Notes to Condensed Consolidated Financial Statements (Unaudited)
1
.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SIGNIFICANT ACCOUNTING POLICIES
These unaudited financial statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our Form 10-K for the year ended October 31, 2016 with our accounting policies described in Note 1. There were no significant changes to those accounting policies during the two months ended December 31, 2016 except as discussed below in "Nature of Operations and Basis of Consolidation."
UNAUDITED INTERIM FINANCIAL INFORMATION
The Condensed Consolidated Financial Statements have not been audited. We have prepared the unaudited Condensed Consolidated Financial Statements under the rules of the Securities and Exchange Commission (SEC). Therefore, certain financial information and note disclosures normally included in annual financial statements prepared in conformity with generally accepted accounting principles (GAAP) in the United States of America are omitted in this interim report under these SEC rules and regulations. The unaudited Condensed Consolidated Financial Statements include all normal recurring adjustments necessary for a fair presentation of the statement of financial position as of December 31, 2016 and October 31, 2016, the results of operations and comprehensive income for the two months ended December 31, 2016 and 2015, and cash flows and changes in equity for the two months ended December 31, 2016 and 2015.
NATURE OF OPERATIONS AND BASIS OF CONSOLIDATION
Piedmont Natural Gas Company, Inc. is an energy services company primarily engaged in the distribution of natural gas to residential, commercial, industrial and power generation customers in portions of North Carolina, South Carolina and Tennessee. We are invested in joint venture, energy-related businesses, including regulated interstate natural gas transportation and storage and regulated intrastate natural gas transportation. Our utility operations are regulated by
three
state regulatory commissions; see
Note 4
for further information on regulatory matters. Unless the context requires otherwise, references to "we," "us," "our," "the Company" or "Piedmont" means consolidated Piedmont Natural Gas Company, Inc. and its subsidiaries.
On October 24, 2015, we entered into an Agreement and Plan of Merger (Merger Agreement) with Duke Energy Corporation (Duke Energy). On October 3, 2016, the merger was consummated between Duke Energy and Piedmont and Forest Subsidiary, Inc. (Merger Sub), a new wholly owned subsidiary of Duke Energy. The Merger Agreement provided for the merger of the Merger Sub with and into Piedmont, with Piedmont surviving as a wholly owned subsidiary of Duke Energy (the Acquisition). The Acquisition was recorded using the acquisition method of accounting. Under SEC regulations, Duke Energy elected to not apply push down accounting to the stand alone Piedmont financial statements. These adjustments will be recorded by Duke Energy. See
Note 2
for further information.
Duke Energy and Piedmont performed a comparative analysis of accounting policies with no significant differences except for actuarial assumptions for pension and other postretirement benefit plans. See Note 13 for the discussion of the change of the discount rate in actuarial assumptions as well as the change of the year end of the plans.
The Condensed Consolidated Financial Statements reflect the accounts of Piedmont and its wholly owned subsidiaries whose financial statements are prepared for the same reporting period as Piedmont using consistent accounting policies. Inter-company transactions have been eliminated in consolidation where appropriate; however, we have not eliminated inter-company profit on sales to affiliates and costs from affiliates in accordance with accounting regulations prescribed under rate-based regulation.
Investments in unconsolidated affiliates, or joint ventures, are accounted for under the equity method as we do not have controlling voting interests or otherwise exercise control over the management of such companies. See
Note 11
for further information on investments in unconsolidated affiliates and related party transactions with these affiliates.
CHANGE IN FISCAL YEAR
Effective November 1, 2016, Piedmont's fiscal year end was changed from October 31 to December 31. The information presented in this Form 10-Q for the two month periods ended December 31, 2016 and 2015 are presented solely for the registrant Piedmont on a stand-alone basis.
SEASONALITY AND USE OF ESTIMATES
Our business is seasonal in nature. The results of operations for the two months ended December 31, 2016 do not necessarily reflect the results to be expected for a full year.
In accordance with GAAP, we make certain estimates and assumptions regarding reported amounts of assets, liabilities, revenues and expenses and the related disclosures, using historical experience and other assumptions that we believe are reasonable at the time. Our estimates may involve complex situations requiring a high degree of judgment in the application and interpretation of existing literature or in the development of estimates that impact our financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions, which are evaluated on a continual basis.
UNBILLED REVENUE
We record revenues when services are provided to our distribution service customers. Revenues are recognized monthly on the accrual basis, which includes estimated amounts for gas delivered to customers but not yet billed under the cycle-billing method from the last meter reading date to month end. The unbilled revenue estimate reflects factors requiring judgment related to estimated usage by customer class, customer mix, changes in weather during the period and the impact of the weather normalization adjustment or margin decoupling mechanisms, as applicable. As of December 31, 2016 and October 31, 2016, unbilled revenues of
$76.6 million
and
$13.4 million
, respectively, are included within "Receivables" on the
Condensed Consolidated Balance Sheets
.
RECENTLY ISSUED ACCOUNTING STANDARDS UPDATE (ASU)
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Guidance
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Description
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Effective date
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Effect on the financial statements or other significant matters
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ASU 2014-09, May 2014,
Revenue from Contracts with Customers (Topic 606)
, including subsequent ASUs clarifying the guidance
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Under the new standard, entities will recognize revenue to depict the transfer of goods and services to customers in amounts that reflect consideration expected to be received in exchange for those goods or services. In doing so, more judgment and estimates may be needed than under current guidance. The disclosure requirements will provide information about the nature, amount, timing and uncertainty of revenue and cash flows from any entity's contracts with customers. An entity may choose to adopt the new standard on either a full retrospective basis (practical expedients available) or through a cumulative effect adjustment to retained earnings as of the start of first period of adoption.
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Annual periods (and interim periods within those periods) beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016.
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We intend to adopt the revised accounting guidance effective for the interim and annual periods beginning January 1, 2018. We are currently evaluating the effect on our financial position and results of operations, as well as monitoring specific developments for our industry. We intend to use the modified retrospective method of adoption. This method results in a cumulative change effect that will be recorded on the balance sheet as of the beginning of 2018 as if the standard had always been in effect. Disclosures for 2018 will include a comparison to what would have been reported for 2018 under the current revenue recognition rules in order to assist financial statement users in understanding how revenue recognition has changed as a result of this standard and to facilitate comparability with prior year reported results, which are not restated under the modified retrospective approach.
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ASU 2016-02, February 2016,
Leases (Topic 842
)
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Under the new standard, entities will recognize right-of-use (ROU) assets and related liabilities on the balance sheet for leases with a term greater than one year. Amortization of the ROU asset will be accounted for using: (1) the finance lease approach, or (2) the operating lease approach. Under the finance lease approach, the ROU asset will be amortized on a straight-line basis with the amortization and the interest on the lease liability presented separately in the income statement. Under the operating lease approach, a single straight-line expense will be presented in the income statement. Qualitative and quantitative disclosures are required to enable a user to assess the amount, timing and uncertainty of cash flows arising from leasing activities. A modified retrospective transition approach, including the option to elect practical expedients, is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements at the date of initial application.
