Why did net income decline in 2007 even though operations improved?

Net income fell to $1,500 million from $1,863 million mainly because 2006 included roughly $246 million of pre-tax gain on the Crescent joint venture, about $783 million of income from discontinued operations (largely the natural gas businesses now spun off), and other one-time gains. Continuing-operations income actually rose to $1,522 million from $1,080 million, driven by a full year of Cinergy results and stronger regulated earnings.

What is Duke Energy's main growth strategy after the spin-off?

The company is focused on becoming a primarily regulated electric utility. Management plans roughly $23 billion of capital spending over 2008-2012 to add about 7,700 MW of regulated generation over ten years, mainly in the Carolinas and Indiana. Much of this spending is intended for base-load coal, IGCC, gas and a possible new nuclear plant, with cost recovery supported by 2007 legislation in North Carolina and South Carolina.

What are the biggest near-term risks to earnings and cash flow?

Key risks include the 2008 North Carolina rate reduction (partly offset by a one-time $80 million merger-savings rider), the expiration of Ohio's Rate Stabilization Plan at end-2008 with uncertain successor pricing, cost overruns or disallowances on Cliffside and Edwardsport, possible federal carbon regulation, drought effects on Carolinas generation, asbestos reserves at Duke Energy Carolinas, and ongoing New Source Review and antitrust litigation. Management says the company has adequate liquidity but warns that a credit-rating downgrade would raise borrowing costs.

How did the dividend change, and what does it signal?

Dividends paid per share fell to $0.86 in 2007 from $1.26 in 2006 because the spin-off of Spectra Energy shifted part of the prior dividend to the new company, so the two stand-alone dividends roughly match the former combined payout. The quarterly dividend was raised to $0.22 in mid-2007, and management plans a further $0.01 per-share increase beginning in Q3 2008. The company has paid dividends for 82 consecutive years.

Is Duke Energy financially healthy, and how is it funding its expansion?

The company reported $1.1 billion of cash and short-term investments against $742 million of short-term borrowings, and it maintains a $2.65 billion master credit facility. Operating cash flow was $3.2 billion in 2007. Credit ratings were A- at S&P and Baa2 at Moody's at the parent level, with Duke Energy Carolinas rated A3 by Moody's. Because the company does not plan to issue common equity for its capital program, funding will rely on debt, which is expected to push the debt-to-capitalization ratio up to roughly 40% by the end of 2008.

Duke Energy CORP 10-K FY2007 Annual Report

01—Abstract

Summary

Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.

Duke Energy's 2007 Form 10-K (filed February 29, 2008) reports a year defined by the January 2, 2007 spin-off of its natural gas businesses (Spectra Energy) and the full-year effect of the April 2006 Cinergy merger.

Reported net income was $1,500 million^a, or $1.19 basic and $1.18 diluted EPS, down from $1,863 million ($1.59 / $1.57) in 2006, largely because 2006 included large one-time gains such as the roughly $246 million Crescent JV gain and discontinued-operations income. Income from continuing operations rose to $1,522 million from $1,080 million, and total reportable segment EBIT grew to $3,009 million from $2,553 million, led by U.S. Franchised Electric and Gas, which earned $2,305 million of EBIT. The company is now primarily a regulated electric utility.

The U.S. Franchised Electric and Gas segment generates the majority of expected future earnings, and the filing points to the need for roughly $23 billion^b of capital expenditures over 2008-2012, with about $19 billion directed to that segment. Major projects include the Cliffside coal unit and gas-fired additions in the Carolinas, the 630 MW Edwardsport IGCC plant in Indiana, and a proposed new nuclear unit (William States Lee III). Management expects the debt-to-capitalization ratio to rise from about 35% to about 40% by year-end 2008, and dividends were cut to $0.86 per share for 2007 as a result of the spin-off, with a planned $0.01 quarterly increase beginning in Q3 2008.

Key risks flagged include North Carolina rate reductions effective January 1, 2008 (roughly a 5% average decrease, with a $210 million^c annual revenue reduction), pending Ohio legislation (SB 221) and the expiration of the Ohio Rate Stabilization Plan at end-2008, federal greenhouse-gas cap-and-trade proposals (estimated 2012 allowance costs of $930 million to $2.8 billion), asbestos liabilities at Duke Energy Carolinas, and ongoing New Source Review and other litigation. Credit ratings are A- at S&P and Baa2 at Moody's at the holding company level.

