01—Abstract
Summary
Summary of the 10-K filed February 25, 2016. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's FY2015 10-K shows a company in transition: consolidated operating revenues fell slightly to $23.5 billiona (from $23.9 billion), while net income attributable to Duke Energy rose to $2.82 billion ($4.05 diluted EPS) from $1.88 billion ($2.66) in 2014, largely because 2014 included a $929 million pretax write-down on the Midwest generation business and a $373 million international repatriation tax charge.
On an adjusted basis, earnings were $3.15 billionb ($4.54 per diluted share), down from $3.22 billion ($4.55), as weaker Latin American hydrology, currency moves and lower NMC equity earnings offset better Regulated Utilities pricing and wholesale margins. The company executed several major portfolio moves in 2015: it sold the nonregulated Midwest generation fleet to Dynegy for about $2.8 billion, repurchased $1.5 billion of stock through an accelerated repurchase program, and completed the $1.25 billion purchase of NCEMPA's interests in certain Progress assets. It also agreed in October 2015 to acquire Piedmont Natural Gas for $4.9 billion in cash plus assumed debt of about $1.9 billion, targeting closing by year-end 2016, and on February 18, 2016 announced a process to divest the International Energy segment (carrying value about $2.7 billion), which would likely be dilutive but would reduce the company's risk profile.
The key investor watch items are coal ash remediation and related penalties, the Clean Power Plan (now stayed by the Supreme Court), the Piedmont regulatory approvals, the pending International Energy sale, and credit ratings, which carry a Negative outlook at the parent on S&P and Moody's. Capital spending of roughly $8.6 to $8.8 billionc is planned for 2016, financed largely with debt, and the dividend is being grown at about 4 percent annually.
02—Key points
Key Highlights
- Adjusted diluted EPS of $4.54 in 2015 versus $4.55 in 2014; GAAP diluted EPS rose to $4.05 from $2.66, mainly because 2014 included large one-time charges.
- Consolidated operating revenues of $23.46 billion, down about 2% year over year; Regulated Utilities revenues of $22.06 billion remain roughly 94% of the total.
- Completed the $2.8 billion sale of the nonregulated Midwest generation business to Dynegy on April 2, 2015, and executed a $1.5 billion accelerated stock repurchase.
- Announced the $4.9 billion Piedmont Natural Gas acquisition (targeted close by end of 2016) and launched a process to divest International Energy in February 2016.
- Capital expenditures of $8.4 billion in 2015, with projected 2016 capital and investment spending of about $8.8 billion; the Regulated Utilities segment accounts for most of the planned spend.
- Coal ash exposure is significant: the Dan River release, a $25 million NCDEQ penalty at L.V. Sutton, a $6.8 million penalty assessed in February 2016, and asset retirement obligations for ash closure of about $5.0 billion.
- Credit ratings outlook is Negative at Duke Energy, S&P and Moody's, with Fitch on Watch Negative; the company has a $7.5 billion Master Credit Facility and debt-to-capitalization near 52%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 25, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $22.37B$22.51B | −0.6% |
| Operating Expenses | $17.32B$17.68B | −2.0% |
| Operating Income | $5.08B$4.84B | +4.9% |
| Interest Expense | $1.53B$1.53B | −0.1% |
| Net Income | $2.82B$1.88B | +49.5% |
| EPS (Basic) | $4.05$2.66 | +52.3% |
| EPS (Diluted) | $4.05$2.66 | +52.3% |
| Shares Outstanding (Basic) | 694.00M707.00M | −1.8% |
| Shares Outstanding (Diluted) | 694.00M707.00M | −1.8% |
05—Questions
Frequently Asked Questions
Why did GAAP earnings more than double in 2015 while adjusted earnings were flat?
GAAP net income attributable to Duke Energy rose to $2.82 billion from $1.88 billion mainly because 2014 included a $929 million pretax Midwest generation write-down (recorded in discontinued operations, about $677 million after-tax total) and a $373 million tax charge on repatriating foreign earnings. Adjusted earnings, which exclude these special items, were roughly flat at $3.15 billion versus $3.22 billion, as Regulated Utilities improvements were offset by Latin American weakness.
What are the main risks to the Piedmont acquisition and what happens if it fails?
Completion requires approvals from state regulators in North Carolina, South Carolina and Tennessee, which may impose conditions that reduce anticipated benefits or lead the parties to abandon the deal. Duke Energy would owe Piedmont a $250 million termination fee in certain circumstances, and would bear transaction costs regardless of outcome, while Piedmont would owe Duke $125 million in some cases.
How significant is coal ash liability for Duke's financial outlook?
It is a major exposure. The company holds about $5.0 billion of asset retirement obligations for ash impoundment closure, and North Carolina law requires closure of high-priority basins by 2019 and the rest by 2029. Management expects recovery through rates, but disallowance would hurt earnings, and fines and lawsuits tied to the Dan River release and groundwater contamination remain unresolved.
Why is the International Energy divestiture important to investors?
The segment had a carrying value of about $2.7 billion and contributed $225 million of segment income in 2015, down sharply from $408 million in 2013 because of Brazilian drought and currency pressure. Management says a sale would be dilutive to earnings but would reduce risk and free proceeds to fund domestic growth. No offers had been solicited as of the filing, and no timeline was set.
What is the dividend and capital allocation picture?
Duke paid $3.24 per share in dividends in 2015 and expects to grow the dividend at about 4% annually, with a targeted payout ratio of 70 to 75% of adjusted EPS through 2020. Projected 2016 dividend payments are about $2.3 billion, and capital spending is largely debt-funded, with about $7.2 billion of cash from operations expected in 2016 against roughly $8.6 to $8.8 billion of capital spending.
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