01—Abstract
Summary
Summary of the 10-K filed February 28, 2014. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2013 Form 10-K reports a year dominated by the July 2012 Progress Energy merger, which was consolidated for a full year in 2013 and drove a jump in revenue to $24.6 billiona (from $19.6 billion) and net income attributable to Duke Energy to $2.67 billion ($3.76 per diluted share, versus $3.07 in 2012).
Adjusted earnings rose to $3.07 billionb ($4.35 per diluted share), and management guides 2014 adjusted diluted EPS to $4.45-$4.60. Regulated Utilities produced $2.5 billion of segment income and remains the core earnings driver, supported by constructive rate cases in all five general rate proceedings and completion of the $9 billion fleet modernization program, including the Edwardsport IGCC plant and the Sutton combined-cycle plant. The filing also flags several material risks.
Duke Energy announced in February 2014 an exit from its nonregulated Midwest generation business, which it expects to reclassify about $3.5 billionc of assets as held for sale and record a pretax impairment of $1 billion to $2 billion in the first quarter of 2014. Crystal River Unit 3 was retired after containment delamination, producing a $295 million regulatory asset write-off and a $57 million joint-owner charge. A Dan River ash basin release in February 2014, estimated at 30,000 to 39,000 tons of ash, carries uncertain remediation and penalty exposure, and the company has received federal criminal subpoenas related to the event.
Ongoing items include North Carolina Supreme Court appeals of rate cases, possible MVP cost liability at Duke Energy Ohio (a $2.7 billiond undiscounted estimate), and the environmental compliance cost estimate of $4.5 to $5.5 billion over ten years. Financially, operating cash flow rose to $6.4 billion, while long-term debt increased to $38.2 billion.
The company continued paying dividends of $3.09 per share, a 2% annual growth pace with a stated target payout ratio of 65% to 70% of adjusted EPS. Total capital expenditures for 2014 are projected at $5.8 billion to $6.1 billion, rising to $7.2 billion to $8.2 billion by 2016.
02—Key points
Key Highlights
- Net income attributable to Duke Energy of $2.67 billion ($3.76 diluted EPS) versus $1.77 billion ($3.07) in 2012; adjusted EPS of $4.35 compared with $4.32 in 2012.
- Total operating revenues of $24.6 billion, up 25% from $19.6 billion, reflecting a full year of Progress Energy results following the July 2012 merger.
- Regulated Utilities segment income of $2.5 billion, with rate increases approved across all five general rate cases, adding roughly $600 million in annualized revenues when fully implemented.
- Exit from nonregulated Midwest generation announced February 2014: about $3.5 billion of assets to be reclassified as held for sale, with an estimated $1 billion to $2 billion pretax impairment in Q1 2014.
- Operating cash flow of $6.4 billion; dividends paid of $2.19 billion ($3.09 per share declared, up from $3.03), with a 65% to 70% target payout ratio on adjusted EPS.
- Material legal and environmental exposure from the February 2014 Dan River ash basin release, with an unquantified remediation cost and a federal criminal investigation; Crystal River Unit 3 retirement also produced $352 million of 2013 charges.
- 2014 adjusted diluted EPS guidance of $4.45 to $4.60, with capital expenditures of $5.8 billion to $6.1 billion planned for 2014.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 28, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $22.76B$17.91B | +27.0% |
| Operating Expenses | $17.89B$15.01B | +19.2% |
| Operating Income | $4.85B$2.91B | +66.7% |
| Interest Expense | $1.54B$1.24B | +24.0% |
| Net Income | $2.67B$1.77B | +50.7% |
| EPS (Basic) | $3.77$3.07 | +22.8% |
| EPS (Diluted) | $3.76$3.07 | +22.5% |
| Shares Outstanding (Basic) | 706.00M574.00M | +23.0% |
| Shares Outstanding (Diluted) | 706.00M575.00M | +22.8% |
05—Questions
Frequently Asked Questions
Why did reported net income rise so sharply in 2013 compared with 2012?
Most of the increase reflects the full-year inclusion of Progress Energy, which was merged on July 2, 2012. The 2012 results also included large merger costs, Edwardsport IGCC impairments and charges, and FERC mitigation costs, so the year-over-year comparison is distorted. On an adjusted basis, EPS rose only modestly, from $4.32 to $4.35, which suggests underlying growth was steady but was offset by higher depreciation, lower AFUDC, and Crystal River charges.
How significant is the Midwest generation exit for investors?
It is significant but largely a balance-sheet event. Duke Energy Ohio plans to exit the nonregulated Midwest generation business by early to mid-2015, reclassifying about $3.5 billion of carrying value and recording an estimated $1 billion to $2 billion pretax impairment in the first quarter of 2014. The business sits in Commercial Power, which contributed very little segment income in 2013 (about $(3) million, a loss), so the exit is expected to reduce earnings volatility from merchant exposure rather than materially reduce core earnings.
What are the main regulatory and environmental risks to the dividend and earnings outlook?
Key risks include the Dan River ash basin release, whose remediation, penalty and litigation costs cannot yet be estimated; pending North Carolina Supreme Court appeals challenging rate of return and capital structure; the MVP cost claim at Duke Energy Ohio, which could be substantial; and the EPA rules (MATS, Clean Water 316(b), coal ash, effluent guidelines, and CO2 standards) that could require $4.5 to $5.5 billion of new controls over ten years. Most of these costs are expected to be recoverable through regulated rates, but recovery is not assured.
Is the dividend sustainable at the current pace?
Dividends per share were $3.09 in 2013, and management targets a 65% to 70% payout ratio based on adjusted EPS, which at $4.35 implies a payout near 71%. Management indicates dividend growth of about 2% annually, slower than earnings growth, and expects to continue paying regular dividends. Holders should note that the payout is already at the upper end of the target range, which limits near-term flexibility if earnings disappoint.
How is leverage and liquidity positioned after the merger?
Long-term debt rose to $38.2 billion at year-end 2013, and capitalization was roughly 50% debt and 50% equity, with a projected shift to 48% debt by 2014. Fixed-charge coverage improved to 3.0 times in 2013 from 2.5 times in 2012. The company holds a $6 billion master credit facility through December 2018, and its senior unsecured ratings are BBB (S&P), A3 (Moody's) and BBB+ (Fitch), with stable outlooks as of February 2014.
06—Continue