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.
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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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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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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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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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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;
•a $33 million increase in wholesale power revenues, net of fuel, primarily due to higher capacity revenues and bulk power sales; and
•a $16 million increase in retail sales due to favorable weather in the current year.
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.
Operating Expenses. The variance was driven primarily by:
•a $780 million increase in fuel used in electric generation and purchased power primarily due to higher natural gas prices;
•a $124 million increase in depreciation and amortization primarily due to an increase in depreciation rates starting in January 2022; and
•a $38 million increase in property and other taxes primarily due to an increase in gross receipt taxes driven by higher revenues.
Partially offset by:
•an $81 million decrease in operation, maintenance and other primarily due to reduced storm amortization and reduced vegetation management costs, partially offset by higher bad debt expense; and
•a $15 million decrease in impairment of assets and other charges due to the prior year optimization of the company's real estate portfolio and reduction of office space.
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 higher pretax income.
DUKE ENERGY OHIO
Results of Operations
Years Ended December 31,
Operating Revenues
Operating Expenses
Fuel used in electric generation and purchased power 657 409 248
Operation, maintenance and other 523 479 44
Impairment of assets and other charges (10) 25 (35)
Gains on Sales of Other Assets and Other, net 1 1 —
Other Income and Expenses, net 19 18 1
Income Tax (Benefit) Expense (21) 30 (51)
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MD&A DUKE ENERGY OHIO
The following table shows the percent changes in GWh sales of electricity, MCF of natural gas delivered and average number of electric and natural gas customers for Duke Energy Ohio. 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.
Electric Natural Gas
Increase (Decrease) over prior year 2022 2022
Residential sales (0.5) % 13.7 %
General service sales (2.1) % 1.3 %
Industrial sales (6.8) % 0.7 %
Wholesale electric power sales (11.0) % n/a
Other natural gas sales n/a (3.6) %
Total sales 0.6 % 4.9 %
Average number of customers 1.3 % 0.6 %
Year Ended December 31, 2022, as compared to 2021
Operating Revenues. The variance was driven primarily by:
•a $372 million increase in fuel related revenues primarily due to higher retail sales volumes and higher fuel rates in the current year in response to an increase in natural gas prices and purchased power expense;
•a $55 million increase in retail revenue riders primarily due to the Ohio CEP and Distribution Capital Investment Rider (DCI);
•a $39 million increase in other electric revenues primarily due to Distribution Decoupling rider adjustments recorded in 2021;
•a $10 million increase in bulk power marketing sales; and
•a $10 million increase due to favorable weather in the current year.
Partially offset by:
•a $15 million decrease due to the MGP Settlement.
Operating Expenses. The variance was driven primarily by:
•a $373 million increase in fuel expense primarily driven by higher retail prices and increased volumes for natural gas and purchased power;
•a $44 million increase in operation, maintenance and other expense primarily due to the MGP Settlement, partially offset by employee related costs;
•a $17 million increase in depreciation and amortization primarily driven by increases in distribution plant in service and lower CEP deferrals, partially offset by rate case adjustments for the over amortization of meter assets in 2022; and
•a $14 million increase in property and other taxes primarily due to higher property taxes, higher kilowatt and natural gas distribution taxes and a lower Network Integration Transmission Services tax deferral.
Partially offset by:
•a $35 million decrease in impairment of assets and other charges primarily due to the prior year impairments related to the propane caverns in Ohio and the optimization of the company's real estate portfolio and reduction of office space, partially offset by the partial reversal of the propane cavern impairment in the current year.
Interest Expense. The variance was primarily due to higher interest rates, outstanding debt balances and post in-service carrying costs, partially offset by AFUDC debt.
Income Tax (Benefit) Expense. The decrease in tax expense was primarily due to an increase in the amortization of excess deferred taxes related to the MGP Settlement.