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Annual periods (and interim periods within those periods) beginning after December 15, 2018, with early adoption permitted.
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We are currently evaluating the effect on our financial position and results of operations. We expect an increase in assets and liabilities from the recording of our operating leases.
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Guidance
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Description
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Effective date
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Effect on the financial statements or other significant matters
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ASU 2016-15, August 2016,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
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The amendment is intended to provide specific guidance on eight cash flow classification issues to reduce the diversity in practice. The eight issues are: 1) debt prepayment or debt extinguishment costs, 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, 3) contingent consideration payments made after a business combination, 4) proceeds from the settlement of life insurance claims, 5) proceeds from the settlement of corporate owned life insurance policies, including bank-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions and 8) separately identifiable cash flows and application of the predominance principle.
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Annual periods (and interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted in any interim or annual period if all amendments are adopted in that period with any adjustments reflected as of the beginning of the fiscal year that includes the interim period.
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We are currently evaluating the effect on the presentation of our cash flows.
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2
.
ACQUISITION BY DUKE ENERGY CORPORATION
On
October 3, 2016
, the Acquisition of Piedmont by Duke Energy was consummated. In September 2016, the North Carolina Utilities Commission (NCUC) approved the Acquisition pursuant to the terms of the stipulation and settlement agreement, which included a one-time bill credit to our North Carolina customers collectively of
$10.0 million
. In October 2016, we reduced customers' bills by
$4.7 million
as a result of the one-time bill credit with the remaining
$5.3 million
reflected on November bills.
COSTS TO ACHIEVE THE ACQUISITION
The following table summarizes pre-tax acquisition consummation costs, integration and other related costs (collectively referred to as costs to achieve) that we recorded in connection with the Acquisition and are included in "Operations, maintenance and other" within "
Operating Expenses
" in the
Condensed Consolidated Statements of Operations and Comprehensive Income
for the two months ended
December 31, 2016
and
2015
.
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(in millions)
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2016
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2015
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Costs to achieve expenses
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$
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7.3
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(1)
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$
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5.7
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(2)
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(1)
See Note 13 for further information on employee benefit plan expenses and Note 14 for further information on severance costs.
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(2)
The prior period expense primarily relates to incremental share-based compensation expense from the accelerated vesting, payment and taxation of certain share-based awards for our former President and Chief Executive Officer and other eligible officers and participants with the issuance of restricted nonvested shares of our common stock in December 2015.
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3
.
BUSINESS SEGMENTS
Effective with the consummation of the Acquisition, our reportable segments changed to
one
segment, Gas Utilities and Infrastructure, based on information used by the chief decision maker in allocating resources and evaluating performance. Gas Utilities and Infrastructure, includes local gas distribution as state regulated utilities, gas pipeline investments and other gas investments. We evaluate the performance of the gas distribution business, including the operations of merchandising and its related service work and home service agreements, based on segment income, which is defined as income from continuing operations. Although the state regulated operations of our Gas Utilities and Infrastructure segment are located in three states under the jurisdiction of individual state regulatory commissions, the operations are managed as one unit having similar economic and risk characteristics.
The remainder of our operations are presented in Other, which is primarily composed of our equity method investment in
SouthStar Energy Services, LLC prior to its October 3, 2016 sale, contributions to the Piedmont Natural Gas Foundation and certain Acquisition-related expenses.
Operations by segment for the two months ended
December 31, 2016
and
2015
, and segment assets as of
December 31, 2016
, are presented below. Segment assets as presented below exclude all intercompany assets.
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Two Months Ended December 31, 2016
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Gas
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Utilities and
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(in millions)
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Infrastructure
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Other
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Total
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Unaffiliated revenues
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$
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308.2
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$
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—
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$
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308.2
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Related party revenue from Duke Energy
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13.5
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—
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13.5
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Total revenues
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$
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321.7
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$
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—
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$
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321.7
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Segment income (loss)
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59.2
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(5.1
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)
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54.1
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Segment assets
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5,944.1
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—
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5,944.1
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Two Months Ended December 31, 2015
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Gas
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Utilities and
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(in millions)
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Infrastructure
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Other
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Total
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Total revenues
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$
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259.6
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$
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—
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$
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259.6
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Segment income (loss)
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57.1
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(5.1
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52.0
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4
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REGULATORY MATTERS
REGULATORY OVERSIGHT AND RATE AND REGULATORY ACTIONS
NORTH CAROLINA
See Note 2 for information on Acquisition-related matters.
In November 2016, the NCUC approved our accounting of gas costs for the twelve months ended May 31, 2016. We were deemed prudent on our gas purchasing policies and practices during this review period and allowed
100%
recovery.
In October 2016, we filed a petition to adjust our rates effective December 1, 2016 to collect an additional
$8.2 million
in annual integrity management rider (IMR) margin revenues from that which was approved by the NCUC in May 2016. The December 2016 rate adjustment was based on IMR-eligible capital investments in integrity and safety projects through September 30, 2016, which total
$513.1 million
since inception of the IMR mechanism. In November 2016, the NCUC approved the requested rate increase.
TENNESSEE
In August 2016, we filed an annual report with the Tennessee Regulatory Authority (TRA) reflecting the shared gas cost savings from gains and losses derived from gas purchase benchmarking and secondary market transactions for the twelve months ended June 30, 2016 under the Tennessee Incentive Plan (TIP). We are waiting on a ruling from the TRA at this time.
In August 2016, we filed an annual report for the twelve months ended June 30, 2016 with the TRA that reflected the transactions in the deferred gas cost account for the Actual Cost Adjustment mechanism. We are waiting on a ruling from the TRA at this time.
In November 2016, we filed an annual report with the TRA under our IMR mechanism seeking authority to collect an additional
$1.7 million
in annual margin revenue effective January 2017 based on
$20.1 million
of capital investments in integrity and safety projects over the twelve-month period ending October 31, 2016. We are waiting on a ruling from the TRA at this time.
5
.
COMMITMENTS AND CONTINGENCIES
LEASES
We lease certain buildings, land and equipment for use in our operations under noncancelable operating leases. We account for these leases by recognizing the future minimum lease payments as expense on a straight-line basis over the respective minimum lease terms under current accounting guidance.
LONG-TERM CONTRACTS
We routinely enter into long-term gas supply commodity and capacity commitments and other agreements that commit future cash flows to acquire services we need in our business. These commitments include pipeline and storage capacity contracts and gas supply contracts to provide service to our customers and telecommunication and information technology contracts and other purchase obligations. Costs arising from the gas supply commodity and capacity commitments, while significant, are pass-through costs to our customers and are fully recoverable subject to our purchased gas adjustment (PGA) procedures and prudence reviews in North Carolina and South Carolina and under the TIP in Tennessee. The time periods for fixed payments under pipeline and storage capacity contracts are up to
nineteen years
. The time periods for fixed payments of reservation fees under gas supply contracts are up to
three years
. The time period for the gas supply purchase commitments is up to
fifteen years
. The time periods for the telecommunications and technology outsourcing contracts, maintenance fees for hardware and software applications, usage fees, local and long-distance costs and wireless service are up to
five years
. Other purchase obligations consist primarily of commitments for pipeline products, equipment and contractors.
