01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2010 Form 10-K (filed February 25, 2011) reports net income attributable to Duke Energy of $1,320 milliona, or $1.00 diluted EPS, up from $1,075 million ($0.83) in 2009.
Results were held back by $660 millionb of goodwill and other impairment charges in the non-regulated Midwest generation business, which compares with $413 million in 2009. Operating revenues rose 12% to $14.27 billion, with the regulated U.S. Franchised Electric and Gas (USFE&G) segment delivering EBIT of $2.97 billion, up 28%, on new North Carolina and South Carolina base rates, favorable weather, and higher AFUDC equity. Commercial Power posted an EBIT loss of $229 million, driven by impairments and customer switching in Ohio, where switching reached about 65% of retail load.
The largest investor question is the pending merger with Progress Energy, announced January 8, 2011. Progress shareholders would receive 2.6125 Duke shares per share, and the transaction would add roughly 765 million shares, which Duke would then reverse-split 1-for-3. The filing values the deal at about $14 billionc, implies $7-8 billion of incremental goodwill, and carries a $675 million termination fee payable by Duke.
Management targets completion by year-end 2011. Capital spending is guided at $4.5d-5.0 billion for 2011, and the company expects to file several rate cases in 2011 and 2012. The balance sheet is solid but levered.
Total assets were $59.1 billion, long-term debt was $17.9 billion, and the debt-to-capitalization ratio is about 45%, with the company expecting 47% in 2011. Credit ratings are BBB+/Baa2 at the parent and A-/Baa2 to A3 at the regulated subsidiaries. Key risks include the Edwardsport IGCC project, where cost estimates rose to $2.88 billion amid regulatory scrutiny in Indiana, the Ohio market transition after the ESP expires in 2011, potential greenhouse gas and EPA emissions rules, and ongoing asbestos and litigation exposure at Duke Energy Carolinas.
02—Key points
Key Highlights
- Diluted EPS rose to $1.00 in 2010 from $0.83 in 2009, while net income attributable to Duke Energy increased 23% to $1,320 million.
- Goodwill and asset impairments reached $660 million in 2010, mainly on non-regulated Midwest generation assets, and weighed on Commercial Power, which posted an EBIT loss of $229 million.
- USFE&G EBIT grew 28% to $2,966 million on new North Carolina and South Carolina base rates, favorable weather, and higher AFUDC equity.
- The pending Progress Energy merger would issue about 765 million Duke shares, creating the largest U.S. electric utility by enterprise value, with a targeted close by end-2011 and a $675 million termination fee.
- Capital spending is projected at $4.5-5.0 billion in 2011, with about $7 billion committed to generation fleet modernization, including Cliffside Unit 6, Edwardsport IGCC, and the Buck and Dan River gas plants.
- Operating cash flow increased to $4.5 billion from $3.5 billion, and the company paid a dividend of $0.97 per share, its 85th consecutive year of quarterly dividends.
- Edwardsport IGCC cost estimate rose to $2.88 billion, with an Indiana IURC proceeding pending and a possible disallowance that could create additional charges.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $14.27B$12.73B | +12.1% |
| Operating Expenses | $11.96B$10.52B | +13.7% |
| Operating Income | $2.46B$2.25B | +9.4% |
| Interest Expense | $840.00M$751.00M | +11.9% |
| Net Income | $1.32B$1.07B | +22.8% |
| EPS (Basic) | $3.00$2.49 | +20.5% |
| EPS (Diluted) | $3.00$2.49 | +20.5% |
| Shares Outstanding (Basic) | 439.00M431.00M | +1.9% |
| Shares Outstanding (Diluted) | 440.00M431.33M | +2.0% |
05—Questions
Frequently Asked Questions
How does the pending Progress Energy merger affect Duke Energy shareholders?
Duke shareholders keep their shares, but the merger would issue about 765 million new common shares to Progress holders at 2.6125 Duke shares per Progress share, before the planned 1-for-3 reverse split. The deal requires approval from both shareholder bases and multiple federal and state regulators, including the NCUC, PSCSC, FPSC, IURC, KPSC, PUCO, FERC, and NRC. Duke expects goodwill of $7-8 billion and assumes about $12 billion of Progress debt. Duke would owe a $675 million termination fee in specified circumstances.
Why did Duke record large impairment charges in 2010?
Duke recorded $660 million of impairments in 2010, including a $500 million goodwill write-off and $160 million of asset and emission allowance writedowns in its non-regulated Midwest generation unit. Drivers included sustained lower forward power prices, expected tighter EPA rules on coal plants lacking emission controls, and rising customer switching in Ohio. A further $216 million goodwill charge was taken at the regulated Ohio transmission and distribution unit.
What is the outlook for Duke's Ohio generation business?
Commercial Power's retail load in Ohio operates under an Electric Security Plan that expires December 31, 2011. Customer switching reached about 65% of Ohio retail load, and Duke Energy Retail recaptured about 60% of switched load. Duke filed a Market Rate Offer in November 2010, but the PUCO rejected the application on February 23, 2011 because it did not meet the five-year MRO requirement, and Duke plans to refile in early Q2 2011. Earnings after the ESP expires could be lower, since pricing is expected to reflect projected 2011 power prices, which are below 2008 levels.
Is Duke's balance sheet and credit profile at risk from the expansion program?
Duke expects its debt-to-total-capitalization ratio to reach 47% in 2011, with about $2.2 billion of net new debt planned. Liquidity includes a $3.14 billion master credit facility that expires June 2012, with $2.4 billion of available capacity at year-end 2010, plus $0.2 billion of regional facilities. Credit ratings were affirmed in January 2011, and Duke Energy Ohio's outlook was revised to stable from positive. Duke has said it could defer some discretionary 2011 capital spending if the economic recovery stalls, and bonus depreciation could generate $1.5-3.0 billion of cumulative cash benefits.
What are the largest project and litigation risks disclosed?
Edwardsport IGCC cost estimates increased to $2.88 billion, and the Indiana Utility Regulatory Commission is reviewing the cost increase in a subdocket proceeding with hearings planned for 2011, so any disallowance could result in additional charges. Duke Energy Carolinas also faces asbestos claims with $853 million of reserves, a federal New Source Review enforcement action, and a Cliffside Unit 6 air permit challenge. Duke has also reported that a Crescent Resources Litigation Trust has sued over a 2006 transaction, seeking to recover about $1.2 billion. A shareholder action challenges the Progress merger.
06—Continue