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MD&A DUKE ENERGY INDIANA
DUKE ENERGY INDIANA
Results of Operations
Years Ended December 31,
Operating Expenses
Fuel used in electric generation and purchased power 1,819 985 834
Operation, maintenance and other 729 750 (21)
Property and other taxes 75 73 2
Impairment of assets and other charges 388 9 379
Other Income and Expenses, net 36 42 (6)
Income Tax (Benefit) Expense (24) 107 (131)
The following table shows the percent changes in GWh sales and average number of customers for Duke Energy Indiana. 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 (0.4) %
General service sales 1.8 %
Industrial sales (12.1) %
Wholesale power sales 5.4 %
Total sales 1.9 %
Average number of customers 1.4 %
Year Ended December 31, 2022, as compared to 2021
Operating Revenues. The variance was driven primarily by:
•a $700 million increase in retail fuel revenues primarily due to higher fuel cost recovery driven by higher retail sales volumes and fuel prices;
•a $74 million increase primarily due to wholesale revenues, including fuel revenues, driven by higher rates and the bulk power marketing sharing provision;
•a $46 million increase in weather-normal retail sales volumes primarily due to higher nonresidential customer demand; and
•a $20 million increase in retail sales due to favorable weather.
Partially offset by:
•a $67 million decrease due to the Indiana Supreme Court ruling on recovery of certain coal ash costs;
•a $13 million decrease primarily due to the Utility Receipts Tax repeal; and
•a $12 million decrease primarily due to fixed bill plans and other electric revenues.
Operating Expenses. The variance was driven primarily by:
•an $834 million increase in fuel used in electric generation and purchased power primarily due to higher purchased power expense and higher natural gas and coal costs;
•a $379 million increase in impairment of assets and other charges primarily due to the Indiana court rulings on recovery of certain coal ash costs; and
•a $30 million increase in depreciation and amortization primarily due to additional plant in service, Step 2 rates true-up adjustment to depreciation expense and coal ash depreciation.
Partially offset by:
•a $21 million decrease in operation, maintenance and other primarily due to lower outage, base maintenance work and employee related costs.
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MD&A DUKE ENERGY INDIANA
Income Tax (Benefit) Expense. The decrease in tax expense was primarily due to a decrease in pretax income and an increase in the amortization of excess deferred income taxes.
PIEDMONT
Results of Operations
Years Ended December 31,
Operating Expenses
Operation, maintenance and other 368 327 41
Depreciation and amortization 222 213 9
Property and other taxes 57 55 2
Impairment of assets and other charges 18 10 8
Gains on Sales of Other Assets and Other, net 4 — 4
Other Income and Expenses, net 54 64 (10)
Income Tax Expense 39 30 9
The following table shows the percent changes in Dth delivered and average number of customers. The percentages for all throughput deliveries represent billed and unbilled sales. Amounts are not weather-normalized.
Increase (Decrease) over prior year 2022
Residential deliveries 5.0 %
Commercial deliveries 8.5 %
Industrial deliveries 1.2 %
Power generation deliveries 23.3 %
For resale (4.3) %
Total throughput deliveries 15.7 %
Secondary market volumes 18.9 %
Average number of customers 1.4 %
The margin decoupling mechanism adjusts for variations in residential and commercial use per customer, including those due to weather and conservation. The weather normalization adjustment mechanisms mostly offset the impact of weather on bills rendered, but do not ensure full recovery of approved margin during periods when winter weather is significantly warmer or colder than normal.
Year Ended December 31, 2022, as compared to 2021
Operating Revenues.The variance was driven primarily by:
•a $257 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; and
•a $64 million increase due to base rate increases.
Operating Expenses.The variance was driven primarily by:
•a $257 million increase in cost of natural gas due to higher natural gas costs passed through to customers and higher volumes;
•a $189 million increase in cost of natural gas due to increased secondary marketing activity including higher off-system sales higher natural gas costs; and
•a $41 million increase in operation, maintenance and other due to higher spend on internal and contract labor costs, locates, fleet, materials and other.
Other Income and Expenses, net. The variance was driven primarily by a decrease in AFUDC equity base.
Interest Expense. The variance was primarily due to higher debt outstanding and interest rates.
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.
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MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Preparation of financial statements requires the application of accounting policies, judgments, assumptions and estimates that can significantly affect the reported results of operations, cash flows or the amounts of assets and liabilities recognized in the financial statements. Judgments made include the likelihood of success of particular projects, possible legal and regulatory challenges, earnings assumptions on pension and other benefit fund investments and anticipated recovery of costs, especially through regulated operations.
