01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2012 Form 10-K (filed March 1, 2013) reflects a transformational year defined by the July 2, 2012 merger with Progress Energy, which roughly tripled total assets to $113.9 billiona (from $62.5 billion) and expanded the regulated share of the business.
Reported 2012 net income attributable to Duke Energy was $1.77 billionb ($3.07 diluted EPS), up from $1.71 billion ($3.83) in 2011, though the per-share comparison is distorted by the 1-for-3 reverse split and roughly 258 million new shares issued to Progress shareholders. Management's adjusted EPS, which excludes special items and economic-hedge mark-to-market effects, was $4.32 versus $4.38 in 2011, a slight decline attributed to unfavorable weather, higher depreciation, and the Progress share dilution, partly offset by the Progress contribution and rate increases. The filing's central investor issues are capital intensity and regulatory execution.
Management projects 2013 capital expenditures of $5.9 to $6.3 billionc, with the Edwardsport IGCC plant (cost estimate raised to about $3.15 billion excluding financing costs, versus a rate-recovery cap of $2.595 billion) and Progress's Sutton plant as the remaining major fleet-modernization projects. Edwardsport produced $897 million of cumulative pre-tax charges, and 2012 net income absorbed $628 million of Edwardsport charges and $636 million of merger costs. The most significant new risk is the February 2013 decision to retire Crystal River Unit 3, which leaves $1.637 billion of net investment in regulatory assets, partly offset by a $835 million NEIL insurance settlement.
Duke also has four pending rate cases, and the proposed Levy nuclear project's total cost has grown to $19 to $24 billiond. The balance sheet has also shifted materially.
Long-term debt rose to about $36.4 billion from $18.7 billion, and goodwill of $16.4 billion (mostly from the Progress acquisition) now represents a meaningful share of equity, creating impairment sensitivity. Credit ratings are investment grade, though S&P carries a negative outlook on the Duke Energy Registrants, and the company's cash dividend ($3.03 per share in 2012) was maintained and is expected to continue.
02—Key points
Key Highlights
- Merger with Progress Energy closed July 2, 2012, expanding total assets to $113.9B (from $62.5B) and substantially increasing the regulated (USFE&G) share of earnings, with 2012 USFE&G segment income of $1.74B.
- Adjusted EPS of $4.32 in 2012 versus $4.38 in 2011 (GAAP diluted EPS $3.07 vs. $3.83), reflecting 2012 unfavorable weather, higher depreciation, and dilution from merger-related share issuance.
- Edwardsport IGCC plant cost estimate of about $3.154B (excluding financing costs) exceeds the IURC-approved rate cap of $2.595B; cumulative pre-tax impairments of $897M; in-service expected mid-2013.
- Crystal River Unit 3 retirement announced February 5, 2013, with $1.637B of net investment reclassified to regulatory assets; NEIL insurance settlement of $835M total ($530M new) partially offsets the impact.
- Capital expenditures planned at $5.9B to $6.3B for 2013; the fleet modernization program will allow retirement of up to 6,800 MW of older coal units by 2015, and Duke expects to issue about $4.3B of new debt in 2013.
- Long-term debt more than doubled to about $36.4B, and goodwill of $16.4B (vs. $3.8B in 2011) creates impairment sensitivity; the company reports $10.3B of subsidiary net assets with restricted transfer to the parent.
- Four rate cases were pending at year-end, including Duke Energy Carolinas' $446M North Carolina request (11.25% ROE) and Progress Energy Carolinas' settlement in principle implying a 4.7% first-year increase; dividends of $3.03 per share were maintained.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $17.91B$14.53B | +23.3% |
| Operating Expenses | $15.01B$11.76B | +27.6% |
| Operating Income | $2.91B$2.78B | +4.8% |
| Interest Expense | $1.24B$859.00M | +44.8% |
| Net Income | $1.77B$1.71B | +3.6% |
| EPS (Basic) | $3.07$3.83 | −19.8% |
| EPS (Diluted) | $3.07$3.83 | −19.8% |
| Shares Outstanding (Basic) | 574.00M444.00M | +29.3% |
| Shares Outstanding (Diluted) | 575.00M444.00M | +29.5% |
05—Questions
Frequently Asked Questions
How did the Progress Energy merger change Duke Energy's financial profile?
The July 2012 merger roughly doubled debt and nearly tripled total assets. Progress contributed about $4.9B of 2012 revenue and roughly $12.5B of goodwill, which was preliminarily allocated to the regulated USFE&G segment. Management expects the business risk profile to improve over time as the regulated share of earnings grows, but the company now carries substantially more leverage and regulatory exposure, particularly in Florida and the Carolinas.
What are the main financial risks from the Edwardsport IGCC project?
Duke Energy Indiana's Edwardsport cost estimate rose to about $3.154B excluding financing costs, against a rate-recovery cap of $2.595B approved by the IURC in December 2012. Duke has recorded $897M of cumulative pre-tax impairment and other charges, and any further cost increases above the cap would be charged to earnings and could be material. The plant is expected in service in mid-2013, and Duke is pursuing about $560M in arbitration damages against GE and Bechtel.
What does the Crystal River Unit 3 retirement mean for investors?
Progress Energy Florida decided to retire the damaged nuclear unit rather than repair it, after an independent review estimated repair costs of $1.49B to $3.43B. The decision leaves $1.637B of net investment in regulatory assets, with recovery allowed under the 2012 FPSC settlement, though the FPSC prudence review hearings are scheduled for June 2013. Replacement power costs and decommissioning, estimated at $989M in 2011 dollars, may be material and could be only partly recoverable.
How strong is Duke Energy's liquidity and credit position?
Duke had $1.8B of cash and short-term investments (of which $1.1B sits in foreign jurisdictions), and a $6B master credit facility with $4.9B available at year-end. Its senior unsecured ratings are BBB+ at Fitch, Baa2 at Moody's, and BBB at S&P, with a stable outlook at Fitch and Moody's and a negative outlook at S&P. The fixed-charge coverage ratio declined to 2.5x in 2012 from 3.2x in 2011, and the company projects 50/50 debt-to-equity capitalization for 2013.
What is the outlook for Duke's dividend and rate recovery?
Duke has paid quarterly cash dividends for 87 consecutive years, totaling $3.03 per share in 2012 (up from $2.97), and expects to continue its policy, though the amount is subject to the Board's discretion. Dividend growth depends on constructive rate outcomes: pending cases include Duke Energy Carolinas' $446M North Carolina request and Progress Energy Carolinas' settlement implying roughly 4.7% in 2013 with a 10.2% ROE, and additional South Carolina filings are planned for late 2013.
06—Continue