Certain storage and pipeline capacity contracts require the payment of demand charges that are based on rates approved by the Federal Energy Regulatory Commission (FERC) in order to maintain our right to access the natural gas storage or the pipeline capacity on a firm basis during the contract term. The demand charges that are incurred in each period are recognized on the
Condensed Consolidated Statements of Operations and Comprehensive Income
as part of gas purchases and included within "Cost of natural gas."
LEGAL
We have routine litigation in the ordinary course of business. We do not expect final disposition of these proceedings to have a material effect, either individually or in the aggregate, on our financial position, results of operations or cash flows.
LETTERS OF CREDIT AND SURETY BONDS
We use letters of credit to guarantee claims from self-insurance under our general and automobile liability policies. We had
$1.7 million
in letters of credit that were issued and outstanding as of
December 31, 2016
. See
Note 6
for additional information concerning letters of credit. Surety bonds held by us as of October 31, 2016 are now held by our parent, Duke Energy.
ENVIRONMENTAL MATTERS
Our
three
regulatory commissions have authorized us to utilize deferral accounting in connection with costs for environmental assessments and cleanups. Accordingly, we have established regulatory assets for actual environmental costs incurred and have recorded estimated environmental liabilities, including those for our manufactured gas plant sites, liquefied natural gas (LNG) facilities and underground storage tanks. There were
no
material changes in the status of environmental-related matters during the two months ended December 31, 2016.
Additional information concerning commitments and contingencies is set forth in Note 7 to the Consolidated Financial Statements in our Form 10-K for the year ended October 31, 2016.
6
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DEBT AND CREDIT FACILITIES
SUMMARY OF LONG-TERM DEBT
Our long-term debt consists of privately placed senior notes issued under note purchase agreements, as well as publicly issued medium-term and senior notes issued under an indenture. All of our long-term debt is unsecured and is issued at fixed rates. None of our debt is actively traded.
Our long-term debt as of
December 31, 2016
and
October 31, 2016
is presented below.
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(in millions)
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December 31, 2016
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October 31, 2016
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Principal
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$
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1,835.0
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$
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1,835.0
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Unamortized debt issuance expenses and discounts
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(13.9
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)
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(14.0
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)
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Total
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1,821.1
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1,821.0
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Less current maturities
(1)
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35.0
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35.0
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Total long-term debt
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$
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1,786.1
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$
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1,786.0
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(1)
8.51% Senior Notes, due September 30, 2017.
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We are subject to default provisions related to our long-term debt and short-term borrowings. Failure to satisfy any of the default provisions may result in total outstanding issues of debt becoming due. There are cross default provisions in all of our debt agreements.
SHELF REGISTRATION
In September 2016, Duke Energy filed a registration statement with the SEC under which it and its registrants, excluding Progress Energy, may issue debt and other securities in the future at amounts, prices and terms to be determined at the time of future offerings. The registration statement is uncapped.
In January 2017, Duke Energy amended its registration statement to add Piedmont as a registrant, and included in the amendment a prospectus for Piedmont under which debt securities may be issued in the same manner as other Duke Energy registrants.
AVAILABLE CREDIT FACILITIES
We have an
$850.0 million
five
-year revolving syndicated credit facility that expires on
December 14, 2020
that has an option to request an expansion up to an additional
$200.0 million
. The facility provides a line of credit for letters of credit of
$10.0 million
.
We have an
$850.0 million
unsecured commercial paper (CP) program that is backstopped by the revolving syndicated credit facility. The amounts outstanding under the revolving syndicated credit facility and the CP program, either individually or in the aggregate, cannot exceed
$850.0 million
.
Our current borrowings and available capacity under our revolving syndicated credit facility as of
December 31, 2016
and
October 31, 2016
are presented below.
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(in millions)
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December 31, 2016
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October 31, 2016
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Facility size
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$
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850.0
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$
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850.0
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Reduction to backstop issuances
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Commercial paper
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(330.0
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)
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(1)
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(145.0
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)
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(2)
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Outstanding letters of credit
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(1.7
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)
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(1.7
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)
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Available capacity
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$
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518.3
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$
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703.3
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(1)
Original maturities ranging from 7 to 15 days from their dates of issuance at a weighted average interest rate of .96%.
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(2)
Original maturities ranging from 1 to 6 days from their dates of issuance at a weighted average interest rate of .64%.
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Other than outstanding CP balances, we did not have any borrowings under the revolving syndicated credit facility for the two months ended
December 31, 2016
. A summary of the short-term debt activity under our CP program for the two months ended
December 31, 2016
is as follows.
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(in millions)
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Minimum amount outstanding
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$
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140.0
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Maximum amount outstanding
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$
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330.0
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Minimum interest rate
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.63
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%
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Maximum interest rate
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1.00
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%
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Weighted average interest rate
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.80
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%
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Our five-year revolving syndicated credit facility’s financial covenants require us to maintain a ratio of
total debt to total capitalization of no greater than 70%
, and our
actual ratio was 56%
at
December 31, 2016
.
7
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ASSET RETIREMENT OBLIGATIONS
We record an asset retirement obligation (ARO) when we have a legal obligation to incur retirement costs associated with the retirement of long-lived assets that result from the acquisition, construction, development and operation of the assets and the fair value of the obligation can be reasonable estimated. We have determined that conditional AROs exist for our underground mains and services. We have non-legal cost of removal obligations that we record as a regulatory liability with balances of
$528.1 million
and
$538.0 million
as of December 31, 2016 and October 31, 2016, respectively. See Note 1 to the Consolidated Financial Statements in our Form 10-K for the year ended October 31, 2016 for information on the regulatory treatment of our AROs.
The following table presents the change in the liability associated with our conditional AROs.
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(in millions)
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Two Months Ended December 31, 2016
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Balance at October 31, 2016
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$
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14.1
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Liabilities incurred in the period
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0.7
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Liabilities settled
|
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(0.8
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)
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Accretion expense
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0.3
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Balance at December 31, 2016
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$
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14.3
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8
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GOODWILL AND INTANGIBLE ASSETS
GOODWILL
As of December 31, 2016 and October 31, 2016, we have
$48.9 million
of recorded goodwill related to the regulated utility prior to the Acquisition.
IMPAIRMENT TESTING
We are required to perform an annual goodwill impairment test as of the same date each year. With the change in our year end as discussed in Note 1, we have changed the date of our annual impairment testing of goodwill from October 31 to
August 31
to align with our parent, Duke Energy.
There have been no events or circumstances to occur since our annual goodwill assessment was performed as of October 31, 2016 that would more likely than not reduce the fair value of our reporting unit below its carrying value. The fair value of our reporting unit substantially exceeded the carrying value as of the most recent annual impairment analysis. Therefore,
no
impairment charges were recorded during the two months ended December 31, 2016.
