Duke Energy 2011 Annual Report Download - page 55

PART II
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
Duke Energy Corporation (collectively with its subsidiaries, Duke
Energy) is an energy company headquartered in Charlotte, North
Carolina. Duke Energy operates in the United States (U.S.) primarily
through its wholly-owned subsidiaries, Duke Energy Carolinas, LLC
(Duke Energy Carolinas), Duke Energy Ohio, Inc. (Duke Energy
Ohio), which includes Duke Energy Kentucky, Inc. (Duke Energy
Kentucky), and Duke Energy Indiana, Inc. (Duke Energy Indiana), as
well as in Latin America through International Energy.
Management’s Discussion and Analysis includes financial
information prepared in accordance with generally accepted
accounting principles (GAAP) in the United States (U.S.), as well as
certain non-GAAP financial measures such as adjusted earnings and
adjusted earnings per share, 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.
When discussing Duke Energy’s consolidated financial
information, it necessarily includes the results of its three separate
subsidiary registrants, Duke Energy Carolinas, Duke Energy Ohio and
Duke Energy Indiana (collectively referred to as the Subsidiary
Registrants), which, along with Duke Energy, are collectively referred
to as the Duke Energy Registrants. The following combined
Management’s Discussion and Analysis of Financial Condition and
Results of Operations is separately filed by Duke Energy, Duke Energy
Carolinas, 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.
Management’s Discussion and Analysis should be read in
conjunction with the Consolidated Financial Statements and Notes for
the years ended December 31, 2011, 2010, and 2009.
EXECUTIVE OVERVIEW
Proposed Merger with Progress Energy, Inc.
On January 8, 2011, Duke Energy entered into an Agreement and
Plan of Merger (Merger Agreement) among Diamond Acquisition
Corporation, a North Carolina corporation and Duke Energy’s wholly-
owned subsidiary (Merger Sub) and Progress Energy, Inc. (Progress
Energy), a North Carolina corporation. Upon the terms and subject to the
conditions set forth in the Merger Agreement, Merger Sub will merge
with and into Progress Energy with Progress Energy continuing as the
surviving corporation and a wholly-owned subsidiary of Duke Energy.
Pursuant to the Merger Agreement, upon the closing of the
merger, each issued and outstanding share of Progress Energy
common stock will automatically be canceled and converted into the
right to receive 2.6125 shares of common stock of Duke Energy,
subject to appropriate adjustment for a reverse stock split of the Duke
Energy common stock as contemplated in the Merger Agreement and
except that any shares of Progress Energy common stock that are
owned by Progress Energy or Duke Energy, other than in a fiduciary
capacity, will be canceled without any consideration therefor. Each
outstanding option to acquire, and each outstanding equity award
relating to, one share of Progress Energy common stock will be
converted into an option to acquire, or an equity award relating to
2.6125 shares of Duke Energy common stock, as applicable, subject
to appropriate adjustment for the reverse stock split. Based on
Progress Energy shares outstanding at December 31, 2011, Duke
Energy would issue 771 million shares of common stock to convert
the Progress Energy common shares in the merger under the
unadjusted exchange ratio of 2.6125. The exchange ratio will be
adjusted proportionately to reflect a 1-for-3 reverse stock split with
respect to the issued and outstanding Duke Energy common stock
that Duke Energy plans to implement prior to, and conditioned on,
the completion of the merger. The resulting adjusted exchange ratio is
0.87083 of a share of Duke Energy common stock for each share of
Progress Energy common stock. Based on Progress Energy shares
outstanding at December 31, 2011, Duke Energy would issue
257 million shares of common stock, after the effect of the 1-for-3
reverse stock split, to convert the Progress Energy common shares in
the merger. The merger will be accounted for under the acquisition
method of accounting with Duke Energy treated as the acquirer, for
accounting purposes. Based on the market price of Duke Energy
common stock on December 31, 2011, the transaction would be
valued at $17 billion and would result in incremental recorded
goodwill to Duke Energy of $11 billion, according to current
estimates. Duke Energy would also assume all of Progress Energy’s
outstanding debt, which is estimated to be $15 billion based on the
approximate fair value of Progress Energy’s outstanding indebtedness
at December 31, 2011. The Merger Agreement has been
unanimously approved by both companies’ Boards of Directors.
The merger is conditioned upon, among other things, approval
by the shareholders of both companies, as well as expiration or
termination of any applicable waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 and approval by the
Federal Energy Regulatory Commission (FERC), the Federal
Communications Commission (FCC), the Nuclear Regulatory (NRC),
the North Carolina Utilities Commission (NCUC), and the Kentucky
Public Service Commission (KPSC). Duke Energy and Progress
Energy also are seeking review of the merger by the Public Service
Commission of South Carolina (PSCSC) and approval of the joint
dispatch agreement by the PSCSC. Although there are no merger-
specific regulatory approvals required in Indiana, Ohio or Florida, the
companies will continue to update the public services commissions
in those states on the merger, as applicable and as required. The
status of regulatory approvals is as follows:
• On April 4, 2011, Duke Energy and Progress Energy, jointly
filed applications with the FERC for the approval of the merger,
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