Duke Energy Corporation (NYSE:DUK) Q2 2023 Earnings Call Transcript

Duke Energy Corporation (NYSE:DUK) Q2 2023 Earnings Call Transcript August 8, 2023

Duke Energy Corporation misses on earnings expectations. Reported EPS is $0.91 EPS, expectations were $0.98.

Operator: Ladies and gentlemen, welcome to the Duke Energy Second Quarter 2023 Earnings Call. My name is Brian, I will be the operator for today’s call. [Operator Instructions] I will now hand over to your host, Abby Motsinger, Vice President of Investor Relations to begin.

Abby Motsinger: Thank you, Brian, and good morning, everyone. Welcome to Duke Energy’s second quarter 2023 earnings review and business update. Leading our call today is Lynn Good, Chair, President and CEO, along with Brian Savoy, Executive Vice President and CFO. Today’s discussion will include the use of non-GAAP financial measures and forward-looking information. Actual results may be different from forward-looking statements, due to factors disclosed in today’s materials and in Duke Energy’s SEC filings. The appendix of today’s presentation includes supplemental information, along with the reconciliation of non-GAAP financial measures. With that, let me turn the call over to Lynn.

Lynn Good: Abby, thank you, and good morning, everyone. Today we announced adjusted earnings per share of $0.91 for the quarter. For the second quarter in a row mild weather impacted results. For perspective in the Carolinas January and February were the mildest in the last 30 years. And May and June were in the top five. Through June we’re facing a weather headwind of nearly $0.30. Agility measures have been put in place which add to the $300 million O&M reduction that was targeted and in place coming into 2023. Our cost initiatives are grounded in our culture of safety and serving our customers with excellence while maintaining our assets for the future. Brian will provide more on cost management in a moment. We’ve had an early look at July and as you would expect July whether is positive consistent with the trend across the U.S. and August and September are in front of us.

With our largest quarter ahead, we are reaffirming our guidance range for 2023 and we’ll have more to say on projected results for the year on the third quarter call. As we look ahead, the fundamentals of our business are strong, and we are reaffirming our 5% to 7% growth rate. Turning to Slide five, you’ll see highlights of the strategic portfolio repositioning we’ve executed over the last decade. With the announcement of the commercial renewable sale which we expect to close by the end of the year, we’re a fully regulated company operating in constructive and growing jurisdictions with a wealth of clean energy investments driving growth for years to come. The regulatory constructs in our states have also meaningfully improved over this time, including landmark bipartisan energy legislation passed in North Carolina in 2021.

Modern constructs like those in HB951 allow us to invest for the benefit of our customers, while preserving returns for our investors. We are pleased that today 90% of our electric utility investments are eligible for modern recovery mechanisms that mitigate regulatory lag. Our growth story is an organic one, with over 145 billion of clean energy grid and LDC investments over the next decade. With the portfolio repositioning complete our sole focus is on our regulated businesses, and the work we have underway to pursue the largest energy transition in our industry. Let me now turn to Slide six, to provide an update on our progress in each jurisdiction. In North Carolina, we continue to work toward resolution of the Duke Energy progress rate case.

We implemented interim rates June 1, subject to refund, with rates for typical residential customers increasing about 5%. We expect the commission to issue an order later this month for the final DEP rates going into effect October 1. We’re also preparing for the Duke Energy Carolinas hearing which is scheduled to begin August 28. Our energy transition in the Carolinas remains a top strategic priority and we’re working diligently on updated resource plans to be filed with the Public Service Commission of South Carolina and the North Carolina Utilities Commission respectively in mid-August. Similar to previous filings, the plans are based on significant stakeholder engagement, and will outline multiple portfolios, each of which preserve affordability and reliability while transitioning to cleaner energy resources.

IRA benefits will be incorporated into the analysis for the first time, as well as increasing load from numerous economic development announcements, and continued strong population migration into the Carolinas. Our modeling will also reflect higher reserve margins as a result of our continuous evaluation of resource adequacy. Later this year, we will begin the CPCN Process in North Carolina for replacement gas generation. At the same time, solar procurement will continue on an annual basis. In fact, our 2022 solar procurement was recently finalized, with nearly 1000 megawatts to be placed in service by 2027. And our 2023 Solar RFP targeting 1400 megawatts was recently approved by the NCUC, with bids to be received later this year. Following the resource plan filings, each commission will hear from interested parties through a transparent regulatory process as they consider our proposals.

We expect an order from the South Carolina Commission in mid ‘24, and an order from the North Carolina Commission by the end of ‘24. Turning to Florida, we’re executing us on our investment plan to benefit customers. We’ve added 300 megawatts of new solar this year and now operate 1200 megawatts in the state, with plans to continue adding about 300 megawatts per year over the next decade. We’re hardening the grid through our storm protection plan and already seeing benefits from improved reliability. With robust customer growth and timely recovery of investments, our Florida utility continues to deliver strong returns. In Kentucky we’ve partnered with Amazon to install a two megawatt solar plant on top of their fulfillment center in Northern Kentucky, the largest rooftop solar site in the state.