On a quarterly basis, or when events or changes in circumstances indicate, we evaluate our investments in unconsolidated affiliates and long-lived assets for impairment. There have been
no
events or circumstances during the two months ended December 31, 2016 that resulted in any impairment charges. See Note 11 for further information on our other-than-temporary impairment (OTTI) assessment of one of our investments in an unconsolidated affiliate.
9
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RELATED PARTY TRANSACTIONS WITH DUKE ENERGY
Effective with the consummation of the Acquisition on
October 3, 2016
, we engage in related party transactions with Duke Energy and its subsidiary registrants in accordance with applicable state and federal regulations.
The following table presents amounts due from or due to Duke Energy that are included in "Receivables from affiliated companies" within "Current Assets" and "Accounts payable to affiliated companies" within "Current Liabilities" on the
Condensed Consolidated Balance Sheets
as of
December 31, 2016
and October 31, 2016.
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December 31,
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|
October 31,
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(in millions)
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2016
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2016
|
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Receivables from Duke Energy
|
$
|
7.2
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$
|
7.0
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Accounts payable to Duke Energy
|
8.1
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6.3
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Amounts related to transactions with Duke Energy occurring subsequent to the consummation of the Acquisition are included in the
Condensed Consolidated Statements of Operations and Comprehensive Income
for the two months ended
December 31, 2016
. The following financial information reflects amounts for the two months ended
December 31, 2016
and
2015
related to transactions, assuming the Acquisition had taken place November 1, 2015.
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(in millions)
|
2016
|
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2015
|
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Revenue from Duke Energy
(1)
|
$
|
13.5
|
|
|
$
|
13.4
|
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Corporate governance and shared service expenses
(2)
|
1.6
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(1)
We provide long-term natural gas delivery service to several of Duke Energy's subsidiaries' natural gas-fired power generation facilities in our market area. This intercompany profit on sales is not eliminated in accordance with accounting regulations prescribed under rate-based regulation, as discussed in Note 1.
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(2)
We are charged our proportionate share of corporate governance and other shared services costs, primarily related to human resources, employee benefits, legal and accounting fees, as well as other third-party costs. Certain Piedmont executives are responsible for all of Duke Energy's natural gas operations and related infrastructure. A proportionate share of these individuals' payroll and employee benefits is charged to Duke Energy's subsidiary registrants. These amounts are recorded in "Operations, maintenance and other" in the Condensed Consolidated Statements of Operations and Comprehensive Income.
|
See Note
15
for discussion of related party income taxes.
10
.
FINANCIAL INSTRUMENTS AND RELATED FAIR VALUE
DERIVATIVE ASSETS AND LIABILITIES UNDER MASTER NETTING ARRANGEMENTS
We maintain brokerage accounts to facilitate transactions that support our gas cost hedging plans with the purchase of financial gas call option derivative instruments (gas purchase options). The accounting guidance related to derivatives and hedging requires that we use a gross presentation, based on our election, for the fair value amounts of our gas purchase options. We use long position gas purchase options to provide some level of protection for our customers in the event of significant commodity price increases. As of
December 31, 2016
and October 31, 2016, we had long gas purchase options providing total coverage of
15.7 million
dekatherms and
15.4 million
dekatherms, respectively. The long gas purchase options held as of
December 31, 2016
are for the period from February 2017 through November 2017
.
DERIVATIVE ASSETS AND LIABILITIES - GAS SUPPLY CONTRACTS
We enter into forward gas supply contracts to provide diversification, reliability and gas cost benefits to our customers as part of our diversified gas supply portfolio. We evaluate all of our gas supply contracts at inception to determine if they meet the definition of a derivative in accordance with accounting guidance, whether any derivative contracts qualify as "normal purchases and normal sales" and would not be subject to fair value accounting requirements, or if they can be designated for hedge accounting purposes. We have certain long-dated, fixed quantity forward gas supply contracts that meet the definition of derivative instruments that should be recorded at fair value. We have included gas supply contracts requiring fair value accounting in "
Other
" in "
Current Liabilities
" and "
Deferred Credits and Other Liabilities
" in the
Condensed Consolidated Balance Sheets
. As these contracts have been entered into for our regulated utility operations, and as commodity costs are recoverable through our PGA clauses in the jurisdictions in which we operate, we have recorded the offset to an applicable regulatory asset.
FAIR VALUE MEASUREMENTS AND QUANTITATIVE AND QUALITATIVE DISCLOSURES
We use gas purchase options as financial instruments that are not designated as hedges for accounting purposes to mitigate commodity price risk for our customers. Based on our continual evaluation under derivative accounting standards of contracts added to our supply portfolio, we have determined that certain of these long-dated, fixed quantity gas supply contracts should be recorded at fair value.
The costs of our gas cost hedging plans for natural gas and all other costs related to hedging activities of our regulated gas costs are recorded in accordance with our regulatory tariffs approved by our state regulatory commissions, and thus are not accounted for as designated hedging instruments under derivative accounting standards. As required by the accounting guidance, we present our derivative positions at fair value on a gross basis and have only asset positions for all periods presented for the fair value of our gas purchase options held for our utility operations. There are
no
gas purchase
options in a liability position, and we have posted
no
cash collateral nor received any cash collateral under our master netting arrangements. Therefore, we have no offsetting disclosures for financial assets or liabilities for our gas purchase options held for utility operations. Our gas purchase options held for utility operations are held with one broker as our counterparty. We have only liability positions for our gas supply derivative contracts presented at fair value that are held for our utility operations.
We also have trading securities that are held in rabbi trusts established for certain deferred compensation plans and are included in "
Other
" within "
Investments and Other Assets
" on the
Condensed Consolidated Balance Sheets
. Securities classified within Level 1 include funds held in money market and mutual funds which are highly liquid and are actively traded on the exchanges.
We classify fair value balances based on the observance of those inputs into the fair value hierarchy levels as set forth in the fair value accounting guidance in Note 1 to the Consolidated Financial Statements in our Form 10-K for the year ended October 31, 2016.
The following table sets forth, by level of the fair value hierarchy, our financial and nonfinancial assets and liabilities that were accounted for at fair value on a recurring basis as of
December 31, 2016
and October 31, 2016. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their consideration within the fair value hierarchy levels. We have had
no
transfers between any level during the two months ended
December 31, 2016
and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Fair Value Measurements as of December 31, 2016
|
|
|
|
|
|
Significant
|
|
|
|
Effects of
|
|
|
|
|
|
Quoted Prices
|
|
Other
|
|
Significant
|
|
Netting and
|
|
|
|
|
|
in Active
|
|
Observable
|
|
Unobservable
|
|
Cash Collateral
|
|
Total
|
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
Receivables/
|
|
Carrying
|
|
(in millions)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Payables
|
|
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives held for distribution operations
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
Debt and equity securities held as trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
Money markets
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
Mutual funds
|
|
4.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.1
|
|
|
Total fair value assets
|
|
$
|
8.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8.1
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - gas supply contracts held for utility operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
186.7
|
|
|
$
|
—
|
|
|
$
|
186.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Fair Value Measurements as of October 31, 2016
|
|
|
|
|
|
Significant
|
|
|
|
Effects of
|
|
|
|
|
|
Quoted Prices
|
|
Other
|
|
Significant
|
|
Netting and
|
|
|
|
|
|
in Active
|
|
Observable
|
|
Unobservable
|
|
Cash Collateral
|
|
Total
|
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
Receivables/
|
|
Carrying
|
|
(in millions)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Payables
|
|
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives held for distribution operations
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
Debt and equity securities held as trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
Money markets
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
Mutual funds
|
|
3.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.7
|
|
|
Total fair value assets
|
|
$
|
5.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.7
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - gas supply contracts held for utility operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
187.9
|
|
|
$
|
—
|
|
|
$
|
187.9
|
|
In our discounted cash flow valuation, our unobservable input was the price of natural gas in future periods past the observable market price, commencing in the middle of the contract terms. The unobservable prices of our gas supply derivative contracts in the mid to later years of contract terms ranged from
$2.31
to
$4.18
per dekatherm.
