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DUK > SEC Filings for DUK > Form 10-K on 28-Feb-2014All Recent SEC Filings

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Form 10-K for DUKE ENERGY CORP


28-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis includes financial information prepared in accordance with generally accepted accounting principles (GAAP) in the U.S., as well as certain non-GAAP financial measures such as adjusted earnings, adjusted earnings per share and adjusted segment income, discussed below. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.

The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations is separately filed by Duke Energy, Duke Energy Carolinas, Progress Energy, Duke Energy Progress, Duke Energy Florida, Duke Energy Ohio and Duke Energy Indiana. However, none of the registrants makes any representation as to information related solely to Duke Energy or the Subsidiary Registrants of Duke Energy other than itself.

DUKE ENERGY

Duke Energy Corporation (collectively with its subsidiaries, Duke Energy) is an energy company headquartered in Charlotte, North Carolina. Duke Energy operates in the U.S. primarily through its wholly owned subsidiaries, Duke Energy Carolinas, Duke Energy Progress, Duke Energy Florida, Duke Energy Ohio, and Duke Energy Indiana, as well as in Latin America.

When discussing Duke Energy's consolidated financial information, it necessarily includes the results of the Subsidiary Registrants, which, along with Duke Energy, are collectively referred to as the Duke Energy Registrants.

Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes for the years ended December 31, 2013, 2012, and 2011.

Executive Overview

Merger with Progress Energy

On July 2, 2012, Duke Energy merged with Progress Energy, with Duke Energy continuing as the surviving corporation, and Progress Energy becoming a wholly owned subsidiary of Duke Energy. Duke Energy Progress and Duke Energy Florida, Progress Energy's regulated utility subsidiaries, are now indirect wholly owned subsidiaries of Duke Energy. Duke Energy's consolidated financial statements include Progress Energy, Duke Energy Progress and Duke Energy Florida activity beginning July 2, 2012.

Immediately preceding the merger, Duke Energy completed a one-for-three reverse stock split with respect to the issued and outstanding shares of Duke Energy common stock. All share and per share amounts presented herein reflect the impact of the one-for-three reverse stock split.

For additional information on the details of this transaction including regulatory conditions and accounting implications, see Note 2 to the Consolidated Financial Statements, "Acquisitions and Dispositions of Businesses and Sales of Other Assets."

2013 Financial Results

The following table summarizes adjusted earnings and net income attributable to
Duke Energy for the years ended December 31, 2013, 2012 and 2011.


                                                                 Years Ended December 31,
                                            2013                           2012                           2011
(in millions, except per share                   Per diluted                    Per diluted                    Per diluted
amounts)                             Amount            share        Amount            share        Amount            share
Adjusted earnings(a)              $  3,071          $  4.35      $  2,483          $  4.32      $  1,943          $  4.38
Net income attributable to Duke
Energy                               2,665             3.76         1,768             3.07         1,706             3.83

(a) See Results of Operations below for Duke Energy's definition of adjusted earnings as well as a reconciliation of this non-GAAP financial measure to net income attributable to Duke Energy.

Adjusted earnings increased from 2012 to 2013 primarily due to the inclusion of a full year of Progress Energy results in 2013, the impact of the revised rates, net of higher depreciation and amortization expense and lower allowance for funds used during construction (AFUDC). Adjusted earnings increased from 2011 to 2012 primarily due to the inclusion of Progress Energy's results beginning July 2012, and the impact of the 2011 Duke Energy Carolina's rate cases.

See "Results of Operations" below for a detailed discussion of the consolidated results of operations, as well as a detailed discussion of financial results for each of Duke Energy's reportable business segments, as well as Other.

2013 Areas of Focus and Accomplishments

In 2013, Duke Energy was focused on completing the fleet modernization program, achieving constructive outcomes in its rate cases, resolving key issues - including the future Crystal River Unit 3 nuclear station, improving nuclear fleet performance, and realizing merger integration plans.

