023. Our procurement teams continue to execute on action plans to enhance planning, augment supply, amend operations and leverage our scale to continue to mitigate these risks to the extent possible.
Constructive Regulatory and Legislative Outcomes. One of our long-term strategic goals is to achieve modernized regulatory constructs in our jurisdictions. Modernized constructs provide benefits, which include improved earnings and cash flows through more timely recovery of investments, as well as stable pricing for customers. Grid investment riders in the Midwest and Florida enable more timely cost recovery and earnings growth and we have a MYRP in Florida through 2024. Additionally, as highlighted above, HB 951 provides the framework for many of the benefits of modernized regulatory constructs in North Carolina under the direction of the NCUC. Duke Energy Progress filed its first rate case utilizing these benefits, including both PBR and MYRP, in North Carolina in October 2022. In January 2023, we also filed a Duke Energy Carolinas rate case in North Carolina, which incorporates elements of PBR and MYRP.
In addition to the Duke Energy Progress and Duke Energy Carolinas rate cases in North Carolina, we continued to move a variety of other regulatory initiatives forward during 2022. Base rate cases were filed for both Duke Energy Progress and Piedmont in South Carolina, for Duke Energy Ohio's natural gas business, and for Duke Energy Kentucky's electric business. Constructive partial settlements were approved by the NCUC in January 2022 related to Piedmont's 2021 North Carolina rate case and by the PUCO in December 2022 related to Duke Energy Ohio's 2021 electric rate case. We also reached a constructive comprehensive settlement with all parties in the Duke Energy Progress South Carolina rate case in January 2023, which the PSCSC approved in February 2023. Duke Energy Indiana's TDSIC 2.0 was approved in June 2022 and Duke Energy Florida's 10 year storm protection plan was approved in October 2022, both of which provide for significant investments to improve the reliability and integrity of the grid in their respective jurisdictions. Overall, this was a very active year as it relates to regulatory filings, which reflects the important investments and ongoing clean energy transition across all our service territories.
In November 2022, the Southeast Energy Exchange Market (SEEM) announced it had initiated operations. The new SEEM platform facilitates sub-hourly, bilateral trading, allowing participants to buy and sell power close to the time the energy is consumed, utilizing available unreserved transmission and providing southeastern electricity customers cost, reliability and environmental benefits. Also in 2022, storm securitization legislation was passed in South Carolina, providing the opportunity to securitize deferred storm costs and lower the bill impacts for our customers. We also continue to evaluate the impacts of the Inflation Reduction Act, which is expected to have significant benefits to customers and lower the cost of the clean energy transition.
Customer Satisfaction. Duke Energy continues to transform the customer experience through our use of customer data to better inform operational priorities and performance levels. This data-driven approach allows us to identify the investments that are most important to the customer experience. In 2022, we successfully implemented the last of eight jurisdictional releases of Customer Connect, a new system that consolidates four legacy billing systems into one customer-service platform, allowing us to deliver the universal experience customers expect. While customer satisfaction across our industry continues to be impacted by the macroeconomic environment and the impacts of higher fuel prices on customer bills, our work continues to be recognized by our customers, with incremental improvements in customer satisfaction scores at certain jurisdictions including Piedmont, which was ranked number one in customer satisfaction by J.D. Power for residential natural gas service in the south.
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MD&A DUKE ENERGY
Operational Excellence, Safety and Reliability. The reliable and safe operation of our power plants, electric distribution system and natural gas infrastructure in our communities continues to be foundational to serving our customers, our financial results, and our credibility with stakeholders. This year presented unique challenges to the grid in our service territories, including attacks on two substations in Moore County, North Carolina and extreme winter weather that forced us to take unprecedented measures to ensure the integrity of our systems in North Carolina. Despite these recent challenges, our regulated generation fleet and nuclear sites had strong performance throughout the year and our electric distribution system performed well. The safety of our workforce is a core value. While our TICR was slightly above target, our employees continued to deliver strong safety results in 2022 and we remain an industry leader in personal safety. In addition, we continued our strong environmental performance, with no reportable environmental events.