The fair value of our gas supply derivative contracts is sensitive to the pricing differential of various natural gas indexes relevant to those particular contracts. An increased market price spread between the indexes would increase the fair value of the derivative and result in an unrealized loss, while conversely, a decreased market price spread would decrease the fair value of the derivative and result in an unrealized gain.
The following is a reconciliation of the gas supply derivative liabilities that are classified as Level 3 in the fair value hierarchy for the two months ended December 31, 2016 and 2015.
|
|
|
|
|
|
|
|
(in millions)
|
Two Months Ended December 31, 2016
|
|
Balance at October 31, 2016
|
$
|
187.9
|
|
|
Realized and unrealized losses:
|
|
|
Recorded to regulatory assets *
|
(1.2
|
)
|
|
Purchases, sales and settlements (net)
|
—
|
|
|
Transfer in/out of Level 3
|
—
|
|
|
Balance at December 31, 2016
|
$
|
186.7
|
|
|
|
|
|
(in millions)
|
Two Months Ended December 31, 2015
|
|
Balance at October 31, 2015
|
$
|
—
|
|
|
Realized and unrealized losses:
|
|
|
Recorded to regulatory assets *
|
149.4
|
|
|
Purchases, sales and settlements (net)
|
—
|
|
|
Transfer in/out of Level 3
|
—
|
|
|
Balance at December 31, 2015
|
$
|
149.4
|
|
|
|
|
|
* Included are the actual costs recorded within "Cost of natural gas" on the Condensed Consolidated Statements of Operations and Comprehensive Income due to the confidential nature of contract pricing.
|
We purchase natural gas for our regulated operations for resale under tariffs approved by state regulatory commissions. We recover the cost of gas purchased for regulated operations through PGA procedures. Our risk management policies allow us to use financial instruments to hedge commodity price risks, but not for speculative trading. The strategy and objective of our hedging programs are to use these financial instruments to reduce gas cost volatility for our customers.
Our regulated utility operations gas purchase options are used in accordance with programs filed with or approved by the NCUC, the Public Service Commission of South Carolina (PSCSC) and the TRA to hedge the impact of market fluctuations in natural gas prices. These gas purchase options are accounted for at fair value each reporting period. In accordance with regulatory requirements, the net gains and losses related to these gas purchase options are reflected in purchased gas costs and ultimately passed through to customers through our PGA procedures. In accordance with accounting provisions for rate-regulated activities, the operation of the hedging programs of the regulated utility operations as a result of the use of these gas purchase options is initially deferred as amounts due from customers included in "Regulatory Assets" within "Current Assets" or amounts due to customers included, when required, in "Regulatory liabilities" within "Current Liabilities" on the Condensed Consolidated Balance Sheets and recognized on the
Condensed Consolidated Statements of Operations and Comprehensive Income
as a component of "Cost of natural gas" when the related costs are recovered through our rates. These gas purchase options are exchange-traded derivative contracts. Exchange-traded contracts are generally based on unadjusted quoted prices in active markets and are classified within Level 1.
Our gas supply derivatives are generally based on unobservable inputs and are classified within Level 3. In accordance with regulatory provisions for rate-regulated activities, any gains and losses associated with these derivatives are reflected as a regulatory asset or liability, as appropriate, on the Condensed Consolidated Balance Sheets.
The following table presents the fair value and balance sheet classification of our gas purchase options and gas supply derivative contracts for natural gas as of
December 31, 2016
and October 31, 2016.
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|
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|
|
|
|
|
|
Fair Value of Derivative Instruments
|
|
|
|
December 31,
|
|
October 31,
|
|
(in millions)
|
|
2016
|
|
2016
|
|
Derivatives Not Designated as Hedging Instruments under Derivative Accounting Standards:
|
|
Financial Asset Instruments:
|
|
|
|
|
|
Current Assets - Gas purchase derivative assets
|
|
$
|
3.4
|
|
|
$
|
1.5
|
|
|
Nonfinancial Liabilities Instruments:
|
|
|
|
|
|
Current Liabilities - Gas supply derivative liabilities
|
|
34.4
|
|
|
41.5
|
|
|
Noncurrent Liabilities - Gas supply derivative liabilities
|
|
152.3
|
|
|
146.4
|
|
The following table presents the impact that our gas purchase options not designated as hedging instruments under derivative accounting standards would have had on the
Condensed Consolidated Statements of Operations and Comprehensive Income
for the two months ended
December 31, 2016
and
2015
, absent the regulatory treatment under our approved PGA procedures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
Amount of
|
|
Location of Gain (Loss)
|
|
|
|
Gain (Loss) Recognized
|
|
Gain (Loss) Deferred
|
|
Recognized through
|
|
|
|
on Derivative Instruments
|
|
Under PGA Procedures
|
|
PGA Procedures
|
|
|
|
|
|
|
|
|
|
|
|
Two Months Ended
|
|
Two Months Ended
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
Gas purchase options
|
|
$
|
0.2
|
|
|
$
|
(1.2
|
)
|
|
$
|
0.2
|
|
|
$
|
(1.2
|
)
|
|
Cost of natural gas
|
In Tennessee, the cost of gas purchase options and all other costs related to hedging activities up to
1%
of total annual gas costs are approved for recovery under the terms and conditions of our TIP as approved by the TRA. In South Carolina, the costs of gas purchase options are subject to and are approved for recovery under the terms and conditions of our gas hedging plan as approved by the PSCSC. In North Carolina, the costs associated with our hedging program are treated as gas costs subject to an annual cost review proceeding by the NCUC.
We would have recorded an unrealized gain (loss) of
$1.2 million
and
$(149.4) million
related to our gas supply derivative contracts in the
Condensed Consolidated Statements of Operations and Comprehensive Income
for the two months ended
December 31, 2016
and 2015, respectively, absent regulatory provisions for rate-regulated activities. We recognize the actual costs of our gas supply derivative contracts in the
Condensed Consolidated Statements of Operations and Comprehensive Income
as a component of "Cost of natural gas" in the month purchased.
