Duke Energy 2014 Annual Report Download - page 129

109
PART II
DUKE ENERGY CORPORATION • DUKE ENERGY CAROLINAS, LLC • PROGRESS ENERGY, INC. •
DUKE ENERGY PROGRESS, INC. • DUKE ENERGY FLORIDA, INC. • DUKE ENERGY OHIO, INC. • DUKE ENERGY INDIANA, INC.
Combined Notes to Consolidated Financial Statements – (Continued)
acceptance of voluntary severance benefi ts is determined by management
based on the facts and circumstances of the benefi ts being offered. See Note 19
for further information.
Guarantees
Liabilities are recognized at the time of issuance or material modifi cation
of a guarantee for the estimated fair value of the obligation it assumes. Fair
value is estimated using a probability-weighted approach. The obligation is
reduced over the term of the guarantee or related contract in a systematic and
rational method as risk is reduced. Any additional contingent loss for guarantee
contracts subsequent to the initial recognition of a liability is accounted for and
recognized at the time a loss is probable and can be reasonably estimated. See
Note 7 for further information.
Stock-Based Compensation
Stock-based compensation represents costs related to stock-based
awards granted to employees and Duke Energy Board of Directors (Board of
Directors) members. Duke Energy recognizes stock-based compensation based
upon the estimated fair value of awards, net of estimated forfeitures at the date
of issuance. The recognition period for these costs begin at either the applicable
service inception date or grant date and continues throughout the requisite
service period, or for certain share-based awards until the employee becomes
retirement eligible, if earlier. Compensation cost is recognized as expense or
capitalized as a component of property, plant and equipment. See Note 20 for
further information.
Income Taxes
Duke Energy and its subsidiaries fi le a consolidated federal income
tax return and other state and foreign jurisdictional returns. The Subsidiary
Registrants entered into a tax-sharing agreement with Duke Energy. Income
taxes recorded represent amounts the Subsidiary Registrants would incur
as separate C-Corporations. Deferred income taxes have been provided for
temporary differences between GAAP and tax bases of assets and liabilities
because the differences create taxable or tax-deductible amounts for future
periods. Deferred taxes are not provided on translation gains and losses when
earnings of a foreign operation are expected to be indefi nitely reinvested.
Investment tax credits (ITC) associated with regulated operations are deferred
and amortized as a reduction of income tax expense over the estimated useful
lives of the related properties.
Positions taken or expected to be taken on tax returns, including the
decision to exclude certain income or transactions from a return, are recognized
in the fi nancial statements when it is more likely than not the tax position can
be sustained based solely on the technical merits of the position. The largest
amount of tax benefi t that is greater than 50 percent likely of being effectively
settled is recorded. Management considers a tax position effectively settled
when: (i) the taxing authority has completed its examination procedures,
including all appeals and administrative reviews; (ii) the Duke Energy
Registrants do not intend to appeal or litigate the tax position included in the
completed examination; and (iii) it is remote the taxing authority would examine
or re-examine the tax position. The amount of a tax return position that is not
recognized in the fi nancial statements is disclosed as an unrecognized tax
benefi t. If these unrecognized tax benefi ts are later recognized, then there will be
a decrease in income taxes payable, an income tax refund or a swap between
deferred and current taxes payable. If the portion of tax benefi ts that has been
recognized changes and those tax benefi ts are subsequently unrecognized, then
the previously recognized tax benefi ts may impact the fi nancial statements
through increasing income taxes payable, reducing income tax refunds
receivable changing deferred taxes. Changes in assumptions on tax benefi ts
may also impact interest expense or interest income and may result in the
recognition of tax penalties.
Tax-related interest and penalties are recorded in Interest Expense and
Other Income and Expenses, net, in the Consolidated Statements of Operations.
See Note 22 for further information.
Accounting for Renewable Energy Tax Credits and Cash Grants
When Duke Energy receives ITC or cash grants on wind or solar facilities,
it reduces the basis of the property recorded on the Consolidated Balance
Sheets by the amount of the ITC or cash grant and, therefore, the ITC or grant
benefi t is recognized through reduced depreciation expense. Additionally, certain
tax credits and government grants received provide for initial tax depreciable
base in excess of the book carrying value equal to one half of the ITC or
government grant. Deferred tax benefi ts are recorded as a reduction to income
tax expense in the period that the basis difference is created.
Excise Taxes
Certain excise taxes levied by state or local governments are required to
be paid even if not collected from the customer. These taxes are recognized on a
gross basis. Otherwise, the taxes are accounted for net. Excise taxes accounted
for on a gross basis as both operating revenues and property and other taxes in
the Consolidated Statements of Operations were as follows.
Years Ended December 31,
(in millions) 2014 2013 2012
Duke Energy $ 498 $ 602 $ 466
Duke Energy Carolinas 94 164 161
Progress Energy 263 304 317
Duke Energy Progress 56 115 113
Duke Energy Florida 207 189 205
Duke Energy Ohio 103 105 102
Duke Energy Indiana 38 29 33
During the third quarter of 2014, the North Carolina gross receipts tax was
terminated due to the North Carolina Tax Simplifi cation and Rate Reduction Act.
The North Carolina gross receipts tax is no longer imposed effective July 1, 2014.
On July 23, 2013, North Carolina House Bill 998 (HB 998) was signed
into law. HB 998 repealed the utility franchise tax effective July 1, 2014. The
utility franchise tax was 3.22 percent gross receipts tax on sales of electricity.
The result of this change in law will be an annual reduction in excise taxes
of approximately $160 million for Duke Energy Carolinas and approximately
$110 million for Duke Energy Progress. HB 998 also increases sales tax on
electricity from 3 to 7 percent effective July 1, 2014. HB 998 requires the NCUC
to adjust retail electric rates for the elimination of the utility franchise tax,
changes due to the increase in sales tax on electricity, and the resulting change
in liability of utility companies under the general franchise tax.
Foreign Currency Translation
The local currencies of most of Duke Energy’s foreign operations have
been determined to be their functional currencies. However, certain foreign
operations’ functional currency has been determined to be the U.S. dollar, based
on an assessment of the economic circumstances of the foreign operation.
Assets and liabilities of foreign operations whose functional currency is not