01—Abstract
Summary
Summary of the 10-K filed February 24, 2017. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2016 10-K shows a year of portfolio transformation: the company closed the $5.0 billiona acquisition of Piedmont Natural Gas in October 2016 and completed the sale of its Latin American (International Disposal Group) businesses in December 2016 for roughly $1.9 billion in cash proceeds, which were used mainly to reduce holding-company debt.
Reported GAAP net income attributable to Duke Energy fell to $2,152 millionb ($3.11 per diluted share) from $2,816 million ($4.05) in 2015, driven primarily by a $514 million pretax loss on the International sale recorded in discontinued operations and $439 million of pretax Piedmont transaction and integration costs. Management's adjusted diluted EPS rose to $4.69 from $4.54, helped by favorable weather, rider-based pricing and cost control at the regulated electric segment, partly offset by higher storm costs and interest expense. The core regulated electric business (Electric Utilities and Infrastructure, about $3.0 billion of segment income) remains the earnings engine, with operating revenues of $21.4 billion and roughly 49,300 MW of owned generation.
Management expects about $30 billionc of Electric Utilities and Infrastructure growth investment and about $6 billion of Gas Utilities and Infrastructure investment over the next five years, with total projected capital expenditures of $8.8 billion in 2017 rising to $10.1 billion in 2019. Funding these plans will require continued debt issuance, with the filing projecting $6.5 billion of debt issuances in 2017 and no equity issuance that year.
Key risks for investors include coal ash closure costs and related North Carolina litigation, pending regulatory decisions on storm cost recovery (about $140 milliond from Hurricane Matthew), the outcome of the EPA Clean Power Plan, the Dan River and groundwater-related claims, and credit ratings: Moody's and Fitch carried a negative outlook on Duke Energy Corporation in February 2017, while S&P's outlook was stable. Balance-sheet leverage rose meaningfully, with long-term debt climbing to $45.6 billion from $36.8 billion, and goodwill increased to $19.4 billion following the Piedmont deal.
02—Key points
Key Highlights
- Adjusted diluted EPS of $4.69 for 2016, up from $4.54 in 2015, versus GAAP diluted EPS of $3.11 after a $0.93 per-share loss on the International business sale and $0.40 of after-tax Piedmont merger costs.
- Completed the $5.0 billion Piedmont Natural Gas acquisition on October 3, 2016, adding roughly 1 million+ gas distribution customers and about $3.4 billion of incremental goodwill.
- Sold Latin American businesses in December 2016 for about $1.9 billion of cash proceeds, primarily used to reduce holding-company debt; a $640 million after-tax loss on disposal was recorded.
- Electric Utilities and Infrastructure segment income rose to $3.04 billion from $2.82 billion, aided by rider revenues, favorable weather and operations and maintenance cost control.
- Long-term debt increased to $45.6 billion (from $36.8 billion) and total assets rose to $132.8 billion, reflecting $3.75 billion of senior notes issued for the Piedmont deal and $1.3 billion of nuclear asset-recovery bonds.
- Projected capital expenditures of $8.8 billion (2017), $10.0 billion (2018) and $10.1 billion (2019), with about $30 billion of electric growth investment planned over five years.
- Credit outlook is mixed: Moody's and Fitch carry negative outlooks on Duke Energy Corporation, while the Duke Energy Indiana outlook is positive at Fitch; the dividend was raised about 4% and the company paid its 90th consecutive annual dividend.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Duke Energy Corp kept $0.09.
- Revenue$22.74B100.0%
- Cost of revenue−$6.63B29.1%
- Gross profit$16.12B70.9%
- Operating costs−$10.92B48.0%
- Operating income$5.20B22.9%
- Interest, other & tax−$3.05B13.4%
- Net income$2.15B9.5%
Where FY2016 revenue went
$22.74B- Operating costs: $10.92B, 48% of revenue
- Cost of revenue: $6.63B, 29% of revenue
- Interest, other & tax: $3.05B, 13% of revenue
- Net income: $2.15B, 9.5% of revenue
Kept 9.5% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 24, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $22.74B$22.37B | +1.7% |
| Cost of Revenue | $6.63B— | — |
| Gross Profit | $16.12B— | — |
| Operating Expenses | $17.57B$17.32B | +1.4% |
| Operating Income | $5.20B$5.08B | +2.4% |
| Interest Expense | $1.92B$1.53B | +25.5% |
| Net Income | $2.15B$2.82B | −23.6% |
| EPS (Basic) | $3.11$4.05 | −23.2% |
| EPS (Diluted) | $3.11$4.05 | −23.2% |
| Shares Outstanding (Basic) | 691.00M694.00M | −0.4% |
| Shares Outstanding (Diluted) | 691.00M694.00M | −0.4% |
05—Questions
Frequently Asked Questions
Why did GAAP earnings fall sharply in 2016 even though adjusted earnings rose?
GAAP net income attributable to Duke Energy declined to $2.15 billion ($3.11 per share) from $2.82 billion ($4.05 per share). The main drivers were a $514 million pretax loss on the sale of the International Disposal Group (with a total after-tax loss of about $640 million, including $620 million of cumulative foreign currency translation losses) and $439 million of pretax Piedmont acquisition and integration costs. Management excludes these items from adjusted EPS, which increased to $4.69 from $4.54.
How did the Piedmont Natural Gas acquisition change Duke Energy's business mix?
Piedmont added a regulated natural gas distribution platform serving more than one million customers in North Carolina, South Carolina and Tennessee, and created a new Gas Utilities and Infrastructure reportable segment alongside Electric Utilities and Infrastructure and Commercial Renewables. The company assumed about $2.0 billion of Piedmont's debt, and the segment contributed $67 million of earnings after the acquisition date in 2016. Management says the deal is intended to build a long-term natural gas infrastructure platform, including the Atlantic Coast Pipeline and Sabal Trail projects.
What are the largest legal and regulatory risks related to coal ash?
Duke Energy must close North Carolina coal ash basins by 2029 under the Coal Ash Act, and closure costs for ash impoundments are a major source of uncertainty; asset retirement obligations for ash closure total about $5.2 billion. Risks include disallowance of recovery by regulators, potential reclassification of basins, ongoing shareholder derivative litigation, groundwater contamination claims from nearby residents, and remaining federal and state enforcement actions following the 2014 Dan River release and the 2015 guilty pleas that carried about $68 million of fines and restitution plus $34 million of community service payments.
How much capital will Duke Energy need, and how will it be funded?
Projected capital and investment expenditures are $8.8 billion in 2017, $10.0 billion in 2018 and $10.1 billion in 2019. The company plans to fund these largely through operating cash flow (projected at $6.8 billion to $8.8 billion over the period) and debt issuances of $6.5 billion in 2017, $6.7 billion in 2018 and $5.4 billion in 2019, with modest equity issuance beginning in 2018. Dividend payments are projected at $2.45 billion to $2.65 billion annually, and the company targets a 70 to 75 percent payout ratio.
What are the main credit and liquidity considerations for investors?
Duke Energy Corporation's senior unsecured debt is rated BBB+ by Fitch and Moody's (Baa1) and BBB+ by S&P (A- issuer rating), with Fitch and Moody's outlooks negative. The Master Credit Facility totals $7.5 billion and had about $5.6 billion of available capacity at year-end 2016. Total debt was about 55 percent of capitalization. A downgrade below investment grade would increase borrowing costs and could require collateral postings under various agreements.
06—Continue