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DUK > SEC Filings for DUK > Form 10-Q on 9-May-2014All Recent SEC Filings

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Form 10-Q for DUKE ENERGY CORP


9-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following combined Management's Discussion and Analysis of Financial Condition and Results of Operations is separately filed by Duke Energy Corporation (collectively with its subsidiaries, Duke Energy) and Duke Energy Carolinas, LLC (Duke Energy Carolinas), Progress Energy, Inc. (Progress Energy), Duke Energy Progress, Inc. (Duke Energy Progress), Duke Energy Florida, Inc. (Duke Energy Florida), Duke Energy Ohio, Inc. (Duke Energy Ohio), and Duke Energy Indiana, Inc. (Duke Energy Indiana) (collectively referred to as the Subsidiary Registrants). 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 is an energy company headquartered in Charlotte, North Carolina. Duke Energy operates in the United States (U.S.) 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 through International Energy.

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 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 diluted earnings per share (EPS), 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 presented herein may not be comparable to similarly titled measures used by other companies.

Management's Discussion and Analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes and with Duke Energy's Annual Report on Form 10-K for the year ended December 31, 2013.

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 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 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 Condensed 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.

Duke Energy's adjusted earnings, adjusted diluted EPS, segment income and adjusted segment income may not be comparable to similarly titled measures of another company because other entities may not calculate the measures in the same manner.

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

Executive Overview

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


                                                                Three Months Ended March 31, 2014
                                                                                                                              Per
(in millions, except per-share     Regulated    International    Commercial  Total Reportable                    Duke     Diluted
amounts)                           Utilities           Energy         Power          Segments     Other        Energy       Share
Adjusted segment income/Adjusted
earnings                          $     737     $        130    $       10   $           877   $  (48)   $       829   $    1.17
Midwest Generation impairment            -                -          (867)             (867)        -          (867)      (1.23)
Costs to achieve Progress Energy
merger                                   -                -             -                 -       (34)          (34)      (0.04)
Economic hedges (mark-to-market)         -                -           (22)              (22)        -           (22)      (0.03)
Segment income (loss)             $     737     $        130    $    (879)   $          (12)   $  (82)          (94)
Loss from Discontinued
Operations                                                                                                       (3)      (0.01)
Net Income Attributable to Duke
Energy                                                                                                   $      (97)   $  (0.14)

                                                                Three Months Ended March 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/Adjusted
earnings                          $     656     $         97    $        6   $           759   $  (43)   $       716   $    1.02
Economic hedges (mark-to-market)         -                -           (48)              (48)        -           (48)      (0.08)
Costs to achieve Progress Energy
merger                                   -                -             -                 -       (34)          (34)      (0.05)
Segment income (loss)             $     656     $         97    $     (42)   $           711   $  (77)           634
Loss from Discontinued
Operations                                                                                                        -           -
Net Income Attributable to Duke
Energy                                                                                                   $       634   $    0.89


PART I

The variance in adjusted earnings for three months ended March 31, 2014, compared to the same period in 2013, was primarily due to:

Increased retail pricing and riders primarily resulting from the implementation of revised rates for Duke Energy Carolinas, Duke Energy Progress, Duke Energy Ohio, and Duke Energy Indiana;

Favorable weather in 2014 compared to 2013;

Increased weather-normal retail sales volumes for the regulated businesses; and

Higher results in Latin America.

Partially offset by:

Higher depreciation and amortization expense primarily due to the reduction of the cost of removal component of amortization expense in 2013 at Duke Energy Florida; and

Higher operating and maintenance expense primarily due to storm costs.

