Q2 2023 Duke Energy Corporation Earnings Call
Ladies and gentlemen, welcome to the Duke Energy second quarter 2023 earnings call.
MS Grant and I'll be the operator for today's call if you'd like to ask a question. During the presentation. You may do so by pressing star one on tackling keypad.
Hey, Joe about you host Abbe morphing, our vice President of Investor Relations to begin.
Thank you grant 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 .
Days 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 material and at Duke Energy's SEC filings.
The appendix of today's presentation includes supplemental information along with a reconciliation of non-GAAP financial measures with that let me turn the call over to Lynn Abby. Thank you and good morning, everyone. Today, we announced adjusted earnings per share of 91 cents for the quarter for the second quarter in a row mild weather impacted.
For perspective in the Carolinas January and February where the mildest in the last 30 years in May and June were in the top five three.
Through June we're facing a weather headwind of nearly 30 cents.
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.
We've had an early look at July and as you would expect or why whether its positive consistent with the trend across the U S. In 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 in 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 Youll see highlights of the strategic portfolio repositioning we've executed over the last decade with the announcement of the commercial renewables sale, which we expect to close by the end of the year were 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 construct in our states have also meaningfully improved over this time, including landmark bipartisan energy legislation passed in North Carolina in 2021.
Modern construct like those in H benign 51 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 and North Carolina, We continue to work towards resolution of the Duke energy progress rate case.
We implemented interim rates June one 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 <unk> rates going into effect October one.
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 outlined multiple portfolios each of which preserve affordability and reliability.
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 CPC and 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 Enc UC with bids to be received later this year.
Following the resource plan filings each commission, we will hear from interested parties through a transparent regulatory process as they consider our proposals we expect an order from the South Carolina commissioning in mid 'twenty, four and an order from the North Carolina Commission by the end of 'twenty four.
Turning to Florida, we are executing on our investment plan to benefit customers. We've added 300 megawatts of new solar this year and now operate 200 megawatts of the state with plans to continue adding about 300 megawatts per year over the next decade.
We are 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 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.
This partnership supports the carbon reduction goals of both Duke energy and Amazon and is 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 worked tirelessly over the July 4th holiday following multiple storms widespread storm systems extended across our entire service territory and led to a multi day effort to restore over 370000 outages.
And in fact today in the Carolinas. Our crews are also working to restore outages. The 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 employees 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 into resource plans and rate adjustments across our jurisdictions to lower cost for customers and federal funding from the infrastructure investment and jobs that creates opportunity to advance new resources for economic development.
The man.
We have put forward multiple proposals through the Iga, a including for methane reduction carbon capture long duration storage hydrogen in grid modernization and we will continue to evaluate opportunities as funding is announced.
We continue to advocate for federal and state support that recognizes the importance of our responsible energy transition and in fact later today, we will file comments on Epa's proposed 111 rule, while we support epa's commitment to a cleaner energy future. We believe an orderly transition requires a diverse mix of energy resources and <unk>.
Just aligned with the pace of technology development.
We will continue to actively work with policymakers industry peer 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 status.
By 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 in 5% to 7% earnings growth over the next five years.
And with that let me turn the call over to Brian .
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 <unk> 32 per share and adjusted earnings of <unk> 91 per share.
This compares to reported and adjusted EPS of $1 14, and $1 nine last year.
Reported results included 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 <unk> 14, compared to last year, driven by 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 penny due to higher margins and customer growth.
And within the other segment, we were five since 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.
We've established a proven track record and a 2022, we're an industry leader across key O&M cost efficiency measures.
Coming into 2023, we implemented a $300 million cost mitigation initiatives 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 into 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 noncritical work, reducing spend on outside services and limiting nonessential travel and overtime.
We expect about 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 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 <unk>, 6% on a rolling 12 month basis.
In the residential class customer growth remained robust at one 8%, but was offset by lower usage per customer.
We believe this is 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 and.
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.
<unk> residential volumes have averaged just under 1% growth per year for the past five years, and our 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 Manny.
Many of our large customers are expanding and.
And we partnered with our states to attract over 29000, new jobs and $23 billion in capital investment in 2022.