Our long-term debt is presented at net cost. In developing the fair value of our long-term debt, we use a discounted cash flow technique, consistently applied, that incorporates a developed discount rate using long-term debt similarly rated by credit rating agencies combined with the U.S. Treasury benchmark with consideration given to maturities, redemption terms and credit ratings. The principal and fair value of our long-term debt, which is classified within Level 2, are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Principal
|
|
Fair Value
|
|
As of December 31, 2016
|
|
$
|
1,835.0
|
|
|
$
|
1,932.6
|
|
|
As of October 31, 2016
|
|
1,835.0
|
|
|
2,061.2
|
|
CREDIT AND COUNTERPARTY RISK
Information regarding our credit and counterparty risk is set forth in Note 6 to the Consolidated Financial Statements in our Form 10-K for the year ended October 31, 2016. During the two months ended December 31, 2016, there were no material changes in our credit and counterparty risk.
We enter into contracts with third parties to buy and sell natural gas. A significant portion of these transactions are with, or are associated with, energy producers, utility companies, off-system municipalities and natural gas marketers. The amount included in "Receivables" within "
Current Assets
" on the
Condensed Consolidated Balance Sheets
attributable to these entities amounted to
$16.2 million
, or approximately
11%
of our gross receivables as of
December 31, 2016
. Our policy requires counterparties to have an investment-grade credit rating at the time of the contract, or in situations where counterparties do not have investment-grade or functionally equivalent credit ratings, our policy requires credit enhancements that include letters of credit or parental guaranties. In either circumstance, our policy specifies limits on the contract amount and duration based on the counterparty’s credit rating and/or credit support. In order to minimize our exposure, we continually re-evaluate third-party creditworthiness and market conditions and modify our requirements accordingly.
RISK MANAGEMENT
Our financial derivative instruments do not contain material credit-risk-related or other contingent features that could require us to make accelerated payments.
We seek to identify, assess, monitor and manage risk in accordance with established comprehensive risk management policies under the direction of Duke Energy’s Chief Executive Officer and Chief Financial Officer. The Finance and Risk Management Committee of Duke Energy's Board of Directors receives periodic updates from Duke Energy's 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.
11
.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Condensed Consolidated Financial Statements include the accounts of our wholly owned subsidiaries who have investments in unconsolidated affiliates. These investments are in joint venture, energy-related businesses that are accounted for under the equity method.
OWNERSHIP INTERESTS
We have the following membership interests in these companies as of
December 31, 2016
.
|
|
|
|
|
|
|
|
|
Entity Name
|
|
Interest
|
|
Activity
|
|
Cardinal Pipeline Company, LLC (Cardinal)
|
|
21.49%
|
|
Intrastate pipeline located in North Carolina; regulated by the NCUC
|
|
Pine Needle LNG Company, LLC (Pine Needle)
|
|
45%
|
|
Interstate LNG storage facility located in North Carolina; regulated by the FERC
|
|
Hardy Storage Company, LLC (Hardy Storage)
|
|
50%
|
|
Underground interstate storage facility located in Hardy and Hampshire Counties, West Virginia; regulated by the FERC
|
|
Constitution Pipeline Company LLC (Constitution)
|
|
24%
|
|
To develop, construct, own and operate 124 miles of interstate natural gas pipeline and related facilities connecting shale natural gas supplies and gathering systems in Susquehanna County, Pennsylvania, to Iroquois Gas Transmission and Tennessee Gas Pipeline systems in New York; regulated by the FERC
|
|
Atlantic Coast Pipeline, LLC (ACP)
|
|
7%
|
|
To develop, construct, own and operate 600 miles of interstate natural gas pipeline with associated compression from West Virginia through Virginia into eastern North Carolina in order to provide interstate natural gas transportation services of Marcellus and Utica gas supplies into southeastern markets; regulated by the FERC
|
Our ownership interest in each entity is included in "
Investments in equity method unconsolidated affiliates
" within "
Investments and Other Assets
" on the
Condensed Consolidated Balance Sheets
. As of
December 31, 2016
and October 31, 2016, our investment balances are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
October 31,
|
|
(in millions)
|
|
2016
|
|
2016
|
|
Cardinal
|
|
$
|
13.9
|
|
|
$
|
14.2
|
|
|
Pine Needle
|
|
16.3
|
|
|
16.6
|
|
|
Hardy Storage
|
|
43.4
|
|
|
42.1
|
|
|
Constitution
|
|
92.4
|
|
|
93.1
|
|
|
ACP
|
|
46.2
|
|
|
33.2
|
|
|
Total investments in equity method unconsolidated affiliates
|
|
$
|
212.2
|
|
|
$
|
199.2
|
|
Our proportionate share of earnings or losses from these unconsolidated affiliates recorded as equity in earnings of unconsolidated affiliates and included within "Other Income and Expense" on the
Condensed Consolidated Statements of Operations and Comprehensive Income
are
$2.3 million
and
$4.6 million
for the two months ended
December 31, 2016
and 2015, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
As an equity method investor, we record the effect of certain transactions in our accumulated other comprehensive income (loss). Cardinal and Pine Needle enter into interest-rate swap agreements to modify the interest expense characteristics of their unsecured long-term debt which is nonrecourse to its members. For these transactions with these unconsolidated affiliates, we record our share of movements in the market value of these hedged agreements and contracts in "
Accumulated other comprehensive loss
" within "
Equity
" on the
Condensed Consolidated Balance Sheets
; the detail of our share of the market value of the various financial instruments are presented in "
Other Comprehensive Income (Loss), net of tax
" on the
Condensed Consolidated Statements of Operations and Comprehensive Income
.
RELATED PARTY TRANSACTIONS
We have related party transactions as a customer of our investments. For the two months ended
December 31, 2016
and 2015, these gas costs and the amounts we owed to our unconsolidated affiliates, as of
December 31, 2016
and October 31, 2016, are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party
|
|
Type of Expense
|
|
Cost of Natural Gas
(1)
|
|
Accounts Payable to Affiliated Companies
(2)
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
October 31,
|
|
(in millions)
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2016
|
|
Cardinal
|
|
Transportation costs
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
0.7
|
|
|
$
|
0.7
|
|
|
Pine Needle
|
|
Gas storage costs
|
|
1.7
|
|
|
1.9
|
|
|
0.9
|
|
|
0.9
|
|
|
Hardy Storage
|
|
Gas storage costs
|
|
1.5
|
|
|
1.5
|
|
|
0.8
|
|
|
0.8
|
|
|
Totals
|
|
|
|
$
|
4.7
|
|
|
$
|
4.9
|
|
|
$
|
2.4
|
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
In the Condensed Consolidated Statements of Operations and Comprehensive Income.
|
|
(2)
In the Condensed Consolidated Balance Sheets.
|
OTHER INFORMATION ON OUR EQUITY METHOD INVESTMENTS
Constitution
On April 22, 2016, the New York State Department of Environmental Conservation (NYSDEC) denied Constitution’s application for a necessary water quality certification for the New York portion of the Constitution pipeline. Constitution filed legal actions in the U.S District Court for the Northern District of New York and in the U.S Court of Appeals for the Second Circuit (U.S. Court of Appeals) challenging the legality and appropriateness of the NYSDEC’s decision. Both courts granted Constitution's motions to expedite the schedules for the legal actions. On November 16, 2016, oral arguments were heard in the U.S. Court of Appeals.
