Duke Energy 2011 Annual Report Download - page 181

PART II
DUKE ENERGY CORPORATION •DUKE ENERGY CAROLINAS, LLC •DUKE ENERGY OHIO, INC. •DUKE ENERGY INDIANA, INC.
Combined Notes to Consolidated Financial Statements – (Continued)
operations. As these undesignated contracts expire as late as 2021,
Duke Energy has entered into economic hedges that leave it
minimally exposed to changes in prices over the duration of these
contracts.
Duke Energy Carolinas uses derivative contracts as economic
hedges to manage the market risk exposures that arise from electricity
generation. As of December 31, 2011 Duke Energy Carolinas does
not have any undesignated commodity contracts.
Duke Energy Ohio uses derivative contracts as economic hedges
to manage the market risk exposures that arise from providing
electricity generation and capacity to large energy customers, energy
aggregators, retail customers and other wholesale companies.
Undesignated contracts at December 31, 2011 are primarily
associated with forward sales and purchases of power, coal and
emission allowances, for the Commercial Power segment.
Duke Energy Indiana uses derivative contracts as economic
hedges to manage the market risk exposures that arise from electric
generation. Undesignated contracts at December 31, 2011 are
primarily associated with forward purchases and sales of power,
forward purchases of natural gas and financial transmission rights.
The Duke Energy Registrants are exposed to risk resulting from
changes in interest rates as a result of their issuance or anticipated
issuance of variable and fixed-rate debt and commercial paper.
Interest rate exposure is managed by limiting variable-rate exposures
to a percentage of total debt and by monitoring the effects of market
changes in interest rates. To manage risk associated with changes in
interest rates, the Duke Energy Registrants may enter into financial
contracts; primarily interest rate swaps and U.S. Treasury lock
agreements. Additionally, in anticipation of certain fixed-rate debt
issuances, a series of forward starting interest rate swaps may be
executed to lock in components of the market interest rates at the
time and terminated prior to or upon the issuance of the
corresponding debt. When these transactions occur within a business
that meets the criteria for regulatory accounting treatment, these
contracts may be treated as undesignated and any pre-tax gain or
loss recognized from inception to termination of the hedges would be
recorded as a regulatory liability or asset and amortized as a
component of interest expense over the life of the debt. Alternatively,
these derivatives may be designated as hedges whereby, any pre-tax
gain or loss recognized from inception to termination of the hedges
would be recorded in AOCI and amortized as a component of interest
expenseoverthelifeofthedebt.
Interest Rate Risk
The following table shows the notional amounts for derivatives related to interest rate risk at December 31, 2011 and December 31,
2010.
Notional Amounts of Derivative Instruments Related to Interest Rate Risk
(in millions) Duke Energy
Duke Energy
Carolinas
Duke Energy
Ohio
Duke Energy
Indiana
Cash Flow Hedges(a) $841 $— $— $—
Undesignated Contracts 247 — 27 200
Fair Value Hedges 275 25 250 —
Total Notional Amount at December 31, 2011 $1,363 $25 $277 $200
(in millions) Duke Energy
Duke Energy
Carolinas
Duke Energy
Ohio
Cash Flow Hedges(a) $ 492 $— $—
Undesignated Contracts 561 500 27
Fair Value Hedges 275 25 250
Total Notional Amount at December 31, 2010 $1,328 $525 $277
(a) Includes amounts related to non-recourse variable rate long-term debt of VIEs of $466 million at December 31, 2011 and $492 million at December 31, 2010.
Volumes
The following tables show information relating to the volume of
Duke Energy and Duke Energy Ohio’s commodity derivative activity
outstanding as of December 31, 2011 and December 31, 2010.
Amounts disclosed represent the notional volumes of commodities
contracts accounted for at fair value. For option contracts, notional
amounts include only the delta-equivalent volumes which represent
the notional volumes times the probability of exercising the option
based on current price volatility. Volumes associated with contracts
qualifying for the NPNS exception have been excluded from the table
below. Amounts disclosed represent the absolute value of notional
amounts. Duke Energy and Duke Energy Ohio have netted
contractual amounts where offsetting purchase and sale contracts
exist with identical delivery locations and times of delivery. Where all
commodity positions are perfectly offset, no quantities are shown
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