Duke Energy 2011 Annual Report Download - page 144

PART II
DUKE ENERGY CORPORATION •DUKE ENERGY CAROLINAS, LLC •DUKE ENERGY OHIO, INC. •DUKE ENERGY INDIANA, INC.
Combined Notes to Consolidated Financial Statements – (Continued)
Station and Buck Steam Station. The Division of Air Quality (DAQ)
issued a final air permit authorizing construction of the Buck and Dan
River combined cycle natural gas-fired generating units in October
2008 and August 2009, respectively.
In November 2011, Duke Energy Carolinas placed its 620 MW
Buck combined cycle natural gas-fired generation facility in service.
This is the first of Duke Energy’s key modernization projects to be
commissioned. The Dan River project is expected to begin operation
by the end of 2012. Based on the most updated cost estimates, total
costs (including AFUDC) for the Buck and Dan River projects are
$700 million and $716 million, respectively.
Duke Energy Indiana Edwardsport IGCC Plant.
On September 7, 2006, Duke Energy Indiana and Southern
Indiana Gas and Electric Company d/b/a Vectren Energy Delivery of
Indiana (Vectren) filed a joint petition with the IURC seeking a CPCN
for the construction of a 618 MW IGCC power plant at Duke Energy
Indiana’s Edwardsport Generating Station in Knox County, Indiana.
The facility was initially estimated to cost approximately $1.985
billion (including $120 million of AFUDC). In August 2007, Vectren
formally withdrew its participation in the IGCC plant and a hearing
was conducted on the CPCN petition based on Duke Energy Indiana
owning 100% of the project. On November 20, 2007, the IURC
issued an order granting Duke Energy Indiana a CPCN for the
proposed IGCC project, approved the cost estimate of $1.985 billion
and approved the timely recovery of costs related to the project. On
January 25, 2008, Duke Energy Indiana received the final air permit
from the Indiana Department of Environmental Management. The
Citizens Action Coalition of Indiana, Inc. (CAC), Sierra Club, Inc.,
Save the Valley, Inc., and Valley Watch, Inc., all intervenors in the
CPCN proceeding, have appealed the air permit.
On May 1, 2008, Duke Energy Indiana filed its first semi-
annual IGCC rider and ongoing review proceeding with the IURC as
required under the CPCN order issued by the IURC. In its filing, Duke
Energy Indiana requested approval of a new cost estimate for the
IGCC project of $2.35 billion (including $125 million of AFUDC) and
for approval of plans to study carbon capture as required by the
IURC’s CPCN order. On January 7, 2009, the IURC approved Duke
Energy Indiana’s request, including the new cost estimate of $2.35
billion, and cost recovery associated with a study on carbon capture.
On November 3, 2008 and May 1, 2009, Duke Energy Indiana filed
its second and third semi-annual IGCC riders, respectively, both of
which were approved by the IURC in full.
On November 24, 2009, Duke Energy Indiana filed a petition
for its fourth semi-annual IGCC rider and ongoing review proceeding
with the IURC. As Duke Energy Indiana experienced design
modifications, quantity increases and scope growth above what was
anticipated from the preliminary engineering design, capital costs to
the IGCC project were anticipated to increase. Duke Energy Indiana
forecasted that the additional capital cost items would use the
remaining contingency and escalation amounts in the current $2.35
billion cost estimate and add $150 million, excluding the impact
associated with the need to add more contingency. Duke Energy
Indiana did not request approval of an increased cost estimate in the
fourth semi-annual update proceeding; rather, Duke Energy Indiana
requested, and the IURC approved, a subdocket proceeding in which
Duke Energy Indiana would present additional evidence regarding an
updated estimated cost for the IGCC project and in which a more
comprehensive review of the IGCC project could occur. The
evidentiary hearing for the fourth semi-annual update proceeding was
held April 6, 2010, and an interim order was received on July 28,
2010. The order approves the implementation of an updated IGCC
rider to recover costs incurred through September 30, 2009, effective
immediately. The approvals are on an interim basis pending the
outcome of the sub-docket proceeding involving the revised cost
estimate as discussed further below.
On April 16, 2010, Duke Energy Indiana filed a revised cost
estimate for the IGCC project reflecting an estimated cost increase of
$530 million. Duke Energy Indiana requested approval of the revised
cost estimate of $2.88 billion (including $160 million of AFUDC), and
for continuation of the existing cost recovery treatment. A major driver of
the cost increase included quantity increases and design changes,
which impacted the scope, productivity and schedule of the IGCC
project. On September 17, 2010, an agreement was reached with the
OUCC, Duke Energy Indiana Industrial Group and Nucor Steel —
Indiana to increase the authorized cost estimate of $2.35 billion to
$2.76 billion, and to cap the project’s costs that could be passed on to
customers at $2.975 billion. Any construction cost amounts above
$2.76 billion would be subject to a prudence review similar to most
other rate base investments in Duke Energy Indiana’s next general rate
increase request before the IURC. Duke Energy Indiana agreed to
accept a 150 basis point reduction in the equity return for any project
construction costs greater than $2.35 billion. Additionally, Duke Energy
Indiana agreed not to file for a general rate case increase before March
2012. Duke Energy Indiana also agreed to reduce depreciation rates
earlier than would otherwise be required and to forego a deferred tax
incentive related to the IGCC project. As a result of the settlement, Duke
Energy Indiana recorded a pre-tax charge to earnings of approximately
$44 million in the third quarter of 2010 to reflect the impact of the
reduction in the return on equity. The charge is recorded in Goodwill
and other impairment charges on Duke Energy’s Consolidated
Statement of Operations. This charge is recorded in Impairment charges
on Duke Energy Indiana’s Consolidated Statements of Operations. Due
to the IURC investigation discussed below, the IURC convened a
technical conference on November 3, 2010 related to the continuing
need for the Edwardsport IGCC facility. On December 9, 2010, the
parties to the settlement withdrew the settlement agreement to provide
an opportunity to assess whether and to what extent the settlement
agreement remained a reasonable allocation of risks and rewards and
whether modifications to the settlement agreement were appropriate.
Management determined that the approximate $44 million charge
discussed above was not impacted by the withdrawal of the settlement
agreement.
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