Constitution remains steadfastly committed to pursuing the project and intends to pursue all available options to challenge the NYSDEC's decision. In light of the denial of the certification, Constitution revised its target in-service date of the project to be as early as the second half of
2018
, assuming that the challenge process is satisfactorily and promptly concluded.
In July 2016, Constitution requested and the FERC approved an extension of the construction period and in-service deadline of the project to December 2018. Also in July, the FERC denied the New York Attorney General's (NYAG) complaint and request for a stay of the certificate order authorizing the project on the grounds that Constitution had improperly cut trees along the proposed route. The FERC found the complaint procedurally deficient and that there was no justification for a stay; it did find the filing constituted a valid request for investigation and thus referred the matter to FERC staff for further examination as may be appropriate. On November 22, 2016, the FERC denied the NYAG's request for reconsideration of this order.
Since April 2016 with the actions of the NYSDEC, Constitution stopped construction and discontinued capitalization of future development costs until the project's uncertainty is resolved. As a result, we evaluate our investment in the Constitution project for OTTI. In this period, we applied the methodology as described in Note 1 and Note 11 to the Consolidated Financial Statements in our Form 10-K for the year ended October 31, 2016, and there have been no material changes regarding legal and regulatory proceedings that affected this period's assessment. At this time, we believe we do not have an OTTI and have not recorded any impairment charge to reduce the carrying value of our investment. However, to the extent that the legal and regulatory proceedings have unfavorable outcomes, or if Constitution concludes that the project is not viable or does not go forward as legal and regulatory actions progress, our conclusions with respect to OTTI could change and may require that we recognize an impairment charge of up to our recorded investment in the project, net of any cash and working capital returned. We will continue to monitor and update our OTTI analysis as required. Different assumptions could affect the timing and amount of any charge recorded in a period.
Pending the outcome of the matters described above, and when construction proceeds, we remain committed to fund an amount in proportion to our ownership interest for the development and construction of the new pipeline. Our total anticipated contributions are approximately
$229.3 million
. Our contributions for the two months ended December 31, 2016 were
$0.2 million
, with our total equity contributions for the project totaling
$85.0 million
to date.
ACP
Our total anticipated contributions based on our ownership percentage for the ACP project are expected to be between
$350.0 million
to
$385.0 million
based upon updated projections that include the cost to reroute segments of the pipeline impacting U.S. Forest Service lands. Our contributions for the two months ended December 31, 2016 were
$12.1 million
, with our total equity contributions for the project totaling
$58.1 million
to date. The targeted in-service date remains the second half of
2019
.
On August 12, 2016, the FERC issued its notice of schedule for environmental review of the project and issued its draft environmental impact statement (EIS) on December 30, 2016 indicating that the proposed pipeline would not cause significant harm to the environment or protected populations. Under the notice of schedule, we anticipate that the FERC will issue its final EIS by June 30, 2017.
On March 2, 2015, ACP entered into a Precedent Agreement with Dominion Transmission, Inc. (DTI) for supply header transportation services that required ACP to provide assurance of its ability to meet its financial obligations to DTI. As ACP, independent of its members, is not currently creditworthy as required by DTI’s FERC Gas Tariff, ACP requested that its members provide proportionate assurance of ACP’s ability to meet its financial obligations under the Precedent Agreement. Based on our current ownership percentage, this commitment is capped at
$10.6 million
. This commitment ceases when DTI acknowledges that ACP is independently creditworthy in accordance with the Precedent Agreement, termination or expiration of the Precedent Agreement, or when we are no longer a member of ACP.
On July 13, 2015, the parent companies of the members of ACP entered into an indemnification agreement with an insurance company to secure surety bonds in connection with preparatory and pre-construction activities on the ACP project. Liability under the indemnification agreement is several and is capped at each member’s proportionate share, based on its membership interest in ACP, of losses, if any, incurred by the insurance company.
12
.
VARIABLE INTEREST ENTITIES
A variable interest entity (VIE) is an entity that is evaluated for consolidation using more than a simple analysis of voting control. The analysis to determine whether an entity is a VIE considers contracts with an entity, including various lease arrangements and contracts to purchase, sell or deliver natural gas and other similar agreements, credit support for an entity, the adequacy of the equity investment of an entity and the relationship of voting power to the amount of equity invested in an entity. This analysis is performed either upon the creation of a legal entity or upon the occurrence of an event requiring reevaluation, such as a significant change in an entity’s assets or activities. A qualitative analysis of control determines the party that consolidates a VIE. This assessment is based on (i) what party has the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) what party has rights to receive benefits or is obligated to absorb losses that could potentially be significant to the VIE. The analysis of the party that consolidates a VIE is a continual reassessment.
As of December 31, 2016, we have determined that our investments in Constitution and ACP are VIEs. These equity method investments are in development stage entities whose equity capitalization is insufficient to support the operations, with reliance upon its members to provide that support in proportion to each member's ownership interest as provided by capital calls in the limited liability company agreements. We have also provided a guarantee and indemnification support for ACP as discussed in Note 11. We have determined that we are not the primary beneficiary under VIE accounting guidance for consolidation of these entities as we do not have the power to direct the activities of these investments that most significantly impact their economic performance, and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Our other equity method investments in Cardinal, Pine Needle and Hardy Storage as discussed in
Note 11
are not VIEs as they have sufficient equity and the ability to support their operations; our contracts as a customer with these entities for gas transportation or storage are at regulated rates. We will continue to apply equity method accounting to all of our investments.
NON-CONSOLIDATED VIEs
The table below shows our VIEs not consolidated, Constitution and ACP, and how these entities impact the Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
December 31, 2016
|
|
October 31, 2016
|
|
Investments in equity method unconsolidated affiliates
|
|
$
|
138.6
|
|
|
$
|
126.3
|
|
|
Current liabilities - taxes payable/(receivable)
(1)
|
|
(1.4
|
)
|
|
(1.1
|
)
|
|
Deferred credits and other liabilities
|
|
3.9
|
|
|
3.7
|
|
|
Total liabilities
|
|
$
|
2.5
|
|
|
$
|
2.6
|
|
|
Net assets
|
|
$
|
136.1
|
|
|
$
|
123.7
|
|
|
|
|
|
|
|
|
(1)
Accrued income taxes are netted by jurisdiction on a consolidated basis and amounts are included in "Taxes accrued" within "Current Liabilities" on the Condensed Consolidated Balance Sheets.
|
We are not aware of any situation where the maximum exposure to loss significantly exceeds the carrying values shown above.
13
.
EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT RETIREMENT AND OTHER POST-RETIREMENT BENEFIT PLANS
We have a noncontributory, tax-qualified defined benefit pension plan (qualified pension plan) for our eligible employees. The qualified pension plan is closed to employees hired after December 31, 2007. Employees hired prior to January 1, 2008 continue to participate in the qualified pension plan. Employees hired or rehired after December 31, 2007 cannot participate in the qualified pension plan but are participants in the Money Purchase Pension (MPP) plan discussed below. We also have non-qualified, non-contributory defined benefit retirement plans which cover certain former employees, non-employee directors or surviving spouses.