Storm activity was severe in our service territories in 2022. Hurricane Ian, the fifth-strongest hurricane on record, impacted our service territories in Florida and the Carolinas with heavy rainfall, strong winds, and life-threatening storm surge and flooding. Across our service territories, we assembled more than 20,000 power line technicians, damage assessors, and vegetation workers to prepare and begin to restore power as soon as it was safe to do so. In total, we experienced 2 million outages, and thanks to their efforts, more than 97% of our Florida customers were restored within three days of the storm moving out of our Florida territories, and over 99% of our Carolinas customers within two days of the storm exiting the Carolinas. In November, Hurricane Nicole made landfall in Florida as a Category 1 hurricane causing nearly 300,000 customer outages. Our crews were able to restore more than 98% of those outages within 12 hours.
In December, high winds and extreme cold from Winter Storm Elliott, customer demand that was higher than forecasted, and inability to import additional power from out of state, resulted in the need to temporarily interrupt service to about 500,000 customers to maintain overall grid reliability and prevent further potential disruptions in the Carolinas. We will continue to further evaluate lessons learned to improve our strategy and communications, and incorporate any identified improvements to address this matter to better serve our customers now and in the future.
Our ability to effectively handle all facets of the 2022 storm response efforts, including navigating ongoing macroeconomic challenges and supply chain constraints, is a testament to our team’s extensive preparation and coordination, applying lessons learned from previous storms, and to on-the-ground management throughout the restoration efforts. Duke Energy has received over 20 Emergency Response Awards since EEI began recognizing storm response in 1998 (including nine for assisting other utilities). We received EEI’s Emergency Assistance Award for our support to other electric companies following Hurricane Ian, as well as EEI’s Emergency Recovery Award for multiple events that include our own recovery from Hurricane Ian, Winter Storm Izzy, and the July storms in the Midwest.
Duke Energy Objectives – 2023 and Beyond
At Duke Energy, our climate strategy is our business strategy – to safely transform and ready our system by investing in new and existing carbon-free technology, modernizing our gas and electric infrastructure, and expanding and integrating efficiency and demand management programs. As we transition our business to cleaner sources of energy, we are focused on delivering sustainable value for our customers and shareholders by maintaining affordability and leveraging business transformation to exceed customer expectations, optimizing investments to drive attractive shareholder returns, and providing new product offerings and solutions that deliver growth and customer value. To achieve these major milestones, we are shaping the landscape by partnering with stakeholders, championing public policy that advances innovation, and advancing regulatory models that support carbon and methane emission reductions.
Matters Impacting Future Results
The matters discussed herein could materially impact the future operating results, financial condition and cash flows of the Duke Energy Registrants and Business Segments.
Regulatory Matters
Coal Ash Costs
Duke Energy Carolinas and Duke Energy Progress both have approximately $1.4 billion, in regulatory assets related to coal ash retirement obligations as of December 31, 2022. Future spending, including amounts recorded for depreciation and liability accretion, is expected to continue to be deferred and recovered in future rate cases or rider filings. The majority of spend is expected to occur over the next 10 to 15 years.
Duke Energy Indiana has interpreted the CCR rule to identify the coal ash basin sites impacted and has assessed the amounts of coal ash subject to the rule and a method of compliance. Interpretation of the requirements of the CCR rule is subject to further legal challenges and regulatory approvals, which could result in additional ash basin closure requirements, higher costs of compliance and greater AROs. Additionally, Duke Energy Indiana has retired facilities that are not subject to the CCR rule. Duke Energy Indiana may incur costs at these facilities to comply with environmental regulations or to mitigate risks associated with on-site storage of coal ash. In January 2022, Duke Energy Indiana received a letter from the EPA regarding interpretation of the CCR rule. Duke Energy Indiana has approximately $385 million in regulatory assets related to coal ash asset retirement obligations as of December 31, 2022. See Note 5 to the Consolidated Financial Statements, "Commitments and Contingencies" for more information.
