Letter from the Chairman
Dear Stakeholders: This year marks a major milestone in our journey as a sustainable company. It’s been five years since Duke Energy merged with Cinergy, and I became chief executive of the combined company. This is also our fifth sustainability report.
This five-year mark is a good time to reflect on our progress. It comes at an important point in time — as Duke Energy prepares to merge with Progress Energy, and our industry continues to navigate the challenges of economic recovery and environmental constraints.
Our commitment to sustainability helps us achieve the critical balance among people, the planet and profits. As our business challenges and priorities change, our five focus areas keep us on the right path for sustainable decisions and results.
Our direction was affirmed in 2010, when Duke Energy earned a place on the Dow Jones Sustainability World Index. Only 15 electric utilities worldwide were named to the elite World Index. We were also named to the North American DJSI for the fifth year in a row.
In this report, Roberta Bowman, Duke Energy’s chief sustainability officer, discusses our sustainability journey over the past five years. I’ll review where we are today, and what lies ahead.
Delivering Today. Investing for Our Future.
This Sustainability Report shares a common theme with our Annual Report: “Delivering Today. Investing for Our Future.” I think it captures our dual responsibilities — to deliver affordable, reliable and increasingly clean energy today, while making the investments needed to ensure a sustainable future.
In a nutshell, sustainability is all about innovation and accountability.
It means the relentless pursuit of productivity gains in the generation, delivery and use of energy.
It means engaging our employees, and unlocking their ideas.
It means managing our business responsibly and transparently, from the financial ledger to the plant floor.
And it means caring about the environment, and the communities we serve.
Real Jobs in a Jobless Recovery
Duke Energy currently offers some of the most competitive electric rates in the U.S. We benefit today from the investment decisions made decades ago.
Now, we are entering a new building cycle — replacing aging energy facilities, improving productivity and efficiency, meeting stricter environmental standards and diversifying our fuel sources.
I believe that investing in new energy infrastructure and related technologies can be the spark that ignites the next engine of American prosperity — bringing jobs and building energy security.
Government has an important role to play in job creation, for sure. But, it is private industry that will supply the fuel and turbines for new power plants, fiberglass for windmills, photovoltaic cells for solar panels, batteries for electric vehicles and the infrastructure for a smart grid — all providing good jobs. A 2009 study by the Political Economy Research Institute estimates that a $1 billion investment in energy-related infrastructure can create from approximately 15,000 to more than 20,000 jobs.
A Technology Company Disguised as a Utility
At the turn of the 20th century, electric companies were the innovators of the world, bringing electricity and all that it enabled to customers and communities. It was a life-changing — and economy-changing — transformation.
The 21st century electric company is a technology company disguised as a utility. We identify, integrate and scale up new technologies that make electricity cleaner, more reliable and affordable. New, more efficient generating plants, seamlessly integrated into a smart grid, will create the foundation for a low-carbon future. A switch to electric vehicles will drive entire new industries and new jobs. A trend toward more efficient buildings and appliances will create opportunities for jobs and investment as well.
Duke Energy is an industry leader in this value chain of sustainable innovation. Here are some highlights:
Promoting Energy Efficiency
One way we are improving productivity and holding down costs is by promoting energy efficiency.
Our regulatory framework for energy efficiency differs from traditional utility conservation programs in that we are rewarded not only for selling power — but also for helping customers save it. The savings are measured and verified by a third party, to ensure we are producing real results.
Our energy efficiency model has been approved in North Carolina, South Carolina and Ohio. While we have not yet filed for a similar framework in Kentucky, we do have conservation programs in place.
After we received preliminary approval in Indiana, the state’s utility commission ordered all utilities to offer a set of standard efficiency programs. We withdrew our previous proposal and submitted new plans for programs beyond those mandated by the state. We are awaiting the commission’s approval.
Our efficiency programs are already helping customers better manage their energy use and create sustainable energy savings.
For example, in 2010, Duke Energy distributed more than 10 million compact fluorescent light bulbs (CFLs) to our residential electric customers. By replacing their incandescent bulbs with CFLs, customers save money and energy.
Also in 2010, we announced Envision: Charlotte, the largest commercial-scale community application of smart-energy technology in the U.S. to date. This public/private partnership aims to reduce overall energy use in some 70 uptown Charlotte buildings by up to 20 percent over the next five years.