Our policy is to fund amounts on an actuarial basis to provide assets sufficient to meet benefit payments to be paid to plan participants. We contributed
$10.0 million
to the qualified pension plan and
$0.1 million
to the non-qualified pension plans during each of the two months ended
December 31, 2016
and
2015
.
We provide certain postretirement health care and life insurance benefits to eligible retirees. Employees are eligible for these benefits if they have met age and service requirements at retirement, as set forth in the plan. Effective January 1, 2016, we replaced the existing retiree medical and dental group coverage for eligible retirees with a tax-free Health Reimbursement Arrangement (HRA). Under the HRA, participating eligible retirees and their dependents may qualify for a subsidy each year through the HRA account to help purchase medical and dental coverage available on public and private health care exchanges using a tax-advantaged account funded by us to pay for allowable medical and dental expenses.
Net periodic benefit costs disclosed in the table below represents the cost of the respective benefit plans for the periods presented. However, portions of the net periodic benefit costs disclosed in the table below have been capitalized as a component of property, plant and equipment.
The following table includes the components of net periodic benefit cost components for the two months ended
December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Pension
|
Nonqualified Pension
|
Other Benefits
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Service cost
|
|
$
|
2.0
|
|
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
Interest cost
|
|
2.1
|
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
Expected return on plan assets
|
|
(3.8
|
)
|
|
(4.0
|
)
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
Amortization of prior service (credit) cost
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
(0.1
|
)
|
|
Amortization of net loss
|
|
1.9
|
|
|
1.4
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
Settlement loss recognized
|
|
2.5
|
|
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost
|
|
$
|
4.4
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Settlement loss is a result of lump sum distributions related to severance activities exceeding periodic service and interest costs in the two months ended December 31, 2016. This settlement loss is included in costs to achieve expenses in Note 2.
|
In the current period, we changed the year end of our benefit plans from October 31 to December 31. As a result of this change, we re-measured our plans as of December 31, 2016, including updating the discount rate from
3.80%
at
October 31, 2016
to
4.10%
at
December 31, 2016
. This change in discount rate decreased our total net benefit obligation of our plans at
December 31, 2016
by
$9.7 million
to
$11.7 million
.
We anticipate that we will contribute the following amounts to our plans during the twelve month period ending December 31, 2017.
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Qualified pension plan
|
$
|
11.0
|
|
|
Nonqualified pension plans
|
0.5
|
|
|
OPEB plan
|
2.2
|
|
EMPLOYEE SAVINGS PLAN
We maintain a 401(k) plan where employees who have met minimum service requirements may defer a portion of their base salary and cash incentive payments to the plan, and we match a portion of their contributions. Employee contributions vest immediately, and company contributions vest after
six months
of service. Employees receive a company match of
100%
up to the first
5%
of eligible pay contributed. Our 401(k) matching contributions were
$1.3 million
during each of the two months ended
December 31, 2016
and
2015
.
The MPP is a defined contribution pension plan that allows the employee to direct the investments and assume the risk of investment returns. Under the MPP plan, we annually deposit a percentage of each participant’s pay into an account of the MPP plan. This contribution equals
4%
of the participant’s compensation plus an additional
4%
of compensation above the social security wage base up to the Internal Revenue Service (IRS) compensation limit. The participant is vested in this plan after
three years
of service. We did not make any contributions to the MPP plan during either of the two months ended
December 31, 2016
and
2015
. In January 2017, we contributed
$2.2 million
to the MPP plan.
OTHER
We have a non-qualified defined contribution restoration plan for certain officers at the vice president level and above where benefits payable under the plan are informally funded annually through a rabbi trust with a bank as the trustee. We contributed
$0.4 million
and
$0.5 million
to this plan during the two months ended
December 31, 2016
and
2015
, respectively.
14
.
SEVERANCE
In conjunction with the Acquisition, certain Piedmont senior executives terminated their employment from Piedmont effective with the closing of the Acquisition. The severance benefits owed to these executives were provided under contracts between the individual and Piedmont, effective upon a change in control. These severances will be paid in April 2017.
In September 2016, Piedmont announced a severance plan covering certain eligible employees whose employment will be involuntarily terminated without cause during the twelve-month period (or twenty-four months for certain senior level employees) following the close of the Acquisition. Upon the close of the Acquisition, positions within Piedmont began to be eliminated. These reductions are a part of the synergies expected to be realized with the Acquisition. The severance benefit payments will be made in accordance with the severance plan.
We recorded
$2.5 million
severance and related expenses that are included in "Operations, maintenance and other" on the
Condensed Consolidated Statements of Operations and Comprehensive Income
for the two months ended
December 31, 2016
. The table below presents the severance liability that is included in "Other" within "Current Liabilities" on the Condensed Consolidated Balance Sheets. Additional accruals can continue through October 3, 2018 as more positions are eliminated.
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Balance at October 31, 2016
|
$
|
18.7
|
|
|
Net Provisions/Adjustments
|
1.4
|
|
|
Cash Reductions
|
—
|
|
|
Balance at December 31, 2016
|
$
|
20.1
|
|
15
.
INCOME TAXES
EFFECTIVE TAX RATES
Our effective tax rates are included in the following table.
|
|
|
|
|
|
|
|
|
|
|
Two Months Ended December 31,
|
|
|
2016
|
|
2015
|
|
Effective tax rate
|
37.4
|
%
|
|
41.0
|
%
|
The decrease in our effective tax rate is primarily due to a decrease in compensation exceeding the deductible limitation under IRS regulations, a reduction in income tax expense related to the portion of the rate decrement implemented to refund excess deferred income taxes to customers in Tennessee and a decrease in the North Carolina corporate income tax rate.
We and our wholly owned subsidiaries will be included in the Duke Energy consolidated income tax returns for the period October 4, 2016 through December 31, 2016. Piedmont and each of our subsidiaries have entered into a tax sharing agreement with Duke Energy and subsidiaries. The tax sharing agreement provides allocation of consolidated tax liabilities and benefits based on amounts participants would incur as separate C-Corporations. Income taxes recorded for the period November 1, 2016 through December 31, 2016 are based on amounts we and our subsidiaries would incur as separate C-Corporations. "
Taxes accrued
" on the Condensed Consolidated Balance Sheets includes
$37.5 million
and
$31.5 million
payable to Duke Energy for federal income taxes due under the tax sharing agreement as of December 31, 2016 and October 31, 2016, respectively. In accordance with IRS regulations, we and our subsidiaries are jointly and severally liable for the federal tax liability.
16
.
SUBSEQUENT EVENTS
We monitor significant events occurring after the balance sheet date and prior to the issuance of the financial statements to determine the impacts, if any, of events on the financial statements to be issued. All subsequent events of which we are aware were evaluated. See
Note 6
and
Note 13
for information on subsequent event disclosure related to debt and credit facilities and employee benefit plans, respectively.