Fuel Cost Recovery
As a result of rapidly rising commodity costs, including natural gas, fuel and purchased power prices in excess of amounts included in fuel-related revenues has led to an increase in the undercollection of fuel costs from customers at certain jurisdictions including Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida. These amounts have been deferred in regulatory assets and have impacted the cash flows of the registrants, including increased borrowings to temporarily finance related expenditures until recovery. The Duke Energy Registrants are working with various state commissions on the timing of recovery of these amounts. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters" for more information.
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MD&A DUKE ENERGY
Commercial Renewables
In November 2022, Duke Energy committed to a plan to sell the Commercial Renewables Disposal Groups. The bid process for the utility-scale solar and wind group is ongoing. Initial indicative bids were received for the distributed generation group in January 2023. Duke Energy expects to dispose of both groups in the second half of 2023. The Commercial Renewables Disposal Groups were classified as held for sale and as discontinued operations in the fourth quarter of 2022. Duke Energy recorded an impairment loss in the fourth quarter of 2022. If necessary, the loss on the sale of the assets will be updated based on market changes or the final sales price, after any adjustments at closing for working capital and capital expenditures and could be materially different than the estimated loss. Additionally, certain other costs resulting from the transactions may be recognized in the period incurred, including Duke Energy's share of debt extinguishment costs and costs incurred to modify or terminate PPAs. Proceeds from the sales are expected to be used for debt avoidance. For more information, see Note 2 to the Consolidated Financial Statements, "Dispositions."
In February 2021, a severe winter storm impacted certain Commercial Renewables assets in Texas. Extreme weather conditions limited the ability for these solar and wind facilities to generate and sell electricity into the Electric Reliability Council of Texas market. Duke Energy has been named in multiple lawsuits arising out of this winter storm. The legal actions related to these lawsuits will remain with Duke Energy and any future activity related to the matters will be presented in discontinued operations. For more information, see Note 5 to the Consolidated Financial Statements, "Commitments and Contingencies."
Supply Chain
Duke Energy is monitoring supply chain disruptions, which could impact the timing of in-service dates and may result in adverse impacts on operating results. The company is also monitoring the potential impacts on future financial results and clean energy goals due to supply chain challenges regarding the availability of transformers and renewable components like solar panels and batteries.
Other
Duke Energy is monitoring general market conditions, including rising interest rates, and evaluating the impact to its results of operations, financial position and cash flows in the future.
Results of Operations
Non-GAAP Measures
Management evaluates financial performance in part based on non-GAAP financial measures, including adjusted earnings and adjusted EPS. These items represent income from continuing operations available to Duke Energy common stockholders in dollar and per share amounts, adjusted for the dollar and per share impact of special items. As discussed below, special items include certain charges and credits, which management believes are not indicative of Duke Energy's ongoing performance. Management believes the presentation of adjusted earnings and adjusted EPS provides useful information to investors, as it provides them with an additional relevant comparison of Duke Energy’s performance across periods.
Management uses these non-GAAP financial measures for planning and forecasting, and for reporting financial results to the Board of Directors, employees, stockholders, analysts and investors. Adjusted EPS is also used as a basis for employee incentive bonuses. The most directly comparable GAAP measures for adjusted earnings and adjusted EPS are GAAP Reported Earnings and EPS Available to Duke Energy Corporation common stockholders (GAAP Reported EPS), respectively.
Special items included in the periods presented include the following, which management believes do not reflect ongoing costs:
•Regulatory matters and litigation represents the net impact of charges related to the Indiana court rulings on coal ash and other unrelated ongoing litigation.
•Workplace and workforce realignment represents costs attributable to business transformation, including long-term real estate strategy changes and workforce reduction.
•Regulatory settlements represents an impairment charge related to the South Carolina Supreme Court decision on coal ash, insurance proceeds and Duke Energy Carolinas and Duke Energy Progress coal ash settlement.
•Gas pipeline investments represents additional exit obligations related to ACP.
