01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2009 Form 10-K shows a company in transition under economic pressure.
Net income attributable to Duke Energy fell to $1,075 milliona ($0.83 diluted EPS) from $1,362 million ($1.07) in 2008, driven mainly by a roughly $371 million non-cash goodwill impairment at Commercial Power's non-regulated Midwest generation unit, plus additional impairments of about $42 million on Midwest generating assets. Total operating revenues declined about 4% to $12.7 billion, reflecting weaker industrial sales (down roughly 14-15%) and lower fuel revenues. Reportable segment EBIT fell to $2.71 billion from $3.07 billion, with U.S. Franchised Electric and Gas, the largest and most stable segment, still contributing the majority of earnings at $2.32 billion.
The filing is important for investors on several fronts. Duke is planning roughly $14b-15 billion of capital expenditures over 2010-2012, mostly in regulated U.S. franchised operations, including the Cliffside Unit 6 coal plant, the Edwardsport IGCC plant, and gas combined-cycle units at Buck and Dan River. The Edwardsport IGCC cost estimate is under review and is expected to rise significantly above the $2.35 billion approved figure, which is a key execution risk.
Customer switching in Ohio, which reached about 40% of Commercial Power's native load, is pressuring the Ohio generation business, and the company flagged possible future goodwill charges. Dividends were $0.94c per share, and the company reported a 2010 voluntary severance program affecting about 8,750 eligible employees with estimated payments of roughly $130 million. Balance-sheet items to watch include total long-term debt rising to about $16.1 billion, a debt-to-capitalization ratio of about 44%, and credit ratings of BBB+/Baa2 at the parent level as of February 2010.
The company also plans to consolidate Cinergy Receivables beginning January 1, 2010, which will bring receivables and short-term debt onto the balance sheet. Ongoing litigation, including NSR Clean Air Act cases, asbestos claims with reserves of about $980 milliond, and the Cliffside permit challenges, adds contingent risk.
02—Key points
Key Highlights
- Net income attributable to Duke Energy fell 21% to $1,075 million ($0.83 per diluted share) from $1,362 million in 2008, primarily due to impairment charges.
- A non-cash goodwill impairment of about $371 million at Commercial Power's Midwest non-regulated generation unit, plus about $42 million in other generating-asset impairments, weighed on 2009 results.
- Operating revenues declined about 4% to $12.7 billion as industrial sales volumes dropped roughly 14-15% and fuel revenues fell.
- U.S. Franchised Electric and Gas remained the core earnings engine with segment EBIT of $2.32 billion, versus $0.03 billion from Commercial Power and $0.37 billion from International Energy.
- Planned 2010-2012 capital expenditures of $14-15 billion, with about $11 billion in regulated U.S. franchised operations; the Edwardsport IGCC cost estimate is under review and expected to rise significantly above $2.35 billion.
- Ohio customer switching reached about 40% of Commercial Power's native load, pressuring the non-regulated generation business and creating risk of further goodwill impairments.
- Total long-term debt of $16.1 billion, a debt-to-capitalization ratio near 44%, and a dividend of $0.94 per share, with the company planning to consolidate Cinergy Receivables starting January 1, 2010.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $12.73B$13.21B | −3.6% |
| Operating Expenses | $10.52B$10.77B | −2.3% |
| Operating Income | $2.25B$2.51B | −10.4% |
| Interest Expense | $751.00M$741.00M | +1.3% |
| Net Income | $1.07B$1.36B | −21.1% |
| EPS (Basic) | $2.49$3.24 | −23.1% |
| EPS (Diluted) | $2.49$3.21 | −22.4% |
| Shares Outstanding (Basic) | 431.00M421.67M | +2.2% |
| Shares Outstanding (Diluted) | 431.33M422.33M | +2.1% |
05—Questions
Frequently Asked Questions
Why did Duke Energy's 2009 earnings decline compared with 2008?
The main driver was a non-cash goodwill impairment of roughly $371 million at Commercial Power's non-regulated Midwest generation unit, caused by lower power prices, weaker load forecasts, customer switching in Ohio, and carbon-legislation uncertainty. Additional impairments of about $42 million on Midwest generating assets and a $33 million charge tied to Brazilian transmission fees also reduced earnings, while the effective tax rate rose to about 41% because the goodwill charge was not tax-deductible. Regulated operations were comparatively stable.
What are the biggest risks to Duke's capital spending plan?
The largest risk is cost overruns and recovery timing on major projects. The Edwardsport IGCC plant's cost estimate is under review in Indiana, and Duke expects the cost increase to be significantly higher than the previously identified $150 million. Cliffside Unit 6 and the gas combined-cycle projects also face permitting challenges and schedule risk. If state commissions disallow costs above approved amounts, future cash flows and earnings could be adversely affected.
How exposed is Duke to competition in Ohio?
Commercial Power's Ohio native load customers can switch to alternative suppliers. By December 31, 2009, switching was about 40% of native load, though Duke's retail subsidiary DERS recaptured about 60% of switched load at lower margins. Management expects an incremental 5% of load to switch in 2010. The Electric Security Plan runs through December 31, 2011, and the company faces uncertainty about pricing and the continued application of regulatory accounting after that period.
What is the outlook for dividends and balance sheet strength?
Duke paid $0.94 per share in 2009, up from $0.90, and says it expects to continue its policy of regular cash dividends, though amounts depend on earnings, capital needs, and board discretion. Duke expects its debt-to-capitalization ratio to remain around 44% in 2010 and plans about $1.7 billion of net new debt at operating subsidiaries plus about $400 million of equity issued through its dividend reinvestment plan. Credit ratings were BBB+ (S&P) and Baa2 (Moody's) at the parent as of February 1, 2010, and a downgrade could increase borrowing costs and collateral requirements.
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