Management discusses these policies, estimates and assumptions with senior members of management on a regular basis and provides periodic updates on management decisions to the Audit Committee. Management believes the areas described below require significant judgment in the application of accounting policy or in making estimates and assumptions that are inherently uncertain and that may change in subsequent periods.
For further information, see Note 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies."
Regulated Operations Accounting
Substantially all of Duke Energy’s regulated operations meet the criteria for application of regulated operations accounting treatment. As a result, Duke Energy is required to record assets and liabilities that would not be recorded for nonregulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities are recorded when it is probable that a regulator will require Duke Energy to make refunds to customers or reduce rates to customers for previous collections or deferred revenue for costs that have yet to be incurred.
Management continually assesses whether recorded regulatory assets are probable of future recovery by considering factors such as:
•applicable regulatory environment changes;
•historical regulatory treatment for similar costs in Duke Energy’s jurisdictions;
•litigation of rate orders;
•recent rate orders to other regulated entities;
•levels of actual return on equity compared to approved rates of return on equity; and
•the status of any pending or potential deregulation legislation.
If future recovery of costs ceases to be probable, asset write-offs would be recognized in operating income. Additionally, regulatory agencies can provide flexibility in the manner and timing of the depreciation of property, plant and equipment, recognition of asset retirement costs and amortization of regulatory assets, or may disallow recovery of all or a portion of certain assets.
As required by regulated operations accounting rules, significant judgment can be required to determine if an otherwise recognizable incurred cost qualifies to be deferred for future recovery as a regulatory asset. Significant judgment can also be required to determine if revenues previously recognized are for entity specific costs that are no longer expected to be incurred or have not yet been incurred and are therefore a regulatory liability.
For further information, see Note 4 to the Consolidated Financial Statements, "Regulatory Matters."
Goodwill Impairment Assessments
Duke Energy performed its annual goodwill impairment tests for all reporting units as of August 31, 2022. Additionally, Duke Energy monitors all relevant events and circumstances during the year to determine if an interim impairment test is required. Such events and circumstances include an adverse regulatory outcome, declining financial performance and deterioration of industry or market conditions. As of August 31, 2022, all of the reporting units' estimated fair value of equity substantially exceeded the carrying value of equity. The fair values of the reporting units were calculated using a weighted combination of the income approach, which estimates fair value based on discounted cash flows, and the market approach, which estimates fair value based on market comparables within the utility and energy industries.
Estimated future cash flows under the income approach are based on Duke Energy’s internal business plan. Significant assumptions used are growth rates, future rates of return expected to result from ongoing rate regulation and discount rates. Management determines the appropriate discount rate for each of its reporting units based on the Weighted Average Cost of Capital (WACC) for each individual reporting unit. The WACC takes into account both the after-tax cost of debt and cost of equity. A major component of the cost of equity is the current risk-free rate on 20-year U.S. Treasury bonds. In the 2022 impairment tests, Duke Energy considered implied WACCs for certain peer companies in determining the appropriate WACC rates to use in its analysis. As each reporting unit has a different risk profile based on the nature of its operations, including factors such as regulation, the WACC for each reporting unit may differ. Accordingly, the WACCs were adjusted, as appropriate, to account for company specific risk premiums. The discount rates used for calculating the fair values as of August 31, 2022, for each of Duke Energy’s reporting units ranged from 6.6% to 6.9%. The underlying assumptions and estimates are made as of a point in time. Subsequent changes, particularly changes in the discount rates, authorized regulated rates of return or growth rates inherent in management’s estimates of future cash flows, could result in future impairment charges.
One of the most significant assumptions utilized in determining the fair value of reporting units under the market approach is implied market multiples for certain peer companies. Management selects comparable peers based on each peer’s primary business mix, operations, and market capitalization compared to the applicable reporting unit and calculates implied market multiples based on available projected earnings guidance and peer company market values as of August 31. The implied market multiples used for calculating the fair values as of August 31, 2022, for each of Duke Energy's reporting units ranged from 10.3 to 13.6.
