Duke Energy 2012 Annual Report Download - page 160

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PART II
Combined Notes to Consolidated Financial Statements – (Continued)
DUKE ENERGY CORPORATION • DUKE ENERGY CAROLINAS, LLC • PROGRESS ENERGY, INC. • CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY
CAROLINAS, INC. • FLORIDA POWER CORPORATION d/b/a PROGRESS ENERY FLORIDA, INC. • DUKE ENERGY OHIO, INC. • DUKE ENERGY INDIANA, INC.
approximately $222 million in the third quarter of 2011 related to costs expected
to be incurred above the cost cap. This charge is in addition to the previous
pre-tax impairment charge related to the Edwardsport project discussed above
and is recorded in Impairment charges on the Consolidated Statements of
Operations and Comprehensive Income.
On November 30, 2011, Duke Energy Indiana fi led a petition with the IURC
in connection with its eighth semi-annual rider request for the Edwardsport
IGCC project. Evidentiary hearings for the seventh and eighth semi-annual rider
requests were held on August 6, 2012 and August 7, 2012.
Phase I and Phase II hearings concluded on January 24, 2012. The CAC has
fi led repeated requests for the IURC to consider issues of ethics, undue infl uence,
due process violations and appearance of impropriety. The IURC denied the most
recent motion in March 2012. In April 2012, the CAC fi led a motion requesting the
IURC to certify questions of law for appeal regarding allegations of fraud on the
commission and due process violations. This motion was denied.
On April 30, 2012, Duke Energy Indiana entered into a settlement
agreement with the OUCC, the Duke Energy Indiana Industrial Group and Nucor
Steel-Indiana on the cost increase for construction of the Edwardsport IGCC
plant, including both Phase I and Phase II of the subdocket. Pursuant to the
agreement, there would be a cap on costs to be refl ected in customer rates
of $2.595 billion, including estimated fi nancing costs through June 30, 2012.
Pursuant to the agreement, Duke Energy Indiana would be able to recover
additional fi nancing costs until November 30, 2012, and 85% of fi nancing costs
that accrue thereafter. Duke Energy Indiana also agreed not to request a retail
electric base rate increase prior to March 2013, with rates in effect no earlier
than April 1, 2014. As a result of the agreement, Duke Energy Indiana recorded
pre-tax impairment and other charges of approximately $420 million in the
fi rst quarter of 2012. Approximately $400 million is recorded in Impairment
charges and the remaining approximately $20 million is recorded in Operation,
maintenance and other on Duke Energy’s Consolidated Statement of Operations
and in Duke Energy Indiana’s Consolidated Statements of Operations and
Comprehensive Income. The $20 million recorded in Operation, maintenance
and other, is attributed to legal fees Duke Energy Indiana will be responsible
for on behalf of certain intervenors, as well as funding for low income energy
assistance, as required by the settlement agreement. These charges are in
addition to previous pre-tax impairment charges related to the Edwardsport
IGCC project as discussed above.
The CAC, Sierra Club Indiana chapter, Save the Valley and Valley Watch,
fi led testimony in opposition to the April 30, 2012 settlement agreement
contending the agreement should not be approved, and that the amount of
costs recovered from customers should be less than what the settlement
agreement provides, potentially even zero. In addition to reiterating their prior
concerns with the Edwardsport IGCC project, the intervenors noted above also
contend new settlement terms should be added to mitigate carbon emissions,
conditions should be added prior to the plant being declared in-service and the
IURC should consider their allegations of undue infl uence. Duke Energy Indiana,
the Industrial Group and the OUCC, fi led rebuttal testimony supporting the
settlement as reasonable and in the public interest. An evidentiary hearing on
the settlement agreement concluded on July 19, 2012. Post-hearing briefi ng has
been completed.
On June 8, 2012, Duke Energy Indiana fi led a petition with the IURC in
connection with its ninth semi-annual rider request for the Edwardsport IGCC
project. An evidentiary hearing for the ninth semi-annual rider request was
January 15, 2013.