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This partnership supports the carbon reduction goals of both Duke Energy and Amazon. And it’s just one example of how we’re working with our customers to meet their energy needs. Turning to Indiana, I’d like to take a moment to thank the nearly 2000 crew members that work tirelessly over the July 4 Holiday following multiple storms. The widespread storm systems extended across our entire service territory, and led to a multi-day effort to restore over 370,000 outages. And in fact today in the Carolinas, our crews are also working to restore outages that resulted from the strong storms in the eastern seaboard and are doing so safely timely, and in close communication with our customers and stakeholders. As with all operations, the safety of our employee’s environment and communities remain front and center and I’m proud to say that for the eighth consecutive year, we’ve led the industry in safety as measured by total incident case rate.

On the federal side, we’re taking advantage of multiple incentives and other opportunities to benefit our customers. We’re incorporating IRA tax benefits and resource plans and rate adjustments across our jurisdictions to lower costs for customers and federal funding from the infrastructure investment and Jobs Act creates opportunity to advance new resources and spur economic development. We have put forward multiple proposals through the IIJA, including for methane reduction, carbon capture long duration storage, hydrogen and grid modernization. And we’ll continue to evaluate opportunities as funding is announced. We continue to advocate for federal and state support that recognizes the importance of a responsible energy transition. And in fact, later today, we will file comments on EPAs proposed 111 rule.

While we support EPAs commitment to a cleaner energy future. We believe an orderly transition requires a diverse mix of energy resources, and must align with the pace of technology development. We will continue to actively work with policymakers, industry peers, state partners and others in support of a reliable affordable energy transition. In closing, we’ve navigated the first half of the year with agility taking swift action in the face of record mild weather while maintaining our focus on our strategic priorities. With our portfolio repositioning complete we offer an attractive fully regulated organic growth proposition. We have a clear strategy ahead of us as we invest to satisfy increasing demand for clean, affordable and reliable energy across our growing regions.

Our long term fundamentals remain as strong as ever, and we’re well positioned to deliver sustainable value and 5% to 7% earnings growth over the next five years. And with that, let me turn the call over to Brian.

Brian Savoy: Thanks, Lynn. And good morning, everyone. I’ll start with quarterly results and highlight key variances to the prior year. As shown on Slide seven, we reported a second quarter loss of $0.32 per share, and adjusted earnings of $0.91 per share. This compares to reported and adjusted EPS of $1.14 and $1.09 last year. GAAP reported results include an impairment of approximately $1 billion related to the commercial renewable sale, which is reflected in discontinued operations. Announcing the sale agreements represents a key milestone, and I’m pleased with the progress we’ve made to-date on this important strategic move. Within the operating segments, electric utilities and infrastructure was down $0.14 compared to last year driven by $0.16 of unfavorable weather.

Absent the weather, we saw growth from rate cases and riders and lower O&M partially offset by lower volumes and higher interest expense. Moving to gas utilities and infrastructure, results were up a $0.01 due to higher margins and customer growth. And within the other segment, we were $0.05 lower primarily due to higher interest expense partially offset by higher market returns on certain benefit plans. Turning to Slide eight. Cost management has become part of the Duke Energy DNA, and continues to produce sustainable savings. We’re leveraging digital innovation, data analytics and process improvements to increase efficiency, making targeted capital investments to reduce maintenance costs and reshaping our operations to streamline work and lower costs.

We’ve established a proven track record and in 2022, we’re an industry leader across key O&M cost efficiency measures. Coming into 2023 we implemented a $300 million cost mitigation initiative to address interest rate and inflation headwinds. These reductions which were incorporated into our base plan are focused on corporate and support areas and remain on track. And as we said 75% of these savings are structural and will be sustainable in the future years. As Lynn mentioned, we’ve seen record mild weather in the first half of the year. We’ve taken action to offset these pressures, including launching significant business agility in the first quarter. We’re looking to tactical O&M reductions and other levers, including deferring non-critical work, reducing spend on outside services, and limiting non-essential travel and overtime.

We expect about $0.20 of mitigation from these measures weighted toward the fourth quarter. We will be thoughtful about these actions keeping our unwavering commitment to safety, reliability and customer service at the forefront of our approach. Looking ahead, residential decoupling in North Carolina will be fully implemented in 2024. But until then, we will continue to flex the agility muscle that we have done so successfully in the past. Turning to Slide nine, I’ll touch on electric volumes and economic trends. Volumes are down 0.6% on a rolling 12-month basis. In the residential class, customer growth remained robust at 1.8% but was offset by lower usage per customer. We believe that this partially driven by energy efficiency and a growing trend of returning to the office.

