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Non-GAAP Financial Measures

Adjusted Diluted Earnings per Share (“EPS”)

Duke Energy’s 2010 Annual Report references 2010 adjusted diluted EPS of $1.43. Adjusted diluted EPS is a non-GAAP (generally accepted accounting principles) financial measure as it represents diluted EPS from continuing operations attributable to Duke Energy Corporation common shareholders, adjusted for the per share 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, used in Duke Energy’s hedging of a portion of the economic value of certain 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 adjusted earnings until settlement better matches the financial impacts of the hedge contract with the portion of the economic value of the underlying hedged asset. Management believes that the presentation of adjusted diluted EPS provides useful information to investors, as it provides them an additional relevant comparison of the company’s performance across periods. Adjusted diluted EPS is also used as a basis for employee incentive bonuses.

The most directly comparable GAAP measure for adjusted diluted EPS is reported diluted EPS from continuing operations attributable to Duke Energy Corporation common shareholders, which includes the impact of special items and the mark-to-market impacts of economic hedges in the Commercial Power segment. The following is a reconciliation of reported diluted EPS from continuing operations to adjusted diluted EPS for 2010, 2009, and 2008:

    2010     2009     2008  
Diluted EPS from continuing operations, as reported $ 1.00   $ 0.82   $ 1.01  
Diluted EPS from discontinued operations, as reported       0.01     0.01  
Diluted EPS from extraordinary items, as reported           0.05  
Diluted EPS, as reported $ 1.00   $ 0.83   $ 1.07  
Adjustments to reported EPS:                  
Diluted EPS from discontinued operations       (0.01 )   (0.01 )
Diluted EPS from extraordinary items           (0.05 )
Diluted EPS impact of special items and mark-to-market in
Commercial Power (see below)
  0.43     0.40     0.20  
Diluted EPS, adjusted $ 1.43   $ 1.22   $ 1.21  

The following is the detail of the $(0.43) per share special items and mark-to-market in Commercial Power impacting adjusted diluted EPS for 2010:

(In millions, except per-share amounts) Pre-Tax
Amount
  Tax
Impact
  2010
Diluted
EPS Impact
 
Goodwill and other impairments $ (660 ) $ 58   $ (0.46 )
Voluntary retirement plan & office consolidation costs   (172 )   67     (0.08 )
Costs to achieve the Cinergy merger   (27 )   10     (0.01 )
Litigation reserve   (26 )   10     (0.01 )
Asset sales   248     (94 )   0.12  
Mark-to-market impact of economic hedges   33     (12 )   0.01  
Total adjusted EPS impact             $ (0.43 )

The following is the detail of the $(0.40) per share special items and mark-to-market in Commercial Power impacting adjusted diluted EPS for 2009:

(In millions, except per-share amounts) Pre-Tax
Amount
  Tax
Impact
  2009
Diluted
EPS Impact
 
Goodwill and other impairments $ (431 ) $ 21   $ (0.32 )
Mark-to-market impact of economic hedges   (60 )   22     (0.03 )
International transmission adjustment   (32 )   10     (0.02 )
Crescent related guarantees and tax adjustments   (26 )   (3 )   (0.02 )
Costs to achieve the Cinergy merger   (25 )   10     (0.01 )
Total adjusted EPS impact             $ (0.40 )

The following is the detail of the $(0.20) per share special items and mark-to-market in Commercial Power impacting adjusted diluted EPS for 2008:

(In millions, except per-share amounts) Pre-Tax
Amount
  Tax
Impact
  2008
Diluted
EPS Impact
 
Crescent project impairments $ (214 ) $ 83   $ (0.10 )
Emission allowances impairment   (82 )   30     (0.04 )
Mark-to-market impact of economic hedges   (75 )   27     (0.04 )
Costs to achieve the Cinergy merger   (44 )   17     (0.02 )
Total adjusted EPS impact             $ (0.20 )