Completing the Fleet Modernization Program


PART II

During 2013, Duke Energy completed its $9 billion fleet modernization program. This program added approximately 6,600 MWs of new combined-cycle natural gas and state-of-the-art coal capacity in North Carolina, South Carolina and Indiana. This new generation will replace up to 6,700 MW of older coal and oil plants, already retired or scheduled for retirement by 2015. The Edwardsport IGCC and Sutton combined-cycle natural gas plant in Wilmington, North Carolina, were placed in commercial service in June and November, respectively.

At Edwardsport, Duke Energy has been testing, tuning and optimizing the unit. All major technology systems have been validated. Performance testing was delayed in January by extreme weather, which also caused some equipment issues that are being resolved. The Edwardsport IGCC project is expected to achieve its full operational capabilities later this year and to be completed within the revised cost estimate of $3.5 billion.

Achieving Constructive Outcomes in Rate Cases

Duke Energy reached constructive regulatory outcomes in all five of its general rate cases to recover investments made to modernize its fleet. When fully implemented, the base rate cases will add approximately $600 million in annualized revenues, while keeping customers' retail priced below national averages.

Resolving Key Issues

Duke Energy also made the decision to retire Crystal River Unit 3, resolved insurance claims with its insurance provider, Nuclear Electric Insurance Limited (NEIL), and obtained approval from the FPSC of a comprehensive settlement. This settlement agreement addressed cost recovery of the nuclear unit, Crystal River 1 and 2 coal units, and the proposed Levy Nuclear Station (Levy). The settlement agreement also provides for new generation in the latter half of this decade to meet customer demand.

Improving Nuclear Fleet Performance

In 2013, Duke Energy's nuclear fleet achieved a capacity factor of 92.8 percent, the 15th consecutive year with a capacity factor over 90 percent. Duke Energy has made targeted investments at nuclear stations to bring the entire fleet to consistent level of excellent performance. In particular, the Robinson Nuclear Station (Robinson) completed a record continuous run of 531 days before beginning a scheduled refueling outage in September. This complemented the record of continuous runs achieved at Oconee Nuclear Station Units 2 and Unit 3.

Realizing Merger Integration Plans

Duke Energy expects to exceed its original targets for fuel and joint-dispatch savings, which benefit customers in the North Carolina and South Carolina. Through 2013, Duke Energy has recorded approximately $190 million of cumulative fuel and joint-dispatch savings since the merger closed. In addition, approximately 65 percent of the total guaranteed savings of $687 million have been contractually locked-in or generated.

Duke Energy is also realizing cost synergies by eliminating duplicative functions and has exceed the original target of five to seven percent in non-fuel operating and maintenance savings. Duke Energy is on pace to deliver about nine percent, or approximately $550 million, of non-fuel operating and maintenance expense in 2014.

2014 Objectives

Duke Energy is dedicated to the energy experience that customers value and trust. Duke Energy strives for leadership and excellence that benefit customers, shareholders and employees. Objectives for 2014 are:

Continue to grow a zero-injury culture and deliver top-decile safety results,

Develop and engage employees,

Deliver new value by improving the customer experience and advancing more flexible regulatory models,

Establish a rigorous process for managing business and financial performance to deliver customer value at a competitive price,

Successfully complete 2014 integration milestones and continue innovative use of technology to deliver value,

Achieve 2014 financial goals, including delivering adjusted diluted EPS guidance range of $4.45 - $4.60, and advance viable future growth opportunities for regulated and nonregulated businesses, and

Serve as a respected leading voice in helping to shape national and state energy policies.

Due to the forward-looking nature of the adjusted diluted EPS range, information to reconcile this non-GAAP financial measure to the most directly comparable GAAP financial measure is not available at this time, as Duke Energy is unable to forecast all special items, the mark-to-market impacts of economic hedges in the Commercial Power segment, or any amounts that may be reported as discontinued operations or extraordinary items for future periods.

Results of Operations

In this section, Duke Energy provides analysis and discussion of earnings and factors affecting earnings on both a GAAP and non-GAAP basis.