Though the reliability of our power delivery system has improved substantially in recent years, we did not meet our aggressive 2010 outage-reduction goals. Stormy weather had a major impact — lightning strikes increased by 80 percent in the Carolinas and 46 percent in the Midwest, compared to 2009.
Weather aside, in order to sustain higher levels of reliability in the long run, our electric power grid needs a major upgrade. That’s where smart grid technology comes in.
Moving from analog to digital technology will equip our delivery system to detect and resolve power problems, and prevent and shorten outages. It will enable our buildings, appliances and electronic devices to use energy more efficiently. And, it will give our customers the information, choices and control to make wiser energy decisions, save energy and save money — in a way that works best for them.
Since 2008, we have installed approximately 140,000 “smart” electric meters and nearly 100,000 digital gas meters for customers in Ohio. We have also installed thousands of digital meters in the Carolinas, mostly in the Charlotte area.
Making Energy Cleaner
Weather extremes in 2010 tested our generating fleet and operations team, and they responded with exceptional performance. Due to higher electricity demand from customers, the fleet emitted about 100 million tons of carbon dioxide (CO2) in 2010 — up from 94 million tons in 2009, when the economy was weaker. Our carbon intensity (tons of CO2 emitted per net megawatt-hour of electricity produced) also increased slightly — from 0.59 in 2009 to 0.60 in 2010 — due to those same factors. However, based on 2009 data (the latest available), while Duke Energy was the fifth largest generator of megawatt-hours among U.S.-based, investor-owned utilities, we were only the 11th highest in U.S. carbon intensity, due to our diverse generation mix.
We remain committed to reducing our environmental footprint, and are taking actions today for a cleaner energy future.
As I mentioned earlier, the power industry’s infrastructure is aging. About 70 percent of the approximately 450 major U.S. electric power generating units began operating more than 30 years ago. Over the next decade, we expect new Environmental Protection Agency regulations may make almost a third of all U.S. coal plants uneconomical to operate. On the Duke Energy system, we will need to replace most of the power plants operating today by 2050. By modernizing and diversifying our generating fleet now, we will produce energy more efficiently, retire older, less-efficient plants, and reduce our carbon footprint — for good.
As I write this letter, we continue to monitor the disasters in Japan — an unprecedented earthquake, a massive tsunami and the resulting emergency at the Fukushima Daiichi nuclear station.
The nuclear energy industry worldwide works cooperatively and continuously to share experience and improve safety. We have long recognized that a problem at one nuclear unit can affect us all. And, while it will take time to better understand the causes and effects of the Japanese nuclear crisis, Duke Energy and the U.S. nuclear industry are already taking actions to ensure the continued safety of our plants. On page 26, our chief generation and nuclear officer, Dhiaa Jamil, a 30-year veteran of the nuclear power industry, answers questions about the Japanese crisis.
It is impossible to predict what impact the events in Japan will have on the burgeoning nuclear renaissance in the U.S. and worldwide. But, I believe nuclear power will remain an important part of our energy mix, because it is the only technology that allows us to generate electricity 24/7 with zero greenhouse gases.
At Duke Energy, we have nearly 40 years of experience safely and efficiently operating nuclear power plants. In fact, in 2010, we set a new company record for capacity factor — approximately 95.9 percent — which translates into lower costs and cleaner power for our customers.
Almost half of the power produced in the U.S. comes from coal. It is plentiful and affordable; our challenge is to find ways to burn it more cleanly.
We have invested approximately $5 billion over the last decade to significantly reduce SO2 and NOx emissions. Over the past five years, we have reduced our sulfur dioxide emissions by 73 percent, and nitrogen oxides emissions by 52 percent.
Our Edwardsport plant in Indiana will be one of the world’s cleanest coal-fired plants when it is completed in 2012. It will also be the largest power plant in the world to use advanced technology to gasify coal, strip out the pollutants and burn the cleaner gas to produce power — reducing carbon emissions per megawatt-hour by nearly half. The plant is more than 80 percent complete, including engineering, procurement and construction.
But Edwardsport has not been without its challenges.
While construction remained on schedule in 2010, the scale and complexity of the project has pushed estimated costs from $2.35 billion to $2.88 billion. We have filed a proposal with the Indiana Utility Regulatory Commission to cap Edwardsport construction costs to be passed on to customers at $2.72 billion plus financing costs, and to lower the overall customer rate increase related to the project.
We expect a decision from the commission in 2011 regarding the cost increase and the cost-cap proposal.