2011 Adjusted Diluted EPS Outlook

Duke Energy’s 2010 Annual Report references Duke Energy’s forecasted 2011 adjusted diluted EPS outlook range of $1.35-$1.40 per share, which is consistent with the 2011 employee incentive earnings target. The materials also reference the forecasted range of growth of 4%-6% in adjusted diluted EPS (on a compound annual growth rate (“CAGR”) basis) from a base of adjusted diluted EPS for 2009 of $1.22. Adjusted diluted EPS is a non-GAAP financial measure as it represents diluted EPS from continuing operations attributable to Duke Energy Corporation shareholders, adjusted for the per-share 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 the economic value of its generation assets in the Commercial Power segment (as discussed separately under “Adjusted Diluted Earnings per Share (‘EPS’)”). The most directly comparable GAAP measure for adjusted diluted EPS is reported diluted EPS from continuing operations attributable to Duke Energy Corporation common shareholders, which includes the impact of special items and the mark-to-market impacts of economic hedges in the Commercial Power segment. Due to the forward-looking nature of this non-GAAP financial measure for future periods, information to reconcile it to the most directly comparable GAAP financial measure is not available at this time, as management is unable to project special items or mark-to-market adjustments for future periods.

Adjusted Segment EBIT for 2009 and 2010

Duke Energy’s 2010 Annual Report includes a discussion of adjusted segment EBIT for the years ended December 31, 2010 and 2009. The primary performance measure used by management to evaluate segment performance is segment EBIT from continuing operations, which at the segment level represents all profits from continuing operations (both operating and non-operating), including any equity in earnings of unconsolidated affiliates, before deducting interest and taxes, and is net of the income attributable to non-controlling interests. Management believes segment EBIT from continuing operations, which is the GAAP measure used to report segment results, is a good indicator of each segment’s operating performance as it represents the results of Duke Energy’s ownership interests in continuing operations without regard to financing methods or capital structures. Duke Energy also uses adjusted segment EBIT as a measure of historical and anticipated future segment performance. When used for future periods, adjusted segment EBIT may also include any amounts that may be reported as discontinued operations or extraordinary items.

Adjusted segment EBIT is a non-GAAP financial measure as it represents reported segment EBIT 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, used in Duke Energy’s hedging of a portion of the economic value of certain of its generation assets in the Commercial Power segment (as discussed above under “Adjusted Diluted Earnings per Share (‘EPS’)”). Management believes that the presentation of adjusted segment EBIT provides useful information to investors, as it provides them an additional relevant comparison of a segment’s performance across periods. The most directly comparable GAAP measure for adjusted segment EBIT is reported segment EBIT, which represents segment results from continuing operations, including any special items and the mark-to-market impacts of economic hedges in the Commercial Power segment.

The following is a reconciliation of adjusted segment EBIT for the years ended December 31, 2010 and 2009, to the most directly comparable GAAP measure:

For the Year Ended December 31, 2010

(In millions) Adjusted
Segment
EBIT
  Goodwill &
Other Asset
Impairments
  Economic Hedges
(Mark-to-Market)
  Reported
Segment
EBIT
 
U.S. Franchised Electric & Gas $ 2,966   $   $   $ 2,966  
Commercial Power   398     (660 )   33     (229 )
International Energy   486             486  
Total 2010 reportable segment EBIT $ 3,850   $ (660 ) $ 33   $ 3,223  

For the Year Ended December 31, 2009

(In millions) Adjusted
Segment
EBIT
  International
Transmission
Adjustment
  Goodwill &
Other Asset
Impairments
  Economic Hedges
(Mark-to-Market)
  Reported
Segment
EBIT
 
U.S. Franchised Electric & Gas $ 2,321   $   $   $   $ 2,321  
Commercial Power   500         (413 )   (60 )   27  
International Energy   409     (26 )   (18 )       365  
Total 2009 reportable segment EBIT $ 3,230   $ (26 ) $ (431 ) $ (60 ) $ 2,713  

Adjusted Earnings per Share Accretion in Year One of Merger with Progress Energy

Duke Energy’s 2010 Annual Report includes a reference to Duke Energy’s assumption that the merger transaction is anticipated to be accretive in the first year after closing, based upon adjusted diluted EPS.