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MD&A CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Duke Energy primarily operates in environments that are rate-regulated. In such environments, revenue requirements are adjusted periodically by regulators based on factors including levels of costs, sales volumes and costs of capital. Accordingly, Duke Energy’s regulated utilities operate to some degree with a buffer from the direct effects, positive or negative, of significant swings in market or economic conditions. However, significant changes in discount rates or implied market multiples over a prolonged period may have a material impact on the fair value of equity.
Duke Energy has $19.3 billion in Goodwill at both December 31, 2022, and 2021. For further information, see Note 12 to the Consolidated Financial Statements, "Goodwill and Intangible Assets."
Asset Retirement Obligations
AROs are recognized for legal obligations associated with the retirement of property, plant and equipment at the present value of the projected liability in the period in which it is incurred, if a reasonable estimate of fair value can be made. Duke Energy has $12.7 billion and $12.6 billion of AROs as of December 31, 2022, and 2021, respectively. See Note 10, "Asset Retirement Obligations," for further details including a rollforward of related liabilities.
The present value of the initial obligation and subsequent updates are based on discounted cash flows, which include estimates regarding the amount and timing of future cash flows, regulatory, legal, and legislative decisions, selection of discount rates and cost escalation rates, among other factors. These estimates are subject to change.
Obligations for nuclear decommissioning are based on site-specific cost studies. Duke Energy Carolinas and Duke Energy Progress assume prompt dismantlement of the nuclear facilities after operations are ceased. During 2020, Duke Energy Florida, closed an agreement for the accelerated decommissioning of the Crystal River Unit 3 nuclear power station after receiving approval from the NRC and FPSC. The retirement obligations for the decommissioning of Crystal River Unit 3 nuclear power station are measured based on accelerated decommissioning from 2020 continuing through 2027. Duke Energy Carolinas, Duke Energy Progress and Duke Energy Florida also assume that spent fuel will be stored on-site until such time that it can be transferred to a yet to be built DOE facility.
Obligations for closure of ash basins are based upon discounted cash flows of estimated costs for site-specific plans. In prior years, certain ash basins have had probability weightings applied to them based on different potential closure methods and the probabilities surrounding pending legal changes.
For further information, see Notes 4, 5 and 10 to the Consolidated Financial Statements, "Regulatory Matters," "Commitments and Contingencies" and "Asset Retirement Obligations."
Discontinued Operations
Duke Energy calculated an estimated impairment on the disposition of its Commercial Renewables Disposal Groups as of December 31, 2022. The impairment was recorded to write-down the carrying amount to fair value, less cost to sell. The fair value was primarily determined from the income approach using discounted cash flows, but also considered market information obtained through the bidding process. Estimated future cash flows under the income approach were based on Duke Energy's forecast, which was informed by existing power purchase agreements with offtakers and forward merchant curves. Significant assumptions used in the income approach include forward merchant curves and discount rates. The discount rates take into account both the after-tax cost of debt and cost of equity.
The actual loss will be recorded based on final sales agreements and could be materially different than the estimated loss.
For further information, See Note 2 to the Consolidated Financial Statements, "Dispositions."
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Duke Energy relies primarily upon cash flows from operations, debt and equity issuances and its existing cash and cash equivalents to fund its liquidity and capital requirements. Duke Energy’s capital requirements arise primarily from capital and investment expenditures, repaying long-term debt and paying dividends to shareholders. Additionally, due to its existing tax attributes and projected tax credits to be generated relating to the IRA, Duke Energy does not expect to be a significant federal cash taxpayer until around 2030.
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MD&A LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
Duke Energy continues to focus on reducing risk and positioning its business for future success and will invest principally in its strongest business sectors. Duke Energy’s projected capital and investment expenditures, including AFUDC debt and capitalized interest, for the next three fiscal years are included in the table below.
Total projected capital and investment expenditures $ 12,200 $ 12,275 $ 13,400
(a) Includes nuclear fuel of approximately $1.9 billion in 2023-2025.