These investments represent several key sectors, such as battery Evs in 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 Cnbc's annual list of America's top states for business, where 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 in commercial and industrial investment continued to support long term growth of roughly a half a percent 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 have 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 reached settlement with the public staff and our <unk> North Carolina fueled proceeding and expect to receive an order in the coming weeks.
Per the agreement, we would recover approximately $1 billion of deferred fueled by the end of 2024.
Across our jurisdictions, we're on pace to recover one seven 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 we use proceeds for debt avoidance at the holding company.
In addition, about $1 5 billion of commercial renewables that 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 paying a quarterly cash dividend and the 17th consecutive annual increase.
Looking forward, we are 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 gives us confidence in our 5% to 7% growth rate through 2027.
Our attractive dividend yield coupled with long term earnings growth from investments in our regulated utilities provide a compelling risk adjusted return for shareholders.
With that we'll open the line for your questions.
Okay.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on tap on Keith.
We're preparing to ask your question. Please ensure your mute locally.
With our first question comes from the Cheyenne Lewis.
Guggenheim Partners. Your line is now open.
Hey, guys good morning.
Hi, Shannon Sharpe.
Good morning.
Obviously, it's been a little bit of a slow start to the year, obviously weather driven youre not alone.
<unk> 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 in you 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 the weather doesn't transpire.
Sure. Thanks for the question no question, it's been a mild weather year and I as 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 mitigation plans in place as Bryan talked about sharp or deferring Noncritical 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 <unk>.
Coming into 'twenty three.
So I look at all of that and the fact that we have the third quarter of have 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 will update within that range at the end of the third quarter.
We did highlight the July we've already had a peak of July so weather was strong in July and we've got August and September in front of us.
What's important to recognize here is that we are working every possible lever, including any contingencies that sat in the fab in the plan at the time, we developed it and I would just point to the strategic progress also assure 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.
Got it and then one last one obviously you reiterated the credit metric targets and lack of equity needs through 2017 with the current plan maybe just a strategy question Here's how I guess, how are you sort of thinking about inorganic opportunities and more importantly for deal does present itself.
Should we assume that the only equity you'd be looking to raise whether the amount needed specifically before that acquisition. So should we be concerned around maybe an over equity rising scenario with the potential deal to further rightsize the balance sheet or do you think that that's not really necessary given your trajectory in the rating agency.
Conversations you've been having.
There's a lot in that one chart, let me start by saying.
What I would like you to takeaway and really investors to take away is that our growth story is an organic one.
And I look at all of the progress we've made in simplifying the portfolio has brought us to this moment, where we're fully regulated with transparent robust capital that will unfold over the next decade in constructive jurisdictions growing jurisdictions and at the same time, we've also put in place and worked through energy.
Policy modernization of regulations, so that gives us a high degree of confidence that we can execute those plans and deliver returns to investors.
And so when I when I think about growth for Duke our sole focus is on this organic plan. That's in front of us and so any idea about M&A has to beat what we have in front of us and it is an increasingly high hurdle because of the confidence we have in our plan. So this notion that we are.
Going to over <unk>, something to chase, an asset and strengthen the balance sheet is just not a narrative that is supported by anything that we're focused on here at Duke.
Okay perfect. That's actually answered the question. Thanks, a lot I appreciate it guys. Thank you.
Thank you.
We have our next question comes from Julien Dumoulin Smith from Bank of America. Your line is now open.
Hey, good morning team. Thank you very much hey, Julien.
Julian back to <unk> question, a moment ago, Hey, good morning, Lynn I just wanted to go back to <unk> question on just back half trends et cetera can you elaborate a little bit more on just how you are trending.
Versus rates and then also specifically even quarter to date. If you will July I mean, it seems like weather may have been pressured again here just.
Trying to get a little bit on where we stand even through the summer.
So.
Julien, let me give a try and Brian may have heard more on that question than I did.
So let me start with 2023 financial plan before we start considering the impact of mild weather. The plan was always back end loaded.
So if you think about we are in the midst of rate cases in our largest jurisdiction, we put interim rates into effect at <unk> June one.
Full rates will go into effect October one the largest jurisdiction DTC interim rates will go in September one.