Management evaluates financial performance in part based on the non-GAAP financial measures, adjusted earnings and adjusted diluted earnings per share (EPS). These items are measured as income from continuing operations after deducting income attributable to noncontrolling interests, adjusted for the dollar and per share impact of special items and mark-to-market impacts of economic hedges in the Commercial Power segment. Special items represent certain charges and credits, which management believes will not be recurring on a regular basis, although it is reasonably possible such charges and credits could recur. Mark-to-market adjustments reflect the impact of derivative contracts, which are used in Duke Energy's hedging of a portion of the economic value of its generation assets in the Commercial Power segment. The mark-to-market impact of derivative contracts is recognized in GAAP earnings immediately as such derivative contracts do not qualify for hedge accounting or regulatory treatment. The economic value of generation assets is subject to fluctuations in fair value due to market price volatility of input and output commodities (e.g. coal, electricity, natural gas). Economic hedging involves both purchases and sales of those input and output commodities related to generation assets. Operations of the generation assets are accounted for under the accrual method. Management believes excluding impacts of mark-to-market changes of the derivative contracts from adjusted earnings until


PART II

settlement better matches the financial impacts of the derivative contract with the portion of economic value of the underlying hedged asset. Management believes the presentation of adjusted earnings and adjusted diluted EPS provides useful information to investors, as it provides them an additional relevant comparison of Duke Energy's performance across periods. Management uses these non-GAAP financial measures for planning and forecasting and for reporting results to the Board of Directors, employees, shareholders, analysts and investors concerning Duke Energy's financial performance. The most directly comparable GAAP measures for adjusted earnings and adjusted diluted EPS are Net Income Attributable to Duke Energy Corporation and Diluted EPS attributable to Duke Energy Corporation common shareholders, which include the dollar and per share impact of special items, mark-to-market impacts of economic hedges in the Commercial Power segment and discontinued operations.

Management evaluates segment performance based on segment income. Segment income is defined as income from continuing operations net of income attributable to noncontrolling interests. Segment income, as discussed below, includes intercompany revenues and expenses that are eliminated in the Consolidated Financial Statements. Management also uses adjusted segment income as a measure of historical and anticipated future segment performance. Adjusted segment income is a non-GAAP financial measure, as it is based upon segment income adjusted for special items and mark-to-market impacts of economic hedges in the Commercial Power segment. Management believes the presentation of adjusted segment income provides useful information to investors, as it provides them with an additional relevant comparison of a segment's performance across periods. The most directly comparable GAAP measure for adjusted segment income is segment income, which represents segment income from continuing operations, including any special items and mark-to-market impacts of economic hedges in the Commercial Power segment.

See Note 3 to the Consolidated Financial Statements, "Business Segments," for a discussion of Duke Energy's segment structure.

Overview

The following table reconciles non-GAAP measures to the most directly comparable
GAAP measure.


                                                                      Year Ended December 31, 2013
                                                                                                                               Per
(in millions, except per share         Regulated   International   Commercial  Total Reportable                            Diluted
amounts)                               Utilities          Energy        Power          Segments     Other   Duke Energy      Share
Adjusted segment income                $  2,776    $        408   $       15   $         3,199  $  (128)   $     3,071  $    4.35
Crystal River Unit 3 charges              (215)              -            -              (215)        -          (215)     (0.31)
Costs to achieve Progress Energy
merger                                       -               -            -                 -      (184)         (184)     (0.26)
Nuclear development charges                (57)              -            -               (57)        -           (57)     (0.08)
Litigation reserve                           -               -            -                 -       (14)          (14)     (0.02)
Economic hedges (Mark-to-market)             -               -           (3)               (3)        -            (3)     (0.01)
Asset sales                                  -               -          (15)              (15)        65            50       0.07
Segment income (loss)                  $  2,504    $        408   $      (3)   $         2,909  $  (261)         2,648
Income from Discontinued Operations                                                                                 17       0.02
Net Income Attributable to Duke
Energy                                                                                                     $     2,665  $    3.76