SEGMENT RESULTS

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

Regulated Utilities


                                                                Three Months Ended March 31,
(in millions)                                                     2014         2013     Variance
Operating Revenues                                           $   5,805    $   5,060    $    745
Operating Expenses                                               4,427        3,840         587
Gains on Sales of Other Assets and Other, net                        1            2         (1)
Operating Income                                                 1,379        1,222         157
Other Income and Expenses, net                                      69           61           8
Interest Expense                                                   270          236          34
Income Before Income Taxes                                       1,178        1,047         131
Income Tax Expense                                                 441          391          50
Segment Income                                               $     737    $     656    $     81

Duke Energy Carolinas GWh sales(a)                              23,693       22,246       1,447
Duke Energy Progress GWh sales                                  16,161       14,701       1,460
Duke Energy Florida GWh sales                                    8,661        8,017         644
Duke Energy Ohio GWh sales                                       6,479        6,178         301
Duke Energy Indiana GWh sales                                    8,874        8,505         369
Total Regulated Utilities GWh sales                             63,868       59,647       4,221
Net proportional MW capacity in operation                       49,595       49,641        (46)

(a) Includes 177 gigawatt-hours (GWh) sales and 184 GWh sales for the three months ended March 31, 2014 and 2013, respectively, associated with interim firm power sale agreements (Interim FERC Mitigation) entered into as part of the Federal Energy Regulatory Commission's approval of the merger with Progress Energy, which are not included in the operating results in the table above.


PART I

Three Months Ended March 31, 2014 as Compared to March 31, 2013

Regulated Utilities' results were positively impacted by higher retail pricing and rate riders, favorable weather, higher weather-normal sales volumes, and an increase in wholesale power margins. These impacts were partially offset by higher depreciation and amortization expense, higher operating and maintenance costs, and higher interest expense. The following is a detailed discussion of the variance drivers by line item.

Operating Revenues. The variance was driven primarily by:

A $332 million increase in fuel revenues driven primarily by (i) increased demand from electric retail customers resulting from favorable weather conditions, and (ii) higher fuel rates for electric retail customers for all jurisdictions, except North Carolina. Fuel revenues represent sales to retail and wholesale customers;

A $217 million net increase in retail pricing primarily due to retail rate changes and updated rate riders;

A $91 million increase in electric sales (net of fuel revenue) to retail customers due to more favorable weather conditions. For the Carolinas, heating degree days for the first quarter of 2014 were 19 percent above normal as compared with 5 percent above normal during the same period in 2013. For the Midwest, heating degree days for the first quarter of 2014 were 25 percent above normal as compared with 6 percent above normal during the same period in 2013. For Florida, heating degree days for the first quarter of 2014 were 3 percent above normal as compared with 16 percent below normal during the same period in 2013;

A $65 million increase in weather-normal sales volumes to retail customers (net of fuel revenue) reflecting increased demand; and

A $32 million increase in wholesale power revenues, net of sharing, primarily due to additional volumes and capacity charges for customers served under long-term contracts.

Operating Expenses. The variance was driven primarily by:

A $321 million increase in fuel expense (including purchased power and natural gas purchases for resale) primarily related to (i) higher volumes of coal and oil used in electric generation due primarily to increased generation resulting from favorable weather conditions, and (ii) higher natural gas prices;

A $143 million increase in depreciation and amortization expense primarily due to the reduction of the cost of removal component of amortization expense for Duke Energy Florida in 2013 as allowed under the settlement agreement in 2012 among Duke Energy Florida, the Florida Office of Public Counsel (OPC) and other customer advocates (2012 Settlement), and increases in depreciation as a result of additional plant in service and amortization of regulatory assets; and

A $103 million increase in operating and maintenance expense primarily due to higher storm costs.

Interest Expense. The variance was primarily due to no longer recording a post in-service debt return on projects now reflected in customer rates.

Income Tax Expense.The variance was primarily due to an increase in pretax income. The effective tax rate for the three months ended March 31, 2014 and 2013 was 37.5 percent and 37.3 percent, respectively.

Matters Impacting Future Regulated Utilities Results

Appeals of recently approved rate cases are pending at the North Carolina Supreme Court. The North Carolina Attorney General (NCAG) and NC Waste Awareness and Reduction Network (NC WARN) dispute the rate of return, capital structure and other matters approved by the NCUC. The outcome of these appeals could have an adverse impact to Regulated Utilities' financial position, results of operations and cash flows. See Note 4 to the Condensed Consolidated Financial Statements, "Regulatory Matters," for additional information.