Debt
Long-term debt maturities and the interest payable on long-term debt each represent a significant cash requirement for the Duke Energy Registrants. See Note 7 to the Consolidated Financial Statements, “Debt and Credit Facilities,” for information regarding the Duke Energy Registrants' long-term debt at December 31, 2022, the weighted average interest rate applicable to each long-term debt category and a schedule of long-term debt maturities over the next five years.
Fuel and Purchased Power
Fuel and purchased power includes firm capacity payments that provide Duke Energy with uninterrupted firm access to electricity transmission capacity and natural gas transportation contracts, as well as undesignated contracts and contracts that qualify as NPNS. Duke Energy’s contractual cash obligations for fuel and purchased power as of December 31, 2022, are as follows:
Payments Due by Period
Other Purchase Obligations
Other purchase obligations includes contracts for software, telephone, data and consulting or advisory services, contractual obligations for Engineering, Procurement, and Construction agreement costs for new generation plants, solar facilities, plant refurbishments, maintenance and day-to-day contract work and commitments to buy certain products. Amount excludes certain open purchase orders for services that are provided on demand for which the timing of the purchase cannot be determined. Total cash commitments for related other purchase obligation expenditures are $12,095 million, with $11,118 million expected to be paid in the next 12 months.
See Note 6 to the Consolidated Financial Statements, “Leases” for a schedule of both finance lease and operating lease payments over the next five years. See Note 10 to the Consolidated Financial Statements, “Asset Retirement Obligations” for information on nuclear decommissioning trust funding obligations and the closure of ash impoundments.
Duke Energy performs ongoing assessments of its respective guarantee obligations to determine whether any liabilities have been incurred as a result of potential increased nonperformance risk by third parties for which Duke Energy has issued guarantees. See Note 8 to the Consolidated Financial Statements, “Guarantees and Indemnifications,” for further details of the guarantee arrangements. Issuance of these guarantee arrangements is not required for the majority of Duke Energy’s operations. Thus, if Duke Energy discontinued issuing these guarantees, there would not be a material impact to the consolidated results of operations, cash flows or financial position. Other than the guarantee arrangements discussed in Note 8 and off-balance sheet debt related to non-consolidated VIEs, Duke Energy does not have any material off-balance sheet financing entities or structures. For additional information, see Note 18 to the Consolidated Financial Statements, "Variable Interest Entities."
Cash and Liquidity
The Subsidiary Registrants generally maintain minimal cash balances and use short-term borrowings to meet their working capital needs and other cash requirements. The Subsidiary Registrants, excluding Progress Energy, support their short-term borrowing needs through participation with Duke Energy and certain of its other subsidiaries in a money pool arrangement. The companies with short-term funds may provide short-term loans to affiliates participating under this arrangement. See Note 7 to the Consolidated Financial Statements, “Debt and Credit Facilities,” for additional discussion of the money pool arrangement.
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Duke Energy and the Subsidiary Registrants, excluding Progress Energy, may also use short-term debt, including commercial paper and the money pool, as a bridge to long-term debt financings. The levels of borrowing may vary significantly over the course of the year due to the timing of long-term debt financings and the impact of fluctuations in cash flows from operations. From time to time, Duke Energy’s current liabilities exceed current assets resulting from the use of short-term debt as a funding source to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate due to the seasonality of its businesses.
As of December 31, 2022, Duke Energy had approximately $409 million of cash on hand, $5.2 billion available under its $9 billion Master Credit Facility. Duke Energy expects to have sufficient liquidity in the form of cash on hand, cash from operations and available credit capacity to support its funding needs. Refer to Notes 7 and 20 to the Consolidated Financial Statements, "Debt and Credit Facilities" and "Stockholders' Equity," respectively, for information regarding Duke Energy's debt and equity issuances, debt maturities and available credit facilities including the Master Credit Facility.
Credit Facilities and Registration Statements
See Note 7 to the Consolidated Financial Statements, "Debt and Credit Facilities," for further information regarding credit facilities and shelf registration statements available to Duke Energy and the Duke Energy Registrants.
Dividend Payments
In 2022, Duke Energy paid quarterly cash dividends for the 96th consecutive year and expects to continue its policy of paying regular cash dividends in the future. There is no assurance as to the amount of future dividends because they depend on future earnings, capital requirements, financial condition and are subject to the discretion of the Board of Directors.
