Business Context and Reporting Period
This Form 8-K Current Report was filed by Duke Energy Corporation on July 5, 2020. The filing addresses a material impairment and other events related to the Atlantic Coast Pipeline (ACP) project. Duke Energy subsidiaries, Duke ACP and Piedmont ACP, announced the decision to cease investment in the construction of the ACP project due to permitting delays, legal challenges, and a strategic shift by the lead developer, Dominion Energy.
Key Financial Metrics and Charges
- Material Charges: Duke Energy expects to record pre-tax charges to earnings of approximately $2.0 billion to $2.5 billion.
- Timing of Charges: Approximately $2.0 billion to $2.2 billion is expected to be recorded in the second quarter of 2020, with the remainder recorded later in 2020 upon incurrence of exit costs.
- Accounting Treatment: These charges will be classified as special items and excluded from adjusted earnings per share (EPS).
- Equity Needs: The company states it has no incremental equity issuance needs, citing a $2.5 billion equity forward settled in Q4 2020 as sufficient balance sheet support.
- AFUDC Impact: Approximately $0.07 of EPS related to the Allowance for Funds Used During Construction (AFUDC) was recorded through June 30, 2020. No additional AFUDC will be recorded for the remainder of 2020.
Material Changes and Guidance Impact
The discontinuation of the ACP project materially alters the company's earnings outlook. Previously, the project was projected to contribute approximately $0.20 to 2020 EPS and $0.30 to $0.35 to 2021 EPS. With the cessation of AFUDC and the recognition of impairment charges, the company's 2020 results are now trending toward the low end of its previously issued guidance range of $5.05 to $5.45 per share. The filing notes that the third quarter is historically the most impactful for earnings and that the company continues to monitor the economic impact of COVID-19.
Outlook, Risks, and Unusual Items
- Unusual Items: The $2.0 billion to $2.5 billion charge is an unusual, non-recurring item driven by the project cancellation.
- Risks: Key risks cited include permitting delays, legal challenges affecting construction permits, and the broader economic impact of the COVID-19 pandemic.
- Management Commentary: Management views the charges as special items not indicative of ongoing performance. They plan to host an analyst call in early August 2020 to discuss Q2 2020 financial results.
- Non-GAAP Measures: The company utilizes adjusted EPS for planning and forecasting. A reconciliation to GAAP measures for future periods is not currently available due to the inability to project all special items (e.g., legal settlements, regulatory orders).
Investor Verification Checklist
- Verify the exact timing and magnitude of the $2.0 billion to $2.5 billion pre-tax charge in the upcoming Q2 2020 earnings release.
- Confirm the status of the $2.5 billion equity forward settlement scheduled for Q4 2020.
- Monitor the August 2020 analyst call for updated 2020 and 2021 EPS guidance following the removal of ACP contributions.
- Assess the potential for additional exit costs or legal settlements related to the ACP project that may impact future periods.
- Review the impact of COVID-19 cost mitigation measures on operating margins in the third and fourth quarters.