In addition, we continue to see most of the weakness in months when weather was extreme. In these situations, it can be challenging to precisely estimate the weather component of total volume variances. The long term residential growth trajectory remains strong. In fact, residential volumes have averaged just under 1% growth per year for the past five years, and are 4% above pre pandemic levels. In the commercial class, second quarter volumes are trending above our full year estimate, supported by continued growth in data centers. In the industrial class, planned investment in our territories continues to be robust. Many of our large customers are expanding, and we partnered with our states to attract over 29,000 new jobs and $23 billion in capital investment in 2022.

These investments represent several key sectors such as battery, EVs and semiconductors, and we expect they will provide around 2000 megawatts of demand as operations ramp up. The strength of our service territories was also reflected in CNBCs annual list of America’s top states for business, were five of the states we serve ranked in the top 15 and North Carolina ranked number one for the second year in a row. In the near term, we’ve seen a slight pullback in some of our manufacturing customers due to softening demand in certain sectors of the economy. We’re monitoring the impact of macroeconomic trends but the underlying fundamentals, residential customer growth, and commercial and industrial investment continue to support long term growth at roughly 0.5% per year.

Moving to slide 10, let me highlight some of the credit supportive actions we’ve taken to maintain balance sheet strength. We continue to collect deferred fuel balances and filed for recovery of all remaining uncollected 2022 fuel costs. In April, we began recovery of 1.2 billion in Florida over 21 months with a debt return. We also read settlement with the public staff in our DEC North Carolina fuel proceeding and expect to receive an order in the coming weeks. Per the agreement, we would recover approximately 1 billion of deferred fuel by the end of 2024. Across our jurisdictions, we’re on pace to recover 1.7 of deferred fuel costs in 2023. And expect our deferred fuel balance to be back in line with our historical average by the end of 2024.

As Lynn mentioned, we expect to complete the sale of our commercial renewables business by the end of the year, and will use proceeds for debt avoidance at the holding company. In addition, about $1.5 billion of commercial renewables debt will come off the balance sheet when the transactions close further supporting metrics. These actions are credit positive, and we expect to see continued balance sheet improvement into 2024 as we recover the remaining deferred fuel costs and see the full year impact of both North Carolina rate cases. Moving to slide 11. This year marks the 97th consecutive year of paying a quarterly cash dividend and the 17th consecutive annual increase. Looking forward we’re executing on our strategic priorities and are excited about the path ahead as a fully regulated company.

We operate in constructive growing jurisdictions, which combined with our $65 billion five-year capital plan give us confidence in our 5% to 7% growth rate through 2027. Our attractive dividend yield coupled with long term earnings growth from investments and our regulated utilities, provide a compelling risk adjusted return for shareholders. With that, we’ll open the line for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Mrs. Shar Pourreza with Guggenheim Partners. The line is now open.

Shar Pourreza: Hey, guys, good morning. Obviously, it’s been a little bit of a slow start to the year, obviously weather driven. You’re not alone. You read their guidance, but can you just talk about where you are within the ‘23 range assuming normal weather and how we should think about incremental levers, especially given where you are from an O&M perspective? I mean, clearly, in the slides, you show how efficient you are and you’ve pulled a lot of levers already. So just curious if you could be a little bit more specific on how much cost mitigation is left for the year especially if weather doesn’t transpire? Thanks.

Lynn Good: Shar, thanks for the question. No question, it’s been a mild weather year and I — so I look around the industry there are other utilities have experienced a trend similar to ours, Midwest and some in the Southeast. We have put in mitigation plans in place as Brian talked about, Shars, the deferring non-critical work, third-party spend, all of those things that you would expect us to attack tactically in 2023, and we see those progressing. We also are on pace with the $300 million of O&M that we targeted to take out of the business coming into ’23. So I look at all of that and the fact that we have the third quarter ahead of us, and we believe the range — we can reaffirm the range. The range still represents the potential we have for 2023, and we’ll update within that range at the end of the third quarter.

We did highlight that July, we had a peak of July. So weather was strong in July, and we’ve got August, September in front of us. I think what’s important to recognize here is that we are working every possible lever, including any contingencies that set in the plan at the time we developed it. And I would just point to the strategic progress also, Shar, that we’ve made because the fundamentals of this company remain unchanged. Strong capital growth, strong jurisdictions and I think that represents a really solid investment thesis for the future.

Shar Pourreza: Got it. And then last one is, obviously, you reiterated the credit metric targets and lack of equity needs through ’27 with the current plan. Maybe just a strategy questions here. I guess, how are you sort of thinking about inorganic opportunities? And more importantly, if a deal does present itself, should we assume that the only equity you’d be looking to raise with the amount needed specifically for that acquisition? So should we be concerned around maybe an over-equitizing scenario with a potential deal to further rightsize the balance sheet? Or do you think that’s not really necessary given your trajectory and the rating agency conversations you’ve been having?