Duke Energy targets a dividend payout ratio of between 65% and 75%, based upon adjusted EPS. Duke Energy increased the dividend by approximately 2% annually in both 2022 and 2021, and the company remains committed to continued growth of the dividend.
Dividend and Other Funding Restrictions of Duke Energy Subsidiaries
As discussed in Note 4 to the Consolidated Financial Statements, “Regulatory Matters,” Duke Energy’s public utility operating companies have restrictions on the amount of funds that can be transferred to Duke Energy through dividends, advances or loans as a result of conditions imposed by various regulators in conjunction with merger transactions. Duke Energy Progress and Duke Energy Florida also have restrictions imposed by their first mortgage bond indentures and Articles of Incorporation, which in certain circumstances, limit their ability to make cash dividends or distributions on common stock. Additionally, certain other Duke Energy subsidiaries have other restrictions, such as minimum working capital and tangible net worth requirements pursuant to debt and other agreements that limit the amount of funds that can be transferred to Duke Energy. At December 31, 2022, the amount of restricted net assets of subsidiaries of Duke Energy that may not be distributed to Duke Energy in the form of a loan or dividend does not exceed a material amount of Duke Energy’s net assets. Duke Energy does not have any legal or other restrictions on paying common stock dividends to shareholders out of its consolidated equity accounts. Although these restrictions cap the amount of funding the various operating subsidiaries can provide to Duke Energy, management does not believe these restrictions will have a significant impact on Duke Energy’s ability to access cash to meet its payment of dividends on common stock and other future funding obligations.
Cash Flows From Operating Activities
Cash flows from operations of EU&I and GU&I are primarily driven by sales of electricity and natural gas, respectively, and costs of operations. These cash flows from operations are relatively stable and comprise a substantial portion of Duke Energy’s operating cash flows. Weather conditions, working capital and commodity price fluctuations and unanticipated expenses including unplanned plant outages, storms, legal costs and related settlements can affect the timing and level of cash flows from operations.
As part of Duke Energy’s continued effort to improve its cash flows from operations and liquidity, Duke Energy works with vendors to improve terms and conditions, including the extension of payment terms. To support this effort, Duke Energy established a supply chain finance program (the “program”) in 2020, under which suppliers, at their sole discretion, may sell their receivables from Duke Energy to the participating financial institution. The financial institution administers the program. Duke Energy does not issue any guarantees with respect to the program and does not participate in negotiations between suppliers and the financial institution. Duke Energy does not have an economic interest in the supplier’s decision to participate in the program and receives no interest, fees or other benefit from the financial institution based on supplier participation in the program. Suppliers’ decisions on which invoices are sold do not impact Duke Energy’s payment terms, which are based on commercial terms negotiated between Duke Energy and the supplier regardless of program participation. A significant deterioration in the credit quality of Duke Energy, economic downturn or changes in the financial markets could limit the financial institutions willingness to participate in the program. Duke Energy does not believe such risk would have a material impact on our cash flows from operations or liquidity, as substantially all our payments are made outside the program.
Duke Energy believes it has sufficient liquidity resources through the commercial paper markets, and ultimately, the Master Credit Facility, to support these operations. Cash flows from operations are subject to a number of other factors, including, but not limited to, regulatory constraints, economic trends and market volatility (see Item 1A, “Risk Factors,” for additional information).
Debt Issuances
Depending on availability based on the issuing entity, the credit rating of the issuing entity, and market conditions, the Subsidiary Registrants prefer to issue first mortgage bonds and secured debt, followed by unsecured debt. This preference is the result of generally higher credit ratings for first mortgage bonds and secured debt, which typically result in lower interest costs. Duke Energy Corporation primarily issues unsecured debt.
In 2023, Duke Energy anticipates issuing additional securities of $6.7 billion through debt capital markets. In certain instances Duke Energy may utilize instruments other than senior notes, including equity-content securities such as subordinated debt or preferred stock. Proceeds will primarily be for the purpose of funding capital expenditures and debt maturities. See to Note 7 to the Consolidated Financial Statements, "Debt and Credit Facilities," for further information regarding significant debt issuances.