On February 2, 2014, a break in a stormwater pipe beneath an ash basin at Duke Energy Carolinas' retired Dan River steam station caused a release of ash basin water and ash into the Dan River. On February 8, 2014, a permanent plug was installed in the stormwater pipe, stopping the release of materials into the river. Duke Energy is a party to multiple lawsuits filed in regards to coal ash management practices, both preceding and following the Dan River incident. The United States Attorney for the District of North Carolina initiated a criminal investigation related to the discharge. In addition, Duke Energy has disclosed estimated costs of various potential approaches to ash management for North Carolina ash basins. The outcome of these lawsuits, investigation and any potential legislative actions could have an adverse impact to Regulated Utilities' financial position, results of operations and cash flows. See Note 5 to the Condensed Consolidated Financial Statements, "Commitments and Contingencies," for additional information.

International Energy


                                                               Three Months Ended March 31,
(in millions)                                                    2014         2013     Variance
Operating Revenues                                          $     382     $    392     $  (10)
Operating Expenses                                                231          263        (32)
Operating Income                                                  151          129          22
Other Income and Expense, net                                      57           33          24
Interest Expense                                                   23           21           2
Income Before Income Taxes                                        185          141          44
Income Tax Expense                                                 51           42           9
Less: Income Attributable to Noncontrolling Interests               4            2           2
Segment Income                                              $     130     $     97     $    33

Sales, GWh                                                      5,241        4,756         485
Net proportional MW capacity in operation                       4,600        4,584          16


PART I

Three Months Ended March 31, 2014 as Compared to March 31, 2013

International Energy's results were positively impacted by favorable results in Brazil, a net remeasurement gain and higher interest income in Latin America, partially offset by unfavorable exchange rates in Brazil. The following is a detailed discussion of the variance drivers by line item.

Operating Revenues. The variance was driven primarily by:

A $20 million decrease in Central America as a result of lower volumes and average prices; and

A $7 million decrease in Argentina due to unfavorable exchange rates and lower average prices partially offset by higher volumes.

Partially offset by:

A $16 million increase in Brazil as a result of higher spot volumes and average prices, partially offset by unfavorable exchange rates.

Operating Expenses. The variance was driven primarily by:

A $17 million decrease in Central America due to lower fuel consumption;

A $7 million decrease in Argentina as a result of favorable exchange rates, lower fuel consumption and purchased power; and

A $6 million decrease in Brazil due to lower purchased power and favorable exchange rates, partially offset by higher variable costs.

Other Income and Expenses, net. The variance is primarily due to higher interest income and a net remeasurement gain in Latin America.

Income Tax Expense.The variance was primarily due to an increase in pretax income. The effective tax rate for the three months ended March 31, 2014 and 2013 was 27.7 percent and 29.4 percent, respectively. The decrease in the effective tax rate is primarily due to certain nondeductible interest payments in 2013.

Commercial Power


                                                  Three Months Ended March 31,
(in millions)                                       2014        2013       Variance
Operating Revenues                            $      449    $    452    $      (3)
Operating Expenses                                 1,862         533         1,329
Operating Loss                                   (1,413)        (81)       (1,332)
Other Income and Expense, net                          5          11           (6)
Interest Expense                                      15          15            -
Loss Before Income Taxes                         (1,423)        (85)       (1,338)
Income Tax Benefit                                 (544)        (43)         (501)
Segment Loss                                  $    (879)    $   (42)    $    (837)

Coal-fired plant production, GWh                   4,711       4,549           162
Gas-fired plant production, GWh                    3,792       3,897         (105)
Renewable plant production, GWh                    1,589       1,405           184
Total Commercial Power production, GWh            10,092       9,851           241
Net proportional MW capacity in operation          7,770       8,094         (324)

Three Months Ended March 31, 2014 as Compared to March 31, 2013

Commercial Power's results were negatively impacted by the impairment for the Midwest Generation business. The following is a detailed discussion of the variance drivers by line item.

Operating Revenues. The variance was driven primarily by:

A $58 million decrease in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of mark-to-market losses of $126 million in 2014 compared to losses of $68 million in 2013; and

A $15 million decrease for the coal-fired generation assets driven primarily by lower realized power prices, partially offset by increased volumes.

