Duke Energy 2011 Annual Report Download - page 58

PART II
In the second half of 2011, Duke Energy Carolina received
orders from the NCUC and the PSCSC approving the continuation of
project development costs for the William States Lee III Nuclear
Station for an additional $120 million through June 30, 2012. These
orders result in cumulative approved development costs of $350
million. Through December 31, 2011, Duke Energy Carolinas has
incurred $261 million of development costs on this project.
In July 2011, Duke Energy Carolinas signed a letter of intent
with South Carolina Public Service Authority (Santee Cooper) related
to the potential acquisition by Duke Energy Carolinas of a five percent
to ten percent ownership interest in the V.C. Summer Nuclear Station
being developed by Santee Cooper and South Carolina Electric & Gas
Company near Jenkinsville, South Carolina. The letter of intent
provides a path for Duke Energy Carolinas to conduct the necessary
due diligence to determine if future participation in this project is
beneficial for its customers.
Executing on Rate Case Filings. Duke Energy Carolinas
obtained favorable rate case outcomes in North Carolina and South
Carolina which will increase revenues by approximately $400
million.
Cost Control Efforts. Since the beginning of the economic
downturn in 2007, Duke Energy was successful in holding
operations and maintenance expenses, net of deferrals and cost
recovery riders, flat through 2009. However, the record temperatures
and related high load demands experienced during 2010 resulted in
an increase in Duke Energy’s operations and maintenance expenses,
net of deferrals and cost recovery riders, in 2010. Duke Energy
expected continued costs pressures in 2011 due to additional
maintenance expenses related to new assets, additional planned
outages at nuclear stations, employee benefit costs and inflation. As a
result of these pressures and significant expenses related to storm
restoration efforts in 2011, Duke Energy’s operations and
maintenance expenses, net of deferrals and cost recovery riders,
increased from 2010. Duke Energy’s operations and maintenance
expenses, net of deferrals and cost recovery riders, has increased
modestly from the beginning of the economic downturn in 2007.
Ohio SSO Filing. In November 2011, the Public Utilities
Commission of Ohio (PUCO) approved the settlement of Duke Energy
Ohio’s new ESP with a term of January 1, 2012 through May 31,
2015. The ESP provides for competitive auctions to establish Duke
Energy Ohio’s SSO price and includes a non-bypassable stability
charge of $110 million per year to be collected from 2012-2014.
The ESP also requires Duke Energy Ohio to transfer its generation
assets to a non-regulated affiliate on or before December 31, 2014.
Duke Energy Ohio believes the ESP balances the interests of all
parties by allowing customers to take advantage of the current low
market power prices, encouraging competition and providing the
company greater clarity and strategic flexibility regarding its
operations. Duke Energy Ohio successfully conducted its initial
auction in December 2011.
Regional Transmission Organization Realignment. Duke Energy
Ohio completed its Regional Transmission Organization (RTO)
realignment from the Midwest Independent Transmission System
Operator, Inc (Midwest ISO) to PJM Interconnection, LLC (PJM), on
December 31, 2011. Benefits of the realignment from Midwest ISO
to PJM include greater electrical interconnectivity, reduced congestion
and production costs, a capacity market structure that promotes long-
term contracting, consolidation of Duke Energy Ohio’s coal-fired and
gas-fired generation into a single market area and alignment of Duke
Energy Ohio’s jointly owned generation units into a single market area
that provides for a consistent dispatch signal. In conjunction with the
realignment, Duke Energy Ohio recorded a liability related to its
Midwest ISO exit obligation and share of MTEP costs, excluding Multi
Value Projects (MVP) of approximately $102 million. Approximately
$74 million of this amount was recorded as a regulatory asset while
the remainder was recorded as an expense. In addition to the above
amounts, Duke Energy Ohio may also be responsible for costs
associated with the Midwest ISO MVP projects. Duke Energy Ohio is
contesting its obligation to pay for such costs. However, depending
on the final outcome of this matter, Duke Energy Ohio could incur
material costs associated with MVP.
2012 Objectives.
Duke Energy will focus on managing regulatory approvals
related to the proposed merger with Progress Energy, completing its
remaining major capital projects, obtaining constructive regulatory
outcomes and achieving its adjusted diluted earnings target and
continuing to grow annual dividends.
Managing Regulatory Approvals Related to the Proposed
Merger with Progress Energy. In December 2011, the FERC rejected
Duke Energy and Progress Energy’s proposed mitigation plan related
to market power concerns. Duke Energy and Progress Energy
continue to evaluate the FERC’s December order in an attempt to
develop an alternative proposal. In addition to addressing FERC’s
market power concerns, any subsequent filing needs to be structured
to balance retaining benefits of the transaction for Duke Energy and
Progress Energy’s customers and shareholders. Prior to submitting an
alternative proposal to FERC, Duke Energy and Progress Energy are
required to make a 30-day notification filing with the NCUC.
Accordingly, Duke Energy filed advance notice of the revised FERC
mitigation plan on February 22, 2012.
Completing Remaining Major Capital Projects. Duke Energy
anticipates total capital expenditures of $4.3 billion to $4.5 billion in
2012. Approximately $1.4 billion of these expenditures are related to
expansion and growth projects, including but not limited to, the
Edwardsport IGCC plant, Cliffside Unit 6 and Dan River combined
cycle facility. Duke Energy also plans to complete 800 MW of wind
projects in its non-regulated businesses during 2012 before the
expiration of federal tax incentives.
Obtaining Constructive Regulatory Outcomes. The majority of
future earnings are anticipated to be contributed from U.S.
Franchised Electric and Gas (USFE&G), which consists of Duke
Energy’s regulated businesses. Duke Energy Carolinas plans to file
rate cases in North Carolina and South Carolina during 2012. Duke
Energy Ohio plans to file for electric distribution and gas rate cases in
2012. These planned rates cases are needed to recover investments
in Duke Energy’s ongoing infrastructure modernization projects and
operating costs. Planning for and obtaining favorable outcomes from
these regulatory proceedings as well as recovery of the Edwardsport
IGCC plant are a key factor in achieving Duke Energy’s long-term
growth assumptions.
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