01—Abstract
Summary
Summary of the 10-K filed February 28, 2019. Cited figures are marked; the original filing is the authoritative source.
Duke Energy's 2018 Form 10-K shows a regulated utility company that delivered a solid operating year but posted weaker GAAP results due to a series of special charges.
GAAP reported EPS fell to $3.76a from $4.36 in 2017, while adjusted diluted EPS rose to $4.72 from $4.57, driven by favorable weather, improved residential volumes, rate case outcomes in North Carolina, and rider growth. Total operating revenues grew about 4% to $24.5 billion, but operating income declined to $4.7 billion from $5.6 billion, largely because of regulatory and legislative charges, impairments (including Commercial Renewables goodwill and the Constitution pipeline investment), severance, and a loss on the sale of the retired Beckjord plant. The balance sheet is larger and more leveraged as the company funds a heavy capital program.
Projected 2019 capital and investment expenditures are $11.1 billionb, with roughly $7.5 billion of new debt planned for 2019. Duke raised $2 billion of common equity in 2018 and plans to issue about $500 million per year through 2023. Long-term debt rose to $51.1 billion, and the company targets a 4 to 6 percent EPS growth rate through 2023 and a 65 to 75 percent dividend payout ratio.
The dividend was increased about 4 percent to $3.64c per share, marking 92 consecutive years of cash dividends. Key risks for investors include coal ash remediation costs and related litigation, including pending North Carolina Supreme Court appeals of rate orders, the uncertain cost and schedule of the Atlantic Coast Pipeline (now estimated at $7.0 to $7.8 billion after adverse court rulings), storm cost recovery for Hurricanes Florence, Michael and Winter Storm Diego, and the cash-flow effects of federal tax reform, since Duke does not expect to be a significant federal cash taxpayer through at least 2022.
02—Key points
Key Highlights
- GAAP reported diluted EPS of $3.76, down from $4.36 in 2017, while adjusted diluted EPS grew 3.3% to $4.72 from $4.57.
- Total operating revenues rose to $24.5 billion (up about 4%), but operating income fell to $4.7 billion from $5.6 billion due to special charges totaling roughly $871 million pretax.
- Projected capital and investment expenditures of $11.1 billion in 2019 ($10.55 billion in 2020 and $9.7 billion in 2021), with about $7.5 billion of planned 2019 debt issuance.
- Long-term debt increased to $51.1 billion; the company issued $2 billion of common equity in 2018 and plans roughly $500 million of annual equity issuance through 2023.
- Dividend increased about 4% to $3.64 per share, the 92nd consecutive year of cash dividends; target payout ratio of 65 to 75 percent of adjusted EPS.
- Atlantic Coast Pipeline (47% owned) faces adverse court rulings; cost estimate raised to $7.0 to $7.8 billion and in-service pushed to late 2020 through 2021; $0.8 billion carrying value with no impairment recorded.
- Duke reports 2018 total GAAP net income attributable to Duke Energy of $2.67 billion, versus $3.06 billion in 2017, and total assets of $145.4 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Duke Energy Corp kept $0.11.
- Revenue$23.76B100.0%
- Cost of revenue−$6.83B28.8%
- Gross profit$16.93B71.2%
- Operating costs−$12.24B51.5%
- Operating income$4.68B19.7%
- Interest, other & tax−$2.02B8.5%
- Net income$2.67B11.2%
Where FY2018 revenue went
$23.76B- Operating costs: $12.24B, 52% of revenue
- Cost of revenue: $6.83B, 29% of revenue
- Net income: $2.67B, 11% of revenue
- Interest, other & tax: $2.02B, 8.5% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 28, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $23.76B— | — |
| Cost of Revenue | $6.83B$6.35B | +7.6% |
| Gross Profit | $16.93B— | — |
| Operating Expenses | $19.75B$17.97B | +9.9% |
| Operating Income | $4.68B$5.63B | −16.7% |
| Interest Expense | $2.09B$1.99B | +5.4% |
| Net Income | $2.67B$3.06B | −12.8% |
| EPS (Basic) | $3.76$4.36 | −13.8% |
| EPS (Diluted) | $3.76$4.36 | −13.8% |
| Shares Outstanding (Basic) | 708.00M700.00M | +1.1% |
| Shares Outstanding (Diluted) | 708.00M700.00M | +1.1% |
05—Questions
Frequently Asked Questions
Why did GAAP earnings decline in 2018 even though adjusted earnings increased?
GAAP EPS fell to $3.76 from $4.36 mainly because of special items management views as non-recurring: regulatory and legislative charges tied to North Carolina rate case orders (about $202 million after tax), impairments (about $179 million after tax, including Constitution and Citrus County CC), severance ($144 million after tax), an $82 million after-tax loss on the sale of the retired Beckjord plant, and merger costs. The 2017 results had benefited from a $102 million Tax Act gain, which did not repeat.
How is Duke funding its large capital program, and what does that mean for shareholders?
Duke is funding its roughly $10 billion-per-year capital plan through a mix of debt and equity. In 2018 it issued $2 billion of common stock, including forward sales settled in December, and it plans about $500 million of equity per year through 2023 via its DRIP and ATM programs. Capitalization is targeted at roughly 56% debt and 44% equity. Investors should weigh the dilution from equity issuance against the earnings growth the new rate base is expected to produce.
What are the biggest legal and regulatory risks in the filing?
The most material items are coal ash closure costs and related litigation: appeals of North Carolina rate orders are pending at the state Supreme Court, and there are groundwater claims, citizen suits, and insurance coverage litigation. Storm cost recovery for 2018 hurricanes and Winter Storm Diego depends on pending regulatory approvals, the Atlantic Coast Pipeline faces ongoing permitting challenges, and Duke Energy Florida faces a Fluor contract dispute over the Citrus County plant.
Will federal tax reform affect Duke's cash flows?
Yes. The Tax Act reduced the federal corporate rate to 21%, which lowers regulated customer rates over time and reduces Duke's cash flow. Duke expects to pass much of the benefit to customers, and because of its NOL position and tax credits, it does not expect to be a significant federal cash taxpayer through at least 2022. The company also received an approximately $573 million AMT credit refund expected in 2019.
06—Continue