Partially offset by:

A $63 million increase for Duke Energy Retail Sales, LLC (Duke Energy Retail) resulting from favorable pricing, partially offset by lower volumes; and

A $7 million increase in PJM Interconnection LLC (PJM) capacity revenues related to higher average cleared capacity auction pricing.

Operating Expenses. The variance was driven primarily by:

A $1,381 million impairment recognized for the Midwest Generation business resulting from the plan to exit that business; and


PART I

A $76 million increase in purchased power to serve Duke Energy Retail customers.

Partially offset by:

A $96 million decrease in net mark-to-market fuel expense on non-qualifying fuel hedge contracts, consisting of mark-to-market gains of $89 million in 2014 compared to losses of $7 million in 2013; and

A $12 million decrease in fuel expenses from the gas-fired generation assets driven by lower natural gas costs and volumes.

Income Tax Expense. The variance was primarily due to a decrease in pretax income. The effective tax rate for the three months ended March 31, 2014 and 2013 was 38.2 percent and 50.8 percent, respectively. The decrease in the effective tax rate was primarily due to the first quarter of 2014 impairment of the Midwest Generation business.

Matters Impacting Future Commercial Power Results

In 2013, a FERC Administrative Law Judge issued an initial decision holding that Commercial Power is responsible for certain Multi Value Projects (MVP) costs, a type of Transmission Expansion Planning (MTEP) cost, approved by Midcontinent Independent System Operator, Inc. (MISO) prior to the date of Commercial Power's withdrawal. The initial decision will be reviewed by Federal Energy Regulatory Commission (FERC). If FERC upholds the initial decision, Commercial Power intends to file an appeal in federal court. If Commercial Power ultimately is found to be responsible for these costs, a portion of these costs may not be eligible for recovery, resulting in an adverse impact to its financial position, results of operations and cash flows. See Note 4 to the Condensed Consolidated Financial Statements, "Regulatory Matters," for additional information.

Changes or variability in assumptions used in calculating fair value of the renewables reporting unit for goodwill testing purposes including but not limited to legislative actions related to tax credit extensions, long-term growth rates and discount rates, could significantly impact the estimated fair value of the renewables reporting unit. In the event of a significant decline in the estimated fair value of the renewables reporting unit, goodwill and other asset impairment charges could be recorded. The carrying value of goodwill and intangible assets associated with proposed renewable projects within Commercial Power's renewables reporting unit was approximately $84 million at March 31, 2014. In addition, management periodically reviews individual projects within Commercial Power's renewables portfolio to evaluate ongoing alignment with the strategic direction of the business. A determination that a project is no longer consistent with the business strategy and a decision to divest of a project or projects could result in an impairment charge.

Other


                                                               Three Months Ended March 31,
(in millions)                                                    2014         2013     Variance
Operating Revenues                                          $      25     $     35     $  (10)
Operating Expenses                                                 84           90         (6)
Operating Loss                                                   (59)         (55)         (4)
Other Income and Expense, net                                       7           11         (4)
Interest Expense                                                  105           95          10
Loss Before Income Taxes                                        (157)        (139)        (18)
Income Tax Benefit                                               (75)         (60)        (15)
Less: Loss Attributable to Noncontrolling Interests                -           (2)           2
Net Expense                                                 $    (82)     $   (77)     $   (5)

Three Months Ended March 31, 2014 as Compared to March 31, 2013

Other's results were negatively impacted by an increase in interest expense. The following is a detailed discussion of the variance drivers by line item.

Operating Revenues. The decrease was primarily due to mark-to-market activity of mitigation sales related to the Progress Energy merger, partially offset by prior-year mark-to-market activity for Duke Energy Trading and Marketing, LLC (DETM), which was divested in 2013.

Interest Expense. The variance was driven primarily by a prior year purchase accounting adjustment related to the redemption of Quarterly Income Preferred Securities (QUIPS).

Income Tax Expense.The variance was primarily due to a decrease in pretax income. The effective tax rate for the three months ended March 31, 2014 and 2013 was 48.1 percent and 42.5 percent, respectively.

. . .

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