Discontinued operations primarily includes results from Duke Energy's Commercial Renewables Disposal Groups, including an estimated impairment on the sale of the business in 2022.
Duke Energy’s adjusted earnings and adjusted EPS may not be comparable to similarly titled measures of another company because other companies may not calculate the measures in the same manner.
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MD&A DUKE ENERGY
Reconciliation of GAAP Reported Amounts to Adjusted Amounts
The following table presents a reconciliation of adjusted earnings and adjusted EPS to the most directly comparable GAAP measures.
Years Ended December 31,
(in millions, except per share amounts) Earnings EPS Earnings EPS
Adjustments to Reported:
Regulatory Matters and Litigation(a) 295 0.39 — —
Regulatory Settlements(c) — — 69 0.09
Gas Pipeline Investments(d) — — 15 0.02
(a) Net of tax benefit of $128 million. $386 million recorded within Impairment of assets and other charges, $46 million within Regulated electric (Operating Revenues) and $34 million within Net Loss Attributable to Noncontrolling Interests. $25 million recorded within Operations, maintenance and other.
(b) Net of tax benefit of $31 million and tax benefit of $44 million for the years ended December 31, 2022, and 2021, respectively. $72 million recorded within Impairment of assets and other charges, $71 million recorded within Operations, maintenance and other and a $7 million gain recorded in Gains on sales of other assets and other for the year ended December 31, 2022. $133 million recorded within Impairment of assets and other charges, $42 million within Operations, maintenance and other, and $17 million within Depreciation and amortization for the year ended December 31, 2021.
(c) Net of tax benefit of $21 million. $202 million of expense recorded within Impairment of assets and other charges, $111 million of income within Other income and expenses, $12 million of expense within Operations, maintenance and other, $28 million of income within Regulated electric operating revenues, $8 million of expense within Interest expense and $7 million of expense within Depreciation and amortization.
(d) Net of tax benefit of $5 million. $20 million loss recorded within Equity in earnings (losses) of unconsolidated affiliates.
(e) Recorded in Loss from Discontinued Operations, net of tax, and Net Loss Attributable to Noncontrolling Interests.
Year Ended December 31, 2022, as compared to 2021
GAAP Reported EPS was $3.17 for the year ended December 31, 2022, compared to $4.94 for the year ended December 31, 2021. The decrease in GAAP Reported Earnings/EPS was primarily due to the estimated impairment on the sale of the Commercial Renewables Disposal Groups in the current year.
As discussed and shown in the table above, management also evaluates financial performance based on adjusted EPS. Duke Energy’s adjusted EPS was $5.27 for the year ended December 31, 2022, compared to $4.99 for the year ended December 31, 2021. The increase in Adjusted Earnings/Adjusted EPS was primarily due to higher volumes, favorable weather and rate case contributions, partially offset by higher financing costs, higher depreciation and property taxes on a growing asset base, storm costs and unfavorable market impacts.
SEGMENT RESULTS
The remaining information presented in this discussion of results of operations is on a GAAP basis. Management evaluates segment performance based on segment income. Segment income is defined as income from continuing operations net of income attributable to noncontrolling interests and preferred stock dividends. Segment income includes intercompany revenues and expenses that are eliminated in the Consolidated Financial Statements.
Duke Energy's segment structure includes Electric Utilities and Infrastructure (EU&I) and Gas Utilities and Infrastructure (GU&I). The remainder of Duke Energy’s operations is presented as Other. See Note 3 to the Consolidated Financial Statements, “Business Segments,” for additional information on Duke Energy’s segment structure.
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MD&A SEGMENT RESULTS - ELECTRIC UTILITIES AND INFRASTRUCTURE
Electric Utilities and Infrastructure
Years Ended December 31,
Operating Expenses
Fuel used in electric generation and purchased power 8,862 6,332 2,530
Impairment of assets and other charges 374 204 170
Gains on Sales of Other Assets and Other, net 7 13 (6)
Other Income and Expenses, net 467 534 (67)
Less: Income Attributable to Noncontrolling Interest 13 14 (1)
Year Ended December 31, 2022, as compared to 2021
EU&I’s higher segment income is due to higher retail sales volumes and favorable weather, partially offset by higher depreciation and higher interest expense. The following is a detailed discussion of the variance drivers by line item.