                                                                      Year Ended December 31, 2012
                                                                                                                               Per
(in millions, except per share         Regulated   International   Commercial  Total Reportable                            Diluted
amounts)                               Utilities          Energy        Power          Segments     Other   Duke Energy      Share
Adjusted segment income                $  2,086    $        439   $       93   $         2,618  $  (135)   $     2,483  $    4.32
Edwardsport impairment and other
charges                                   (402)              -            -              (402)        -          (402)     (0.70)
Costs to achieve Progress Energy
merger                                       -               -            -                 -      (397)         (397)     (0.70)
Economic hedges (Mark-to-market)             -               -           (6)               (6)        -            (6)     (0.01)
Democratic National Convention Host
Committee support                            -               -            -                 -        (6)           (6)     (0.01)
Employee severance and office
consolidation                                60              -            -                 60        -             60       0.11
Segment income                         $  1,744    $        439   $       87   $         2,270  $  (538)         1,732
Income from Discontinued Operations                                                                                 36       0.06
Net Income Attributable to Duke
Energy                                                                                                     $     1,768  $    3.07

                                                                      Year Ended December 31, 2011
                                                                                                                               Per
(in millions, except per share         Regulated   International   Commercial  Total Reportable                            Diluted
amounts)                               Utilities          Energy        Power          Segments     Other   Duke Energy      Share
Adjusted segment income                $  1,316    $        466   $      186   $         1,968  $   (25)   $     1,943  $    4.38
Edwardsport impairment and other
charges                                   (135)              -            -              (135)        -          (135)     (0.30)
Emission allowance impairment                -               -          (51)              (51)        -           (51)     (0.12)
Costs to achieve Progress Energy
merger                                       -               -            -                 -       (51)          (51)     (0.12)
Economic hedges (Mark-to-market)             -               -           (1)               (1)        -            (1)     (0.01)
Segment income                         $  1,181    $        466   $      134   $         1,781  $   (76)         1,705
Income from Discontinued Operations                                                                                  1         -
Net Income Attributable to Duke
Energy                                                                                                     $     1,706  $    3.83

The variance in adjusted earnings for the year ended December 31, 2013, compared to 2012, was primarily due to:

The inclusion of Progress Energy results for the first six months of 2013;

Increased retail pricing and riders resulting primarily from the implementation of revised rates in all jurisdictions; and


PART II

Lower operating and maintenance expense resulting primarily from the adoption of nuclear outage cost levelization in the Carolinas, lower benefit costs and merger synergies.

Partially offsetting these increases was:

Higher depreciation and amortization expense;

Lower AFUDC;

Lower nonregulated Midwest gas generation results; and

Incremental shares issued to complete the Progress Energy merger (impacts per diluted share amounts only).

The variance in adjusted earnings for the year ended December 31, 2012, compared to 2011, was primarily due to:

The inclusion of Progress Energy results beginning in July 2012; and

Increased retail pricing and riders primarily resulting from the implementation of revised rates in North Carolina and South Carolina for Duke Energy Carolinas.

Partially offsetting these increases was:

Unfavorable weather in 2012 compared to 2011;

Higher depreciation and amortization expense;

Lower nonregulated Midwest coal generation results; and

Incremental shares issued to complete the Progress Energy merger (impacts per diluted share amounts only).

Segment Results

The remaining information presented in this discussion of results of operations is on a GAAP basis.

Regulated Utilities


                                                                             Years Ended December 31,
                                                                                        Variance
                                                                                        2013 vs.                             Variance 2012
(in millions)                                      2013                  2012               2012                 2011             vs. 2011
Operating Revenues                           $   20,910            $   16,080          $  4,830            $   10,619          $    5,461
Operating Expenses                               16,126                12,943             3,183                 8,473               4,470
Gains on Sales of Other Assets and
Other, net                                            7                    15               (8)                     2                  13
Operating Income                                  4,791                 3,152             1,639                 2,148               1,004
Other Income and Expense, net                       221                   341             (120)                   274                  67
Interest Expense                                    986                   806               180                   568                 238
Income Before Income Taxes                        4,026                 2,687             1,339                 1,854                 833
Income Tax Expense                                1,522                   941               581                   673                 268
Less: Income Attributable to
Noncontrolling Interest                              -                      2               (2)                    -                    2
Segment Income                               $    2,504            $    1,744          $    760            $    1,181          $      563

