01—Abstract
Summary
Summary of the 10-K/A filed February 23, 2018. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2017 Form 10-K (filed February 23, 2018) reports a year shaped by the completed portfolio transition: the 2016 Piedmont Natural Gas acquisition and the exit from Latin America.
With the transition finished, Duke describes itself as a domestic, regulated energy infrastructure business. GAAP reported EPS rose to $4.36a from $3.11, helped by a $0.14 per-share benefit from the Tax Act and the absence of 2016 disposal losses. Adjusted diluted EPS fell to $4.57 from $4.69, mainly because of unfavorable weather (about $0.26 per share, including Hurricane Irma) and higher financing costs tied to the Piedmont acquisition.
The balance sheet and capital plan are the key investor issues. Long-term debt rose to $49.0 billionb and total assets reached $137.9 billion. Duke projects roughly $30 billion of Electric Utilities and Infrastructure growth investment and about $7 billion for Gas Utilities over 2018-2022, with total capital expenditures near $11 billion a year in 2018-2019.
To strengthen credit metrics, management plans to issue $2 billionc of common equity in 2018 and trim capex by about $1 billion over 2018-2022. Moody's revised the outlook on Duke Energy and Piedmont to negative in January 2018 because of tax-reform credit risk, and Fitch's outlook is also negative. The Tax Act (corporate rate cut from 35% to 21%) created a net regulatory liability of about $8.3 billion that is expected to flow back to customers, while Duke expects little federal cash tax through at least 2022.
Key risks include coal ash remediation costs and litigation in North Carolina, pending rate cases, the Atlantic Coast Pipeline (cost estimate raised to $6.0d-6.5 billion and in-service date targeted for late 2019), and the Constitution Pipeline, where Duke may record an impairment of up to its $81 million carrying value in early 2018 after the FERC ruling. The dividend was raised about 4% to $3.49 per share, marking 91 consecutive years of cash dividends, and the company targets a 70-75% payout ratio with 4-6% EPS growth through its five-year planning horizon.
02—Key points
Key Highlights
- GAAP EPS of $4.36 (vs. $3.11 in 2016) and adjusted EPS of $4.57 (vs. $4.69), with weather a $0.26/share headwind
- Net income attributable to Duke Energy of $3.06 billion; revenue of $23.6 billion, up 4% year over year
- Capital plan of roughly $30B (Electric) and $7B (Gas) over 2018-2022; 2018 capex projected at $10.95B
- Planned $2B common equity issuance in 2018 to bolster credit metrics; Moody's outlook revised to negative in January 2018
- Tax Act produced a provisional net benefit of $112M and a regulatory liability of about $8.3B to be returned to customers
- Coal ash closure obligations of $4.5B (AROs) and multiple NC lawsuits and NCDEQ enforcement actions remain key uncertainties
- Dividend increased about 4% to $3.49/share, the 91st consecutive year of cash dividends
03—One dollar
04—Financials
Financial Highlights
Figures from 10-K/AFY2017filed February 23, 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
How did the Tax Cuts and Jobs Act affect Duke Energy's 2017 results and future cash flows?
The Tax Act produced a net 2017 benefit of about $0.14 per share (a $112M net provisional benefit) after a $534M remeasurement benefit and a $406M valuation allowance on foreign tax credits. Most of the deferred tax remeasurement for regulated operations (about $8.3B) was recorded as a regulatory liability to be returned to customers, so it is not a permanent earnings gain. Duke expects to be a minimal federal cash taxpayer through at least 2022, and rate reductions could materially reduce near-term operating cash flow.
Why did adjusted EPS decline in 2017 despite growth from Piedmont?
Adjusted diluted EPS fell to $4.57 from $4.69. Primary drivers were lower regulated electric revenues from unfavorable weather (about $0.26/share, including Hurricane Irma), the absence of International Energy operating earnings sold in December 2016, and higher financing costs from the Piedmont acquisition. Partial offsets included rate increases, lower O&M, and higher pipeline equity earnings.
What are the main financing and credit risks for investors?
Debt rose to $49.0B of long-term debt, with about 56% debt in the capital structure. Moody's revised the outlook for Duke Energy and Piedmont to negative in January 2018 due to potential credit-metric deterioration from the Tax Act, and Fitch's outlook is negative. Management plans $2B of 2018 equity issuance and roughly $1B of capex reductions over 2018-2022. Several subsidiaries face dividend restrictions tied to merger conditions, though management says these will not significantly limit parent-level cash.
What are the largest project and legal risks?
The Atlantic Coast Pipeline's development cost estimate rose to $6.0-6.5B from $5.0-5.5B, with in-service now targeted for late 2019 and subject to further permitting risk. The Constitution Pipeline is stalled after New York denied water quality certification, and Duke may record an impairment of up to its $81M investment in Q1 2018. Coal ash closure costs and NC enforcement actions, including groundwater claims and shareholder derivative suits, could result in material additional charges. The Levy nuclear project was abandoned, with about $135M of pretax charges recorded in 2017.
What is the dividend outlook?
Duke paid $3.49 per share in 2017, up about 4%, and targets a 70-75% payout ratio of adjusted EPS. Management expects annual dividend growth of about 4-6% through 2022, and any future dividends remain subject to Board approval and earnings and capital needs.
06—Continue