Operating Revenues. The variance was driven primarily by:
•a $2,332 million increase in fuel revenues primarily due to higher fuel prices and retail sales volumes;
•a $456 million increase in weather-normal retail sales volumes;
•a $293 million increase in retail base rate pricing due to general rate cases in North Carolina, net of rider impacts as well as multiyear rate adjustments in Florida;
•a $145 million increase in retail sales due to favorable weather compared to prior year;
•a $141 million increase in wholesale revenues primarily due to higher capacity volumes; and
•a $137 million increase in rider revenues primarily due to higher sales volumes and storm securitization in North Carolina.
Partially offset by:
•an $86 million decrease in capacity revenue primarily due to accelerated recovery of the retired coal units Crystal River 1 and 2 in 2021; and
•a $67 million decrease due to the Indiana Supreme Court ruling on recovery of certain coal ash costs.
Operating Expenses. The variance was driven primarily by:
•a $2,530 million increase in fuel used in electric generation and purchased power due to higher fuel prices and volumes from customer demand;
•a $299 million increase in depreciation and amortization primarily due to higher plant in service and resolution of prior year rate cases, partially offset by lower depreciation related to the extension of the lives of nuclear facilities;
•a $170 million increase in impairment of assets and other charges due to the Indiana court rulings on recovery of certain coal ash costs; and
•an $82 million increase in property and other taxes primarily due to higher property taxes as well as higher revenue related taxes.
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MD&A SEGMENT RESULTS - ELECTRIC UTILITIES AND INFRASTRUCTURE
Other Income and Expenses, net. The variance is primarily due to coal ash insurance litigation proceeds received in the prior year, partially offset by an increase in AFUDC equity due to higher capital expenditures.
Interest Expense. The variance was primarily driven by higher interest rates and outstanding debt balances.
Income Tax Expense. The increase in tax expense was primarily due to an increase in pretax income and a decrease in the amortization of excess deferred taxes. The ETRs for the years ended December 31, 2022, and 2021, were 12.0% and 11.3%, respectively. The increase in the ETR was primarily due to a decrease in the amortization of excess deferred taxes.
Gas Utilities and Infrastructure
Years Ended December 31,
Operating Expenses
Operation, maintenance and other 532 442 90
Impairment of assets and other charges (12) 19 (31)
Gains on Sales of Other Assets and Other, net 1 — 1
Other income and expenses, net 78 70 8
Income Tax Expense 8 55 (47)
Year Ended December 31, 2022, as compared to 2021
GU&I’s results were impacted primarily by margin growth, partially offset by higher operation and maintenance costs and higher interest expense. The following is a detailed discussion of the variance drivers by line item.
Operating Revenues.The variance was driven primarily by:
•a $383 million increase due to higher natural gas costs passed through to customers and higher volumes;
•a $213 million increase due to increased secondary marketing activity including higher off-system sales natural gas costs;
•a $64 million increase due to base rate increases;
•a $48 million increase due to rider revenues related to Ohio Capital Expenditure Program (CEP); and
•a $4 million increase due to customer growth.
Partially offset by:
•a $15 million decrease due to the MGP Settlement.
Operating Expenses.The variance was driven primarily by:
•a $383 million increase in cost of natural gas due to higher natural gas costs passed through to customers and higher volumes;
•a $188 million increase in cost of natural gas due to increased secondary marketing activity including higher off-system sales natural gas costs;
•a $90 million increase in operations, maintenance and other primarily due to the MGP settlement, higher spend on internal and contract labor costs, locates, fleet, and materials;
•a $24 million increase in depreciation and amortization due to additional plant in service and lower CEP deferrals; and
•an $18 million increase in property and other taxes due to lower CEP deferrals.
