Duke Energy 2011 Annual Report Download - page 60

PART II
rates, political conditions and policies of foreign governments.
Changes in these factors are difficult to predict and may impact Duke
Energy’s future results.
Duke Energy also relies on access to both short-term money
markets and longer-term capital markets as a source of liquidity for
capital requirements not met by cash flow from operations. An
inability to access capital at competitive rates or at all could adversely
affect Duke Energy’s ability to implement its strategy. Market
disruptions or a downgrade of Duke Energy’s credit rating may
increase its cost of borrowing or adversely affect its ability to access
one or more sources of liquidity. For further information related to
management’s assessment of Duke Energy’s risk factors, see
Item 1A. “Risk Factors.”
RESULTS OF OPERATIONS
Duke Energy
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 measure, Adjusted Earnings, which is
measured as income from continuing operations after deducting
income attributable to noncontrolling interests, adjusted for the
impact of special items and the 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 mark-to-market impact of derivative contracts, which is
recognized in GAAP earnings immediately as such derivative
contracts do not qualify for hedge accounting or regulatory accounting
treatment, used in Duke Energy’s hedging of a portion of economic
value of its generation assets in the Commercial Power segment. The
economic value of the generation assets is subject to fluctuations in
fair value due to market price volatility of the input and output
commodities (e.g., coal, power) and, as such, the economic hedging
involves both purchases and sales of those input and output
commodities related to the generation assets. Because the operations
of the generation assets are accounted for under the accrual method,
management believes that excluding the impact of mark-to-market
changes of the economic hedge contracts from operating earnings
until settlement better matches the financial impacts of the hedge
contract with the portion of economic value of the underlying hedged
asset. Management believes that the presentation of Adjusted
Earnings provides useful information to investors, as it provides them
an additional relevant comparison of Duke Energy’s performance
across periods. Management uses this non-GAAP financial measure
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 measure for Adjusted Earnings is net income
attributable to Duke Energy common shareholders, which includes
the impact of special items, the mark-to-market impacts of economic
hedges in the Commercial Power segment and discontinued
operations.
OVERVIEW
The following table reconciles the non-GAAP financial measure Adjusted Earnings to the GAAP measure Net income attributable to Duke
Energy (amounts are net of tax and, except for per-share amounts, are in millions):
Years Ended December 31,
2011 2010 2009
Amount
Per
diluted
share Amount
Per
diluted
share Amount
Per
diluted
share
Adjusted Earnings $1,943 $ 1.46 $1,882 $ 1.43 $1,577 $ 1.22
Economic Hedges (Mark-to-Market) (1) — 21 0.01 (38) (0.03)
Asset Sales ——154 0.12 — —
Costs to Achieve Mergers (51) (0.04) (17) (0.01) (15) (0.01)
Crescent Related Guarantees and Tax Adjustments —— — — (29) (0.02)
Edwardsport Impairment (135) (0.10) —— —
Emission Allowance Impairment (51) (0.04) —— —
Employee Severance and Office Consolidation ——(105) (0.08) —
Goodwill and Other Asset Impairments ——(602) (0.46) (410) (0.32)
Litigation Reserves ——(16) (0.01) —
International Transmission Adjustment —— — — (22) (0.02)
Income from Discontinued Operations 1— 3 — 12 0.01
Net income attributable to Duke Energy $1,706 $ 1.28 $1,320 $ 1.00 $1,075 $ 0.83
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