On October 30, 2012, Duke Energy Indiana revised its project cost
estimate from approximately $2.98 billion, excluding fi nancing costs, to
approximately $3.154 billion, excluding fi nancing costs, and revised the
projected in-service date from the fi rst quarter of 2013 to the second quarter
of 2013. The revised estimate is due primarily to lower than projected
revenues from test output and delays due to more extensive testing conditions.
As a result, Duke Energy Indiana recorded a pre-tax impairment charge of
approximately $180 million in the third quarter of 2012 related to costs expected
to be incurred above the cost cap proposed in the settlement agreement fi led
in April 2012, as discussed above. This amount is in addition to previous
pre-tax impairment charges related to the Edwardsport IGCC project and is
recorded in Impairment charges on Duke Energy’s Consolidated Statements of
Operations and Duke Energy Indiana’s Consolidated Statements of Operations
and Comprehensive Income.
On December 27, 2012, the IURC approved the settlement agreement
fi nalized in April 2012, as discussed above, between Duke Energy Indiana,
the OUCC, the Duke Energy Indiana Industrial Group and Nucor Steel Indiana,
on the cost increase for the construction of the project. This order resolves all
subdocket issues in Phase I and Phase II of the proceeding. The settlement
agreement, as approved, caps costs to be refl ected in customer rates at
$2.595 billion, including estimated AFUDC through June 30, 2012. Duke Energy
Indiana was allowed to recover AFUDC after June 30, 2012 until customer rates
are revised, with such recovery decreasing to 85% on AFUDC accrued after
November 30, 2012.
The IURC modifi ed the settlement agreement as previously agreed to by
the parties to (i) require the Duke Energy Indiana to credit customers $31 million
for cost control incentive payments which the IURC found to be unwarranted as
a result of delays that arose from project cost overruns and (ii) provide that if
the Duke Energy Indiana should recover more than the project costs absorbed
by Duke Energy’s shareholders through litigation, any surplus must be returned
to the Duke Energy Indiana’s ratepayers. On December 11, 2012, Duke Energy
Indiana fi led an arbitration action against General Electric Company (General
Electric) and Bechtel Corporation (Bechtel) in connection with their work at the
Edwardsport IGCC facility. Duke Energy Indiana is seeking damages of not less
than $560 million. Duke Energy cannot predict the outcome of this matter.
The CAC, Sierra Club Indiana chapter, Save the Valley and Valley Watch
have appealed the IURC order approving the Settlement Agreement to the
Indiana Court of Appeals. No briefi ng schedule has been set.
Also on December 27, 2012, the IURC issued orders on the fi fth, sixth,
seventh and eighth IGCC riders, concluding those proceedings. In the eighth
IGCC rider order, the IURC approved construction work in process recovery on
the settlement agreement’s hard cost cap amount of $2.595 billion.
The project is scheduled to be in commercial operation in mid-2013.
Additional updates to the cost estimate could occur through the completion of
the plant.
Duke Energy Indiana Storm Cost Deferrals.
On July 14, 2010, the IURC approved Duke Energy Indiana’s deferral
of $12 million of retail jurisdictional storm expense until the next retail rate
proceeding. This amount represents a portion of costs associated with a
January 27, 2009 ice storm, which damaged Duke Energy Indiana’s distribution
system. On August 12, 2010, the OUCC fi led a notice of appeal with the IURC.
On December 7, 2010, the IURC issued an order reopening this proceeding for
review in consideration of the evidence presented as a result of an internal audit
performed as part of an IURC investigation of Duke Energy Indiana’s hiring of
an attorney from the IURC staff which resulted in the IURC’s termination of the
employment of the Chairman of the IURC. The audit did not fi nd that the order
confl icted with the staff report; however, it did note that the staff report offered
no specifi c recommendation to either approve or deny the requested relief, and
that the original order was appealed. On October 19, 2011, the IURC issued
an order denying Duke Energy Indiana the right to defer the storm expense