Partially offset by:
•a $31 million decrease in impairment of assets and other charges due to an impairment of propane caverns in 2021, which was partially reversed in 2022.
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MD&A SEGMENT RESULTS - GAS UTILITIES AND INFRASTRUCTURE
Interest Expense. The variance was primarily due to higher interest rates and outstanding debt balances and lower CEP Rider deferrals.
Income Tax Expense. The decrease in tax expense was primarily due to an increase in the amortization of excess deferred taxes related to the Ohio MGP Settlement, partially offset by an increase in pretax income. The ETRs for the years ended December 31, 2022, and 2021, were 1.7% and 12.2%, respectively. The decrease in the ETR was primarily due to an increase in the amortization of excess deferred taxes related to the Ohio MGP Settlement.
Other
Years Ended December 31,
Gains (Losses) on Sales of Other Assets and Other, net 14 (1) 15
Other Income and Expenses, net 65 125 (60)
Loss Before Income Taxes (875) (815) (60)
Less: Net Income Attributable to Noncontrolling Interests — 1 (1)
Less: Preferred Dividends 106 106 —
Year Ended December 31, 2022, as compared to 2021
The higher net loss was driven by higher interest expense and lower return on investments, partially offset by higher equity earnings from the NMC investment and prior year obligations to the Duke Energy Foundation.
Operating Expenses. The decrease was primarily driven by prior year obligations to the Duke Energy Foundation, lower expense on certain employee benefit obligations and lower asset impairments to optimize the company's real estate portfolio and reduce office space.
Other Income and Expenses, net. The variance was primarily due to lower return on investments that fund certain employee benefit obligations, partially offset by higher equity earnings from the NMC investment.
Interest Expense. The variance was primarily due to higher interest rates and outstanding debt balances.
Income Tax Benefit. The decrease in the tax benefit was primarily due to a reduction of a valuation allowance relating to a capital loss carryforward in the prior year, partially offset by lower state tax benefit in the prior year. The ETRs for the years ended December 31, 2022, and 2021, were 27.9% and 34.5%, respectively. The decrease in the ETR was primarily due to a reduction of a valuation allowance relating to a capital loss carryforward in the prior year.
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
Years Ended December 31,
Loss From Discontinued Operations, net of tax $ (1,323) $ (144) $ (1,179)
Year Ended December 31, 2022, as compared to December 31, 2021
The variance was primarily driven by the estimated impairment on the sale of the Commercial Renewables Disposal Groups in the current year.
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MD&A DUKE ENERGY CAROLINAS
SUBSIDIARY REGISTRANTS
Basis of Presentation
The results of operations and variance discussion for the Subsidiary Registrants is presented in a reduced disclosure format in accordance with General Instruction (I)(2)(a) of Form 10-K.
DUKE ENERGY CAROLINAS
Results of Operations
Years Ended December 31,
Operating Expenses
Fuel used in electric generation and purchased power 2,015 1,601 414
Impairment of assets and other charges 26 227 (201)
Gains on Sales of Other Assets and Other, net 4 2 2
Other Income and Expenses, net 221 270 (49)
The following table shows the percent changes in GWh sales and average number of customers for Duke Energy Carolinas. The below percentages for retail customer classes represent billed sales only. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized.
Increase (Decrease) over prior year 2022
Residential sales 0.5 %
General service sales 4.0 %
Industrial sales 1.0 %
Wholesale power sales 1.3 %
Joint dispatch sales 0.9 %
Total sales 3.6 %
Average number of customers 1.8 %
Year Ended December 31, 2022, as compared to 2021
Operating Revenues.The variance was driven primarily by:
•a $396 million increase in fuel revenues driven by higher fuel prices and higher volumes;
•a $156 million increase in weather-normal retail sales volumes;
•a $78 million increase in retail sales due to favorable weather compared to prior year;
•a $63 million increase due to higher pricing from the North Carolina retail rate case, net of a return of EDIT to customers; and
•a $52 million increase in rider revenues primarily due to energy efficiency, storm securitization, and competitive procurement of renewable energy programs.