Our reputation was tested in 2010 with a controversy over the hiring of a former Indiana Utility Regulatory Commission attorney and related issues in Indiana. We immediately launched an investigation after concerns were raised, and cooperated fully with external investigations. As we learned more, we took swift, decisive and appropriate policy and personnel actions. You can read more about our response to this matter on pages 40 and 41. We are working hard to rebuild the trust of our Indiana stakeholders.
In North Carolina, the modernization of our Cliffside coal plant is on schedule for completion in 2012. A new, highly efficient unit will replace 1,000 megawatts of older coal-fired generation, including four units at Cliffside. Emission control systems will remove 99 percent of sulfur dioxide emissions, 90 percent of nitrogen oxides emissions and 90 percent of mercury, while the plant generates more than twice the electricity as before.
Natural gas is becoming an increasingly popular fuel for electric generation, particularly as an alternative to coal. This is primarily due to lower prices driven by new discoveries of shale gas reserves, as well as lower emissions. We are building two natural gas-fired generating plants in North Carolina — Buck and Dan River — and plan to retire two 1940s- and 1950s-vintage coal units at each site.
The gas-fired plant at Buck will be completed and begin operation in 2011. Construction began on Dan River in January 2011, and it is scheduled to go on line in late 2012.
Duke Energy now has nearly 1,000 megawatts (MW) of commercial wind energy on line, with two major projects — Top of the World in Wyoming and Kit Carson in Colorado — completed at the end of 2010. We also grew our commercial solar business in 2010 with the 14-MW Blue Wing Solar Project in Texas and two smaller farms in North Carolina. We expect to complete additional solar facilities by the end of 2011.
On the regulated side, we had more applicants than we could accommodate for our distributed solar program in North Carolina. Factories, businesses and schools are renting out their property and rooftops to Duke Energy for solar energy installations. The panels can produce 8 megawatts of electricity — enough to serve about 1,300 homes. In addition, we purchase solar power from third parties, like the SunEdison solar farm in Davidson County, N.C., one of the largest in the country.
Duke Energy also buys renewable power generated from landfill methane gas, which we expect to play an increasingly important role in meeting North Carolina’s Renewable Energy and Energy Efficiency Portfolio Standard.
Promoting electric vehicles
Electric vehicles represent an important innovation both in cleaner transportation and in electricity storage and use. We are collaborating with manufacturers of vehicles, batteries and charging stations to promote the long-term adoption of plug-in electric vehicles.
Duke Energy is a board member of the Electric Drive Transportation Association and helped launch www.GoElectricDrive.com in 2010. The association’s website offers information on advancements in electric vehicle technologies, purchase incentives and environmental benefits.
Some of our employees in Indiana and North Carolina are also participating in pilot programs so we can better understand the user experience and the impact of electric vehicles on our power grid. We’re also “greening” our fleet with more hybrid and electric vehicles, consistent with our 2009 Clinton Global Initiative commitment to make those our only new purchases by 2020.
Scaling new technology with China
I believe that China has developed the “intellectual property” behind scaling new technologies. That’s why we are working with Chinese energy companies to share information on clean energy technologies and explore joint projects. The end game, of course, is to apply what we learn to better serve our customers with affordable, reliable and increasingly clean electricity.
In 2010, we signed an agreement with BYD, a Chinese manufacturer of electric vehicles, to collaborate on energy storage, electric vehicle and digital grid technologies, and to look for opportunities for joint business development.
Since 2009, we’ve partnered with ENN Group, one of China’s largest private energy companies, on clean energy technologies, including solar and other low-carbon innovations. We also continue to explore clean energy technologies with Huaneng Group, China’s largest power generator.
Maintaining Financial Strength
Our financial results in 2010 exceeded expectations. Extreme weather grabbed the headlines, but masked the story of operating excellence by our people and power plants.
We ended 2010 with adjusted diluted earnings per share of $1.43, above our original adjusted diluted earnings guidance range of $1.25 to $1.30, and up from $1.22 per share in 2009.
Our total shareholder return (TSR) — the change in stock price plus dividends — was 9.5 percent in 2010, once again outperforming our peers. The TSR for the Philadelphia Utility Index of 20 utilities (including Duke Energy) was 5.7 percent in comparison.
Duke Energy has also maintained one of the electric utility industry’s strongest balance sheets during the economic recession. That has allowed us to access capital at very low interest rates.