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Duke Energy’s capitalization is balanced between debt and equity as shown in the table below.
Restrictive Debt Covenants
Duke Energy’s debt and credit agreements contain various financial and other covenants. Duke Energy's Master Credit Facility contains a covenant requiring the debt-to-total capitalization ratio to not exceed 65% for each borrower, excluding Piedmont, and 70% for Piedmont. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements or sublimits thereto. As of December 31, 2022, Duke Energy presented approximately $131 million of long-term debt as current on the Consolidated Balance Sheet as a result of a technical default due to the bankruptcy filing of a Duke Energy customer. The Duke Energy Registrants were in compliance with all other covenants related to their debt agreements as of December 31, 2022. In addition, some credit agreements may allow for acceleration of payments or termination of the agreements due to nonpayment, or acceleration of other significant indebtedness of the borrower or some of its subsidiaries. None of the debt or credit agreements contain material adverse change clauses.
Credit Ratings
Moody’s Investors Service, Inc. and S&P provide credit ratings for various Duke Energy Registrants. The following table includes Duke Energy and certain subsidiaries’ credit ratings and ratings outlook as of February 2023.
Moody's S&P
Duke Energy Corporation Stable Stable
Issuer Credit Rating Baa2 BBB+
Senior Unsecured Debt Baa2 BBB
Junior Subordinated Debt/Preferred Stock Baa3 BBB-
Commercial Paper P-2 A-2
Duke Energy Carolinas Stable Stable
Senior Secured Debt Aa3 A
Senior Unsecured Debt A2 BBB+
Progress Energy Stable Stable
Senior Unsecured Debt Baa1 BBB
Duke Energy Progress Stable Stable
Senior Secured Debt Aa3 A
Duke Energy Florida Stable Stable
Senior Secured Debt A1 A
Senior Unsecured Debt A3 BBB+
Duke Energy Ohio Stable Stable
Senior Secured Debt A2 A
Senior Unsecured Debt Baa1 BBB+
Duke Energy Indiana Stable Stable
Senior Secured Debt Aa3 A
Senior Unsecured Debt A2 BBB+
Duke Energy Kentucky Stable Stable
Senior Unsecured Debt Baa1 BBB+
Piedmont Natural Gas Stable Stable
Senior Unsecured A3 BBB+
Credit ratings are intended to provide credit lenders a framework for comparing the credit quality of securities and are not a recommendation to buy, sell or hold. The Duke Energy Registrants’ credit ratings are dependent on the rating agencies’ assessments of their ability to meet their debt principal and interest obligations when they come due. If, as a result of market conditions or other factors, the Duke Energy Registrants are unable to maintain current balance sheet strength, or if earnings and cash flow outlook materially deteriorates, credit ratings could be negatively impacted.
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Cash Flow Information
The following table summarizes Duke Energy’s cash flows for the two most recently completed fiscal years.
Years Ended December 31,
Cash flows provided by (used in):
Net increase (decrease) in cash, cash equivalents and restricted cash 83 (36)
Cash, cash equivalents and restricted cash at beginning of period 520 556
Cash, cash equivalents and restricted cash at end of period $ 603 $ 520
OPERATING CASH FLOWS
The following table summarizes key components of Duke Energy’s operating cash flows for the two most recently completed fiscal years.
Years Ended December 31,
Contributions to qualified pension plans (58) — (58)
Net cash provided by operating activities $ 5,927 $ 8,290 $ (2,363)
The variance was driven primarily by:
•a $1,184 million increase in cash outflows from working capital and a $1,397 million increase in cash outflows from Other assets and Other liabilities primarily due to an increase in under-collected fuel used in generation due to higher commodity costs.
Partially offset by:
•a $320 million increase in net income after adjustment for non-cash items primarily due to higher revenues from rate cases in various jurisdictions, favorable weather and volumes, partially offset by an estimated impairment on the Commercial Renewables Disposal Groups.
INVESTING CASH FLOWS
The following table summarizes key components of Duke Energy’s investing cash flows for the two most recently completed fiscal years.