Operating Expenses. The variance was driven primarily by:
•a $414 million increase in fuel used in electric generation and purchased power primarily due to higher coal and natural gas prices and changes in the generation mix, partially offset by the recovery of fuel expenses;
•a $59 million increase in operation, maintenance and other expense primarily due to higher storm restoration costs, higher bad debt expense and higher nuclear outage and maintenance costs;
•a $58 million increase in depreciation and amortization primarily due to new depreciation rates associated with the North Carolina rate case and a higher depreciable base, partially offset by lower depreciation related to the extension of the lives of nuclear facilities; and
•a $20 million increase in property and other taxes due to higher franchise and property taxes and a prior year sales and use tax refund.
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MD&A DUKE ENERGY CAROLINAS
Partially offset by:
•a $201 million decrease in impairment of assets and other charges primarily due to the prior year South Carolina Supreme Court decision on coal ash.
Other Income and Expenses. The variance was driven by the coal ash insurance litigation proceeds received in the prior year, partially offset by an increase in AFUDC equity due to higher capital expenditures.
Interest Expense. The variance was driven by higher interest rates and outstanding debt balances.
Income Tax Expense.The increase in tax expense was primarily due to an increase in pretax income.
PROGRESS ENERGY
Results of Operations
Years Ended December 31,
Operating Expenses
Fuel used in electric generation and purchased power 5,078 3,584 1,494
Impairment of assets and other charges 12 82 (70)
Gains on Sales of Other Assets and Other, net 11 14 (3)
Other Income and Expenses, net 181 215 (34)
Less: Net Income Attributable to Noncontrolling Interests — 1 (1)
Year Ended December 31, 2022, as compared to 2021
Operating Revenues. The variance was driven primarily by:
•a $1,481 million increase in fuel revenues driven by higher fuel prices and higher volumes;
•a $249 million increase in weather-normal retail sales volumes;
•a $230 million increase in retail pricing due to the North Carolina rate case and base rate adjustments at Duke Energy Florida related to annual increases from the 2021 Settlement Agreement and the solar base rate adjustment;
•an $85 million increase in rider revenues due to higher revenues from the Storm Protection Plan at Duke Energy Florida and storm securitization and energy efficiency riders at Duke Energy Progress;
•a $53 million increase in wholesale revenues, net of fuel, due to higher capacity volumes; and
•a $43 million increase in retail sales due to favorable weather.
Partially offset by:
•an $86 million decrease in capacity revenue primarily due to accelerated recovery of retired Crystal River coal units in 2021.
Operating Expenses. The variance was driven primarily by:
•a $1,494 million increase in fuel used in electric generation and purchased power primarily due to higher demand and higher natural gas prices;
•a $213 million increase in depreciation and amortization primarily due to increased rates at Duke Energy Florida and higher amortization of deferred coal ash and storm costs at Duke Energy Progress, partially offset by the extension of the lives at nuclear facilities at Duke Energy Progress; and
•a $65 million increase in property and other taxes primarily due to an increase in gross receipts taxes at Duke Energy Florida and higher franchise and property taxes at Duke Energy Progress.
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MD&A PROGRESS ENERGY
Partially offset by:
•a $71 million decrease in operation, maintenance and other expense primarily due to reduced storm amortization at Duke Energy Florida; and
•a $70 million decrease in impairment of assets and other charges due to the prior year South Carolina Supreme Court decision on coal ash and optimization of the company's real estate portfolio and reduction of office space.
Other Income and Expenses, net. The variance is primarily due to coal ash insurance litigation proceeds received in the prior year at Duke Energy Progress.
Interest Expense. The variance was driven primarily by higher interest expense and outstanding debt balances at Duke Energy Progress and Duke Energy Florida.
Income Tax Expense. The increase in tax expense was primarily due to an increase in pretax income and a decrease in the amortization of excess deferred taxes.