Duke Energy Carolinas' GWh sales(a)              85,790                81,362             4,428                82,127               (765)
Duke Energy Progress' GWh sales(b)(c)            60,204                58,390             1,814                56,223               2,167
Duke Energy Florida GWh sales(d)                 37,974                38,443             (469)                39,578             (1,135)
Duke Energy Ohio GWh sales                       24,557                24,344               213                24,923               (579)
Duke Energy Indiana GWh sales                    33,715                33,577               138                33,181                 396
Total Regulated Utilities GWh sales             242,240               236,116             6,124               236,032                  84
Net proportional MW capacity in
operation                                        49,607                49,654              (47)                27,397              22,257

(a) Includes 781 and 421 gigawatt-hour (GWh) sales for the years ended December 31, 2013 and 2012, respectively, associated with interim firm power sale agreements (Interim FERC Mitigation) entered into as part of FERC's approval of the merger with Progress Energy. The impacts of the Interim FERC Mitigation are reflected in the Other segment, and are not included in the operating results in the table above.
(b) Includes 904 and 577 GWh sales for the years ended December 31, 2013 and 2012, respectively, associated with the Interim FERC Mitigation. The impacts of the Interim FERC Mitigation are reflected in the Other segment, and are not included in the operating results in the table above.
(c) For Duke Energy Progress, all GWh sales for the year ended December 31, 2011, and 26,634 GWh sales for the year ended December 31, 2012, occurred prior to the merger between Duke Energy and Progress Energy.
(d) For Duke Energy Florida, all GWh sales for the year ended December 31, 2011, and 18,348 GWh sales for the year ended December 31, 2012, occurred prior to the merger between Duke Energy and Progress Energy.

Year Ended December 31, 2013 as Compared to 2012

Regulated Utilities' results were positively impacted by 2012 impairment and other charges related to the Edwardsport IGCC plant, higher retail pricing and rate riders, the inclusion of Progress Energy results for the first six months of 2013, a net increase in wholesale power revenues, and higher weather normal sales volumes. These impacts were partially offset by higher income tax expense, Crystal River Unit 3


PART II

charges, lower AFUDC equity and higher depreciation and amortization expense. The following is a detailed discussion of the variance drivers by line item.

Operating Revenues. The variance was driven primarily by:

A $4,339 million increase due to the inclusion of Progress Energy for the first six months of 2013,

A $434 million net increase in retail pricing primarily due to revised rates approved in all jurisdictions;

A $76 million net increase in wholesale power revenues, net of sharing, primarily due to additional volumes and charges for capacity for customers served under long-term contracts; and

A $72 million increase in weather-normal sales volumes to retail customers (net of fuel revenue) reflecting increased demand.

Partially offset by:

A $132 million decrease in fuel revenues (including emission allowances) driven primarily by (i) the impact of lower Florida residential fuel rates, including amortization associated with the settlement agreement approved by the FPSC in 2012 (2012 Settlement), (ii) lower fuel rates for electric retail customers in the Carolinas, Florida and Ohio, and (iii) lower revenues for purchased power, partially offset by (iv) increased demand from electric retail customers. Fuel revenues represent sales to retail and wholesale customers.

Operating Expenses. The variance was driven primarily by:

A $3,393 million increase due to the inclusion of Progress Energy for the first six months of 2013,

A $346 million increase in impairment and other charges in 2013 primarily related to Crystal River Unit 3 and Levy. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information, and

A $102 million increase in depreciation and amortization expense primarily due to a decrease in the reduction of the cost of removal component of amortization expense as allowed under the 2012 Settlement.

Partially offset by:

A $600 million decrease due to 2012 impairment and other charges related to the Edwardsport IGCC plant. See Note 4 to the Consolidated Financial Statements, "Regulatory Matters," for additional information, and

. . .

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