Quality operations also contributed to the bottom line. In addition to record-setting nuclear performance, our regulated fossil (coal and natural gas) generation fleet met high energy demand with excellent commercial availability of approximately 88.7 percent in 2010. Our nonregulated Midwest generation fleet also experienced superior operational results, with commercial availability of 89.7 percent.
You’ll find more detail on our financial and operating performance in our 2010 Annual Report and Form 10-K.
If I’ve learned anything as a utility CEO for more than 20 years, it’s that we can’t go it alone. As a company, we cannot be sustainable unless we continue to engage all of our stakeholders — communities, customers, employees, investors, partners, NGOs (nongovernmental organizations), suppliers, regulators and policymakers.
Engaging our workforce
We achieve business success by tapping the diversity and talents of our employees. In 2010, we harvested a number of exciting innovations from employee-driven sustainability projects. Throughout this report, you’ll find examples of employees who are accountable in various ways for helping us do business in a sustainable way.
We are making progress on safety. Employees achieved our lowest-ever Total Incident Case Rate (the number of OSHA-recordable incidents per 100 employees) in 2010, and employee TICR has improved by 40 percent since 2006.
But no degree of success is good enough unless every one of our workers goes home safe at the end of the day. Tragically, five contractors died from injuries sustained while working for Duke Energy in 2010.
In late 2010, we commissioned a team of senior leaders to address the issue of contractor safety. This task force will help us move to the next level in our safety culture — where all employees and all contractors go home safely to their families.
Partnering with communities
The importance of supporting our communities is magnified in these tough economic times. Charitable giving from The Duke Energy Foundation and the company, along with employee and retiree donations and the value of their volunteer time, totaled nearly $29 million in 2010.
In addition, Duke Energy’s economic development team helped state, regional and local government officials attract almost $5.8 billion in capital investments and nearly 14,000 new jobs to our five service areas.
Charlotte, our headquarters city, is reinventing itself as a hub of energy innovation. The 16-county Charlotte region now has more than 240 energy-related companies employing about 27,000 workers.
Participating in public policy
It’s been a challenge to lead a company through an era of regulatory uncertainty related to climate change and other energy policy issues. It’s like playing a high-stakes game with no rules — and you don’t find out until the end if you’ve won or lost.
Having spent a great deal of time and energy advocating for fair climate legislation, I’ve been disappointed that Congress hasn’t passed a bill. Our country needs a sound, clear and consistent energy policy. As an industry, we need to know the rules on carbon emissions, new nuclear development and a host of other issues that affect the investments we make for the future.
I applaud President Obama’s call earlier this year for a review of federal regulations to avoid excessive, inconsistent and redundant rules, and promote economic growth. With a clear road map, our industry can accelerate its efforts to replace aging plants, update the power grid, develop clean energy technologies — and create jobs in the process.
Focused on the Future
On Jan. 10, 2011, we announced that Duke Energy would be merging with Progress Energy, based in Raleigh, N.C.
Duke and Progress share a common view of the future. We’ve both been working to improve energy efficiency and develop renewable energy, and to keep nuclear power a viable option. Both companies have spent billions modernizing our plants and making them cleaner for our customers. For years, we’ve shared work crews and equipment in the aftermath of major storms. We’ve also worked side-by-side at the policy level on key federal and state legislation.
This merger will create the largest electric utility in the U.S. But “bigger” is not our goal. We want to be the best. We will have the size, scale and financial strength to modernize our operations while holding down costs for our customers. And, we will have the humility and agility to foresee — and seize — new opportunities that occur during periods of transformation and change.
In the months ahead, we will be working to secure the necessary approvals and develop plans to integrate our companies. Once the merger is completed, I will become the executive chairman of Duke Energy, and Bill Johnson, the current CEO of Progress Energy, will become our CEO.
I assure you that sustainability will continue to be a priority of the new Duke Energy. In fact, it is key to our drive for productivity gains and an important element of what will become our new corporate culture. In the pages that follow, you’ll read more about the progress Duke Energy is making in our five sustainability focus areas. Following the merger, we will revisit and reset our goals to reflect the combined company.
Let me take this opportunity to thank Roberta Bowman, our chief sustainability officer, who will be retiring from Duke Energy later this year after 25 years of service. We simply could not have come this far this fast without a leader of her caliber guiding our company’s sustainability efforts.
Finally, I want to thank all of our employees and stakeholders who have been part of this journey to become a more sustainable company. Your ideas, comments and feedback have made us better.
Chairman, President and
Chief Executive Officer
April 6, 2011