01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's FY2011 Form 10-K (filed February 28, 2012) shows a company in the middle of a major transition.
Net income attributable to Duke Energy rose 29% to $1,706 milliona ($1.28 per diluted share), up from $1,320 million ($1.00) in 2010, while Adjusted Earnings (a non-GAAP measure) grew modestly to $1,943 million ($1.46 per share) from $1,882 million ($1.43). The 2010 comparison was depressed by $660 million of Midwest generation impairments, while 2011 included a $222 million pre-tax Edwardsport IGCC impairment and a $79 million emission allowance write-down. Operating revenues grew 2% to $14.5 billion, and cash from operations was $3.7 billion, down from $4.5 billion, largely due to coal inventory build and working capital changes.
The dominant forward-looking story is the pending merger with Progress Energy, announced January 2011, which would issue roughly 257 million post-reverse-split shares (after a 1-for-3 reverse split) and assume about $15 billionb of Progress debt, with goodwill of about $11 billion. FERC rejected the companies' initial market-power mitigation plan in December 2011, and regulatory approvals remain unresolved, with a termination fee of $675 million payable by Duke under specified circumstances. Management guides 2012 adjusted diluted EPS to $1.40 to $1.45 and projects capital expenditures of $4.3 to $4.5 billion.
Risk concentrates in the regulated Midwest and Indiana projects. The Edwardsport IGCC plant (about 97% complete) has a cost estimate of roughly $2.98 billionc excluding financing costs, against a proposed recoverable cap of $2.72 billion, and the Indiana Utility Regulatory Commission's final orders are not expected before late 2012.
The company also faces roughly $4.5 to $5 billiond of estimated compliance costs for EPA rules over ten years, and Ohio's new electric security plan separates generation from retail load effective January 2012, which will pressure Commercial Power margins. The balance sheet is robust, with total assets of $62.5 billion, but long-term debt has risen to $18.7 billion, and credit ratings are investment grade (S&P BBB+ at the parent level).
02—Key points
Key Highlights
- Net income attributable to Duke Energy of $1,706 million ($1.28 diluted EPS) for 2011, up from $1,320 million ($1.00) in 2010; Adjusted Earnings of $1,943 million ($1.46 per share) versus $1,882 million ($1.43).
- Pending all-stock merger with Progress Energy (announced January 2011): about 257 million new Duke shares after a 1-for-3 reverse split, roughly $17 billion equity value, about $11 billion of goodwill, and $15 billion of assumed debt; FERC rejected the mitigation plan in December 2011 and the merger agreement's outside date was extended to July 8, 2012.
- Edwardsport IGCC plant: pre-tax impairments of $222 million (2011) and $44 million (2010); estimated cost now about $2.98 billion excluding financing costs versus a $2.72 billion proposed cost cap, with IURC final orders not expected before the end of Q3 2012.
- Ohio electric security plan effective January 1, 2012 separates generation from retail load, with a $110 million annual stability charge through 2014, while lower PJM capacity prices reduce Commercial Power's revenues and earnings through 2014.
- 2012 guidance: adjusted diluted EPS of $1.40 to $1.45, capital expenditures of $4.3 to $4.5 billion, and roughly $400 million of combined base rate increases from the 2011 North Carolina and South Carolina rate cases taking effect in 2012.
- Cash from operations fell to $3.7 billion in 2011 from $4.5 billion in 2010, driven mainly by a coal inventory build of about $247 million and working capital changes; total assets were $62.5 billion and long-term debt was $18.7 billion.
- Environmental exposure: EPA rules (MATS, CSAPR, Clean Water Act 316(b), coal combustion residuals) could require $4.5 to $5 billion of control equipment over ten years and accelerated retirements of about 3,300 MW of coal capacity.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $14.53B$14.27B | +1.8% |
| Operating Expenses | $11.76B$11.96B | −1.7% |
| Operating Income | $2.78B$2.46B | +12.8% |
| Interest Expense | $859.00M$840.00M | +2.3% |
| Net Income | $1.71B$1.32B | +29.2% |
| EPS (Basic) | $3.83$3.00 | +27.7% |
| EPS (Diluted) | $3.83$3.00 | +27.7% |
| Shares Outstanding (Basic) | 444.00M439.00M | +1.1% |
| Shares Outstanding (Diluted) | 444.00M440.00M | +0.9% |
05—Questions
Frequently Asked Questions
What is the status of the Progress Energy merger, and what could derail it?
Shareholders of both companies approved the merger in August 2011, and the NCUC, KPSC, NRC and the Hart-Scott-Rodino waiting period have cleared. FERC conditionally approved it in September 2011 but in December 2011 rejected the companies' mitigation plan for wholesale market-power concerns, and the joint dispatch and OATT filings were dismissed without prejudice. A revised plan was given advance notice to the NCUC in February 2012. The PSCSC has yet to rule, and the outside date was extended to July 8, 2012. Duke would owe a $675 million termination fee in specified circumstances, and Progress would owe $400 million.
How much of Duke's earnings depends on regulated operations versus unregulated generation?
U.S. Franchised Electric and Gas (USFE&G) produced the majority of segment EBIT, at $2,604 million in 2011 versus $3,508 million total reportable segment EBIT. Commercial Power contributed $225 million and International Energy $679 million, with Other at negative $261 million. USFE&G's operations are substantially cost-of-service regulated, which dampens commodity exposure, while Commercial Power is more exposed to wholesale prices and PJM capacity pricing, which the filing expects to decline through 2014.
What are the main risks to the Edwardsport IGCC project?
Costs have risen from the original $1.985 billion estimate to about $2.98 billion excluding financing costs. Duke Energy Indiana proposed recovery capped at $2.72 billion, with costs above $2.76 billion subject to prudence review. Intervenors allege fraud, concealment and gross mismanagement and seek to limit recovery to the original estimate. Phase I and II hearings concluded January 24, 2012, and final IURC orders are not expected before late 2012. Any disallowance or further cost increase would be an additional charge to earnings, potentially material.
Is the dividend secure, and what is the payout trend?
Duke paid quarterly dividends for 86 consecutive years and declared $0.99 per share for 2011, up from $0.97 in 2010 and $0.94 in 2009. The company says it expects to continue regular cash dividends and to grow the annual dividend, but the amount depends on future earnings, capital requirements and board action. Subsidiary dividend restrictions from Cinergy merger conditions limit upstream cash, though management does not expect these to constrain dividend payments, with $8.6 billion of subsidiary net assets subject to restriction.
What are the credit ratings and debt maturity profile?
As of February 1, 2012, the parent's senior unsecured ratings were BBB+ at S&P and Baa2 at Moody's, while Duke Energy Carolinas was rated A- and A3, and Ohio and Indiana were rated A- and Baa1. Total debt was about $21.0 billion at year-end 2011, with $1.9 billion of current maturities, including $750 million of 6.25% notes repaid in January 2012. The company has a new $6 billion five-year master credit facility, of which $4 billion was available at closing and $3.3 billion of total borrowing capacity was available across facilities at year-end.
06—Continue