Years Ended December 31,
Debt and equity securities, net 90 5 85
Disbursements to canceled equity method investments — (855) 855
The variance relates primarily to an increase in capital expenditures due to higher investments in EU&I, partially offset by a payment made in 2021 to fund ACP's outstanding debt. The primary use of cash related to investing activities is typically capital, investment and acquisition expenditures, net of return of investment capital detailed by reportable business segment in the following table.
Years Ended December 31,
Electric Utilities and Infrastructure $ 8,985 $ 7,653 $ 1,332
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FINANCING CASH FLOWS
The following table summarizes key components of Duke Energy’s financing cash flows for the two most recently completed fiscal years.
Years Ended December 31,
Notes payable and commercial paper 574 479 95
Contributions from noncontrolling interests 1,377 1,575 (198)
Other financing items (121) (89) (32)
Net cash provided by financing activities $ 6,129 $ 2,609 $ 3,520
The variance was driven primarily by:
•a $3,720 million net increase in proceeds from issuances of long-term debt, primarily due to timing of issuances and redemptions of long-term debt.
Partially offset by:
•a $198 million decrease in contributions from noncontrolling interests, primarily due to fewer project investments financed by tax equity being placed into service in the current year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management Policies
The Enterprise Risk Management policy framework at Duke Energy includes strategy, operational, project execution and financial or transaction related risks. Enterprise Risk Management includes market risk as part of the financial and transaction related risks in its framework.
Duke Energy is exposed to market risks associated with commodity prices, interest rates and equity prices. Duke Energy has established comprehensive risk management policies to monitor and manage these market risks. Duke Energy’s Chief Executive Officer and Chief Financial Officer are responsible for the overall approval of market risk management policies and the delegation of approval and authorization levels. The Finance and Risk Management Committee of the Board of Directors receives periodic updates from the Chief Risk Officer and other members of management on market risk positions, corporate exposures and overall risk management activities. The Chief Risk Officer is responsible for the overall governance of managing commodity price risk, including monitoring exposure limits.
The following disclosures about market risk contain forward-looking statements that involve estimates, projections, goals, forecasts, assumptions, risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. See Item 1A, “Risk Factors,” and “Cautionary Statement Regarding Forward-Looking Information” for a discussion of the factors that may impact any such forward-looking statements made herein.
Commodity Price Risk
Price risk represents the potential risk of loss from adverse changes in the market price of electricity or other energy commodities. Duke Energy’s exposure to commodity price risk is influenced by a number of factors, including the effects of regulation, commodity contract size and length, market liquidity, market conditions, location and unique or specific contract terms. Duke Energy is exposed to the impact of market fluctuations in the prices of electricity, coal, natural gas and other energy-related products marketed and purchased as a result of its ownership of energy-related assets.
Duke Energy’s exposure to these fluctuations through its regulated utility operations is limited since these operations are subject to cost-based regulation and are typically allowed to recover substantially all of these costs through various cost recovery clauses, including fuel clauses, formula-based contracts, or other cost-sharing mechanisms. While there may be a delay in timing between when these costs are incurred and when they are recovered through rates, changes from year to year generally do not have a material impact on operating results of these regulated operations.
Duke Energy employs established policies and procedures to manage risks associated with these market fluctuations, which may include using various commodity derivatives, such as swaps, futures, forwards and options. For additional information, see Note 15 to the Consolidated Financial Statements, “Derivatives and Hedging.”
Generation Portfolio Risks
For the EU&I segment, the generation portfolio not utilized to serve retail operations or committed load is subject to commodity price fluctuations. However, the impact on the Consolidated Statements of Operations is limited due to mechanisms in these regulated jurisdictions that result in the sharing of most of the net profits from these activities with retail customers.
Hedging Strategies
Duke Energy monitors risks associated with commodity price changes on its future operations and, where appropriate, uses various commodity instruments such as electricity, coal and natural gas hedging contracts and options to mitigate the effect of such fluctuations on operations. Duke Energy’s primary use of energy commodity derivatives is to hedge against exposure to the prices of power, fuel for generation and natural gas for customers.
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