This accretion assumption is a non-GAAP financial measure as it is based upon diluted EPS from continuing operations attributable to Duke Energy Corporation shareholders, adjusted for the per-share impact of special items and the mark-to-market impacts of economic hedges in the Commercial Power segment (as discussed above under “Adjusted Diluted Earnings per Share (‘EPS’)”). The most directly comparable GAAP measure for adjusted diluted EPS is reported diluted EPS from continuing operations attributable to Duke Energy Corporation common shareholders, which includes the impact of special items (including costs-to-achieve the merger) and the mark-to-market impacts of economic hedges in the Commercial Power segment. On a reported diluted EPS basis, this transaction is not anticipated to be accretive due to the level of costs-to-achieve the merger. Due to the forward-looking nature of this non-GAAP financial measure for future periods, information to reconcile it to the most directly comparable GAAP financial measure is not available at this time, as management is unable to project special items or mark-to-market adjustments for future periods.

Dividend Payout Ratio

Duke Energy’s 2010 Annual Report includes a discussion of Duke Energy’s anticipated long-term dividend payout ratio of 65-70% based upon adjusted diluted EPS. This payout ratio is a non-GAAP financial measure as it is based upon forecasted diluted EPS from continuing operations attributable to Duke Energy Corporation shareholders, adjusted for the per-share impact of special items and the mark-to-market impacts of economic hedges in the Commercial Power segment (as discussed above under “Adjusted Diluted Earnings Per Share (‘EPS’)”). The most directly comparable GAAP measure for adjusted diluted EPS is reported diluted EPS from continuing operations attributable to Duke Energy Corporation common shareholders, which includes the impact of special items and the mark-to-market impacts of economic hedges in the Commercial Power segment. Due to the forward-looking nature of this non-GAAP financial measure for future periods, information to reconcile it to the most directly comparable GAAP financial measure is not available at this time, as management is unable to project special items or mark-to-market adjustments for future periods.

Total Available Liquidity

Duke Energy’s 2010 Annual Report includes a discussion of total available liquidity. Total available liquidity is a non-GAAP financial measure as it represents cash and cash equivalents (excluding amounts held in foreign jurisdictions) and remaining availability under the master credit and regional bank credit facilities. The most directly comparable GAAP financial measure for available liquidity is cash and cash equivalents. The following is a reconciliation of total available liquidity as of December 31, 2010, to the most directly comparable GAAP measure:

(In millions) As of
December 31, 2010
 
Cash and cash equivalents $ 1,670  
Less: Amounts held in foreign jurisdictions   (724 )
    946  
Plus: Remaining availability under master credit and regional bank credit facilities   2,482  
Total available liquidity $ 3,428  

Adjusted Operation, Maintenance and Other Expenses

Duke Energy’s 2010 Annual Report includes a discussion of adjusted operation, maintenance and other costs (“O&M expenses”). Adjusted O&M expenses is a non-GAAP financial measure as it represents reported O&M expenses adjusted for the impact of special items and deferrals and cost recovery riders. 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. The most directly comparable GAAP measure for adjusted O&M expenses is reported O&M expenses, which includes the impact of special items. The following is a reconciliation of adjusted O&M expenses for the years ended December 31, 2010 and 2009, to the most directly comparable GAAP measure:

(In millions)   2010     2009  
Operation, maintenance and other (a) $ 3,825   $ 3,313  
Transfers to capital (b)   108     149  
Less:            
Voluntary retirement plan & office consolidation costs (c)   (164 )    
International transmission adjustment (c)       (30 )
Costs to achieve the Cinergy merger (c)   (4 )   (5 )
Deferrals, recoverables, and other (d)   (343 )   (85 )
Adjusted operations and maintenance cost $ 3,422   $ 3,342  

(a)As reported in the Consolidated Statements of Operations for the years ended December 31, 2010 and December 31, 2009. 2008 and 2007 operation, maintenance and other expenses were $3,351 million and $3,324 million, respectively.

(b)Represents capitalized costs that were included for purposes of calculating the employee operations and maintenance costs target.

(c)Presented as a special item for purposes of calculating adjusted diluted earnings per share.

(d)Primarily represents expenses to be deferred or recovered through rate riders (e.g., impact of regulatory deferrals, reagents, etc.).