02—Key points

Key Highlights

Net income of $1,500 million ($1.18 diluted EPS) in 2007, down from $1,863 million ($1.57) in 2006, reflecting 2006 one-time gains and discontinued-operations income; continuing-operations income rose 41% to $1,522 million.
Total reportable segment EBIT increased to $3,009 million from $2,553 million, with U.S. Franchised Electric and Gas contributing $2,305 million (up $494 million), helped by favorable weather and a full year of Cinergy operations.
Capital plan of approximately $23 billion over 2008-2012 (about $5.1 billion projected for 2008), with roughly 75% allocated to U.S. Franchised Electric and Gas, focused on new coal, IGCC, gas and nuclear capacity.
Business-mix shift after the January 2007 spin-off of natural gas operations to Spectra Energy; 2007 dividends were $0.86 per share versus $1.26 in 2006, with a planned $0.01 per-share increase beginning Q3 2008.
North Carolina rate case concluded with an average 5% rate decrease in 2008 (rising to 7% after a one-time merger-savings rider expires), and clean-air cost amortization discontinued in favor of capitalization.
Balance sheet pressure: total assets fell to $49.7 billion from $68.7 billion, long-term debt dropped to $9.5 billion from $18.1 billion, and the debt-to-capitalization ratio is expected to rise to about 40% by end-2008 as new debt funds construction.
Significant policy exposure: estimated 2012 federal greenhouse-gas allowance costs of $930 million to $2.8 billion under the proposed S. 2191 bill, plus pending decisions on Ohio SB 221, the Indiana IGCC appeal, and the Cliffside and Lee nuclear approvals.

03—One dollar

04—Financials

Financial Highlights

10-KFY2007filed February 29, 2008

Revenue$12.72B Net Income$1.50B11.8% Net Margin EPS (Diluted)$3.54 Cash & Equivalents$678.00M Free Cash Flow$83.00M

Financial Statements

Revenue	$12.72B
Operating Expenses	$10.22B
Operating Income	$2.49B
Interest Expense	$685.00M
Net Income	$1.50B
EPS (Basic)	$3.57
EPS (Diluted)	$3.54
Shares Outstanding (Basic)	420.00M
Shares Outstanding (Diluted)	421.67M

05—Questions

Frequently Asked Questions

Why did net income decline in 2007 even though operations improved?
Net income fell to $1,500 million from $1,863 million mainly because 2006 included roughly $246 million of pre-tax gain on the Crescent joint venture, about $783 million of income from discontinued operations (largely the natural gas businesses now spun off), and other one-time gains. Continuing-operations income actually rose to $1,522 million from $1,080 million, driven by a full year of Cinergy results and stronger regulated earnings.
What is Duke Energy's main growth strategy after the spin-off?
The company is focused on becoming a primarily regulated electric utility. Management plans roughly $23 billion of capital spending over 2008-2012 to add about 7,700 MW of regulated generation over ten years, mainly in the Carolinas and Indiana. Much of this spending is intended for base-load coal, IGCC, gas and a possible new nuclear plant, with cost recovery supported by 2007 legislation in North Carolina and South Carolina.
What are the biggest near-term risks to earnings and cash flow?
Key risks include the 2008 North Carolina rate reduction (partly offset by a one-time $80 million merger-savings rider), the expiration of Ohio's Rate Stabilization Plan at end-2008 with uncertain successor pricing, cost overruns or disallowances on Cliffside and Edwardsport, possible federal carbon regulation, drought effects on Carolinas generation, asbestos reserves at Duke Energy Carolinas, and ongoing New Source Review and antitrust litigation. Management says the company has adequate liquidity but warns that a credit-rating downgrade would raise borrowing costs.
How did the dividend change, and what does it signal?
Dividends paid per share fell to $0.86 in 2007 from $1.26 in 2006 because the spin-off of Spectra Energy shifted part of the prior dividend to the new company, so the two stand-alone dividends roughly match the former combined payout. The quarterly dividend was raised to $0.22 in mid-2007, and management plans a further $0.01 per-share increase beginning in Q3 2008. The company has paid dividends for 82 consecutive years.
Is Duke Energy financially healthy, and how is it funding its expansion?
The company reported $1.1 billion of cash and short-term investments against $742 million of short-term borrowings, and it maintains a $2.65 billion master credit facility. Operating cash flow was $3.2 billion in 2007. Credit ratings were A- at S&P and Baa2 at Moody's at the parent level, with Duke Energy Carolinas rated A3 by Moody's. Because the company does not plan to issue common equity for its capital program, funding will rely on debt, which is expected to push the debt-to-capitalization ratio up to roughly 40% by the end of 2008.

06—Continue

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