DUKE ENERGY PROGRESS
Results of Operations
Years Ended December 31,
Operating Expenses
Fuel used in electric generation and purchased power 2,492 1,778 714
Operation, maintenance and other 1,475 1,467 8
Impairment of assets and other charges 7 63 (56)
Gains on Sales of Other Assets and Other, net 4 13 (9)
Other Income and Expenses, net 114 143 (29)
The following table shows the percent changes in GWh sales and average number of customers for Duke Energy Progress. The below percentages for retail customer classes represent billed sales only. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized.
Increase (Decrease) over prior year 2022
Residential sales (0.8) %
General service sales 7.5 %
Industrial sales 18.1 %
Wholesale power sales 2.5 %
Joint dispatch sales 27.5 %
Total sales 5.4 %
Average number of customers 1.9 %
Year Ended December 31, 2022, as compared to 2021
Operating Revenues. The variance was driven primarily by:
•a $699 million increase in fuel revenues driven by higher fuel prices and higher volumes;
•a $128 million increase due to higher pricing from the North Carolina retail rate case, net of a return of EDIT to customers;
•a $58 million increase in weather-normal retail sales volumes;
•a $39 million increase in rider revenues primarily due to storm securitization and energy efficiency riders, partially offset by the Renewable Energy Portfolio Standards rider;
•a $27 million increase in retail sales due to favorable weather compared to the prior year; and
•a $20 million increase in wholesale revenues, net of fuel, due to higher capacity volumes.
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MD&A DUKE ENERGY PROGRESS
Operating Expenses. The variance was driven primarily by:
•a $714 million increase in fuel used in electric generation and purchased power primarily due to higher natural gas prices and changes in the generation mix, partially offset by the recovery of fuel expenses and lower coal expense;
•a $90 million increase in depreciation and amortization due to higher amortization of deferred coal ash costs and amortization related to deferred storm costs, partially offset by lower depreciation related to the extension of the lives of nuclear facilities; and
•a $31 million increase in property and other taxes due to higher franchise and property taxes and a prior year sales and use tax refund.
Partially offset by:
•a $56 million decrease in impairment of assets and other charges primarily due to the prior year South Carolina Supreme Court decision on coal ash and optimization of the company's real estate portfolio and reduction of office space.
Other Income and Expenses, net. The variance was primarily due to coal ash insurance litigation proceeds received in the prior year.
Interest Expense. The variance was driven primarily by higher outstanding debt balances.
Income Tax Expense. The increase in tax expense was primarily due to an increase in pretax income and a decrease in the amortization of excess deferred taxes.
DUKE ENERGY FLORIDA
Results of Operations
Years Ended December 31,
Operating Expenses
Fuel used in electric generation and purchased power 2,586 1,806 780
Operation, maintenance and other 967 1,048 (81)
Impairment of assets and other charges 4 19 (15)
Gains on Sales of Other Assets and Other, net 2 1 1
Other Income and Expenses, net 74 71 3
The following table shows the percent changes in GWh sales and average number of customers for Duke Energy Florida. The below percentages for retail customer classes represent billed sales only. Wholesale power sales include both billed and unbilled sales. Total sales includes billed and unbilled retail sales and wholesale sales to incorporated municipalities, public and private utilities and power marketers. Amounts are not weather-normalized.
Increase (Decrease) over prior year 2022
Residential sales 1.5 %
General service sales 3.5 %
Industrial sales 6.6 %
Wholesale power sales 38.7 %
Total sales 8.9 %
Average number of customers 1.7 %
Year Ended December 31, 2022, as compared to 2021
Operating Revenues. The variance was driven primarily by:
•a $782 million increase in fuel revenues driven by higher fuel prices and higher volumes;
•a $191 million increase in weather-normal retail sales volumes;
•a $102 million increase in retail pricing due to base rate adjustments related to annual increases from the 2021 Settlement agreement and the solar base rate adjustment;
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MD&A DUKE ENERGY FLORIDA
•a $46 million increase in rider revenues primarily due to increased Storm Protection Plan rider revenue driven by higher debt and equity returns from increased capital expenditures in the current year;