01—Abstract
Summary
Summary of the 10-K filed February 21, 2018. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2017 Form 10-K, filed February 21, 2018, describes a company that completed a multiyear portfolio transition in 2017, operating as a domestic regulated energy infrastructure business after acquiring Piedmont Natural Gas in October 2016 and exiting Latin America in December 2016.
Reported GAAP net income attributable to Duke Energy was $3,059 milliona, or $4.36 per diluted share, versus $3.11 in 2016. Adjusted diluted EPS declined to $4.57 from $4.69, driven mainly by unfavorable weather (including Hurricane Irma), higher financing costs from the Piedmont acquisition, and higher depreciation. Management reaffirmed 4 to 6 percent EPS growth over its five-year planning horizon and a dividend growth expectation of roughly 4 to 6 percent annually through 2022, with a 70 to 75 percent payout target.
The filing is dominated by policy and balance-sheet issues. The Tax Cuts and Jobs Act reduced the federal corporate rate from 35 to 21 percent, producing a $112 millionb net provisional tax benefit at the consolidated level, but the company recorded an $8.3 billion regulatory liability for the revalued deferred taxes that is expected to flow back to customers, and cash taxes are expected to stay low through at least 2022. Moody's moved the outlook for Duke Energy and Piedmont to negative in January 2018.
Coal ash remediation remains the largest legal and cost risk, with North Carolina ash basin closure obligations, pending rate cases, and ongoing shareholder and groundwater litigation. Other notable items include a $1.5 billionc-plus capital program for 2018 (about $10.95 billion total projected capital spending in 2018), $2 billion of planned 2018 equity issuance, a Constitution Pipeline impairment risk, and cost overruns at the Atlantic Coast Pipeline, now estimated at $6.0 to $6.5 billion. For investors, the key takeaways are steady regulated earnings and a reliable dividend offset by near-term EPS pressure, a heavier capital program funded partly by new equity, a negative rating outlook tied to tax-driven credit metric risk, and continuing exposure to coal ash costs and pipeline project uncertainty.
02—Key points
Key Highlights
- GAAP diluted EPS of $4.36 in 2017, up from $3.11 in 2016, aided by a $0.14 per-share Tax Act benefit and lower Piedmont merger costs.
- Adjusted diluted EPS fell to $4.57 from $4.69 due to weather (-$0.26 per share, including Hurricane Irma), higher financing costs, and higher depreciation.
- Electric Utilities and Infrastructure segment income rose to $3.21 billion, while Gas Utilities and Infrastructure segment income more than doubled to $319 million on a full year of Piedmont.
- Tax Act revaluation created an approximately $8.3 billion regulatory liability for customers, and Duke does not expect to be a significant federal cash taxpayer through at least 2022.
- Projected capital expenditures total $10.95 billion in 2018, with about $30 billion planned for Electric Utilities growth over 2018-2022, and $2 billion of common equity planned for 2018.
- Moody's revised the outlook for Duke Energy and Piedmont to negative in January 2018 due to credit metric risk from the Tax Act.
- Coal ash closure costs, the Atlantic Coast Pipeline cost increase to $6.0-6.5 billion, and a possible Constitution Pipeline impairment remain key risks.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 21, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Cost of Revenue | $6.35B$6.63B | −4.2% |
| Operating Expenses | $17.97B$17.57B | +2.3% |
| Operating Income | $5.63B$5.20B | +8.1% |
| Interest Expense | $1.99B$1.92B | +3.7% |
| Net Income | $3.06B$2.15B | +42.1% |
| EPS (Basic) | $4.36$3.11 | +40.2% |
| EPS (Diluted) | $4.36$3.11 | +40.2% |
| Shares Outstanding (Basic) | 700.00M691.00M | +1.3% |
| Shares Outstanding (Diluted) | 700.00M691.00M | +1.3% |
05—Questions
Frequently Asked Questions
What drove the decline in adjusted EPS in 2017?
Adjusted diluted EPS fell to $4.57 from $4.69, primarily due to less favorable weather (about $0.26 per share, including lost revenue from Hurricane Irma), the absence of earnings from the International Disposal Group sold in December 2016, higher financing costs from the Piedmont acquisition, and higher depreciation at the electric utilities.
How does the Tax Act affect Duke Energy's earnings and cash flow?
The Tax Act lowered the federal corporate tax rate to 21 percent. For regulated operations, the resulting deferred tax remeasurement is recorded as a regulatory liability to be returned to customers, so it does not boost reported earnings, though it reduces rates over time. Because of NOL and credit positions, Duke expects minimal federal cash taxes through at least 2022, and lower regulated customer rates could reduce operating cash flow in the short term.
What are the main risks tied to coal ash?
North Carolina's Coal Ash Act requires ash impoundment closures by 2024 to 2029, and the EPA CCR rule adds federal requirements. Duke faces cost recovery uncertainty if regulators disallow costs, pending rate cases, groundwater contamination claims from residents, shareholder derivative litigation, and environmental enforcement actions. Asset retirement obligations for ash closure total about $4.5 billion.
What is Duke's capital spending and financing plan?
Projected capital spending is about $10.95 billion in 2018, $10.98 billion in 2019, and $9.05 billion in 2020. Planned funding includes $6 billion of debt issuance in 2018, $2 billion of common equity in 2018 through a public offering and dividend reinvestment, and operating cash flows of roughly $7.9 billion.
What is the outlook for the dividend and earnings growth?
Duke targets 4 to 6 percent EPS growth over its five-year planning horizon and a dividend payout ratio of 70 to 75 percent of adjusted diluted EPS. The company expects annual dividend growth of about 4 to 6 percent through 2022 and has paid a cash dividend for 91 consecutive years.
06—Continue