So the plan was always back end loaded and I think that's important for you to recognize and then the mitigation that we've added to that is obviously going to be back end loaded youll begin to see some of it in third quarter are stronger amount of it in the fourth quarter.
And so when I think about July just consistent with what you saw on the front page of every newspaper Hot Hot Hot It was hot and our jurisdictions as well. So we had a positive weather story in July and we'll be monitoring August and September and give you more on where we are in the range after the third quarter.
So hopefully that answered it Julien I don't know, Brian if you have anything to add no. Thank you.
Uh huh.
Okay, all right excellent and then just also as a further follow up I mean, obviously, it's an intense amount of.
Focus here, just with the willingness to engage or any further thoughts on the Williston engaged in inorganic growth has that changed at all in the last few months as you've seen the backdrop right, whether it's utility valuations that large.
One et cetera, just any further thoughts around that backdrop.
Julian I would leave you with our sole focus is on organic growth.
So our focus is on organic growth because when we look at what we have in front of us and our ability to drive growth with the capital plans that sit in our jurisdictions, we believe that will deliver the greatest value to shareholders.
Excellent I think that was quite clear. Thank you very much we'll see you soon alright. Thank you. Thank you.
Thank you.
Well. Our next question comes from David Arcaro from Morgan Stanley . Your line is now open.
Hey, good morning, Thanks for taking my question.
Hi, David.
Sure.
About the float at that range and the target 13% to 14.
For this year I was wondering if you could give a sense of kind of where in that range you're tracking given some of the pressures.
You've been experiencing so far and then also just latest thinking on timing for when you can get comfortably above that 14% level.
David I would say the primary pressure in 'twenty three centers around deferred fuel and we've given you a sense of how that is tracking so we're expecting to collect about $1 billion seven of that in 'twenty, three which will strengthen the balance sheet. We also have the commercial renewable sale.
<unk>.
We will see proceeds of about $800 million before the end of the year that is also credit positive.
But as you indicated weak weather goes the other way and so stronger weather in July and hopefully a stronger third quarter will be an offset to that so we feel like the 13 to 14 range remains.
On an appropriate consideration for 'twenty three strengthening into 'twenty four.
Would you add anything to that Bryan I would say the final lap of the deferred fuel recovery in 'twenty four will move us into that into that 14 range coupled with the North Carolina rate cases that are that are going to be in place for.
For the full year and 24, so those are big catalysts as we look forward.
The IRA benefits, we'll start nearing in larger quantities as we move into the middle part of the decade as well.
Okay understood. That's helpful and then secondarily with interest rates rising again, I'm wondering if that's representing an incremental headwind.
To your plan just how are you managing that exposure on some of your short term debt outstanding and also refinancings and new debt issuances, if they come up.
Yes, David.
You are rightly focused on that as interest.
Interest rates higher for longer.
Weakness here with mild weather. So we are working through that just using all the tools you would expect us to use to minimize the interest expense, but also looking at the levers we have within our financial plan to offset that as well. So it represents something that gets a great deal of attention and we're working our way through it and I would again.
Note that we are reaffirming our guidance range for 'twenty three and continue to believe we can grow at 5% to 7% over the long term based on the fundamentals in the business and as we move through these rate cases, I would just also emphasize that interest rates are being reset as.
As we go through rate cases, and Thats, an important consideration as you know.
Got it thanks, so much.
Thank you.
Thank you.
Our next question comes from Jeremy Tonet from J P. Morgan Jamie Your line is now open.
Hi, good morning.
Hi, Jeremy Jeremy.
Okay.
Just wanted to come back to the drivers to this year, if I could and as you noted weather.
Sherri pressure higher interest rates all represent headwinds.
Want to go to the load a little bit more at the beginning of the year you assume 12 month retail load growth would be.
About 5% I think in weather normal retail load growth right now is down to 7% year to date.
And you expect to H 323, low growth to be flat to 5%. So just wondering for <unk>.
What trends Youre seeing in load that are different than expectations do you expect those to correct over time and just any any color that you can provide there would be.
Helpful.
Yes, Jeremy let me give a start and I know, Brian will have something to add to this is we look at the various classes residential load is below our expectation for a for the year, but I would say to you as we look at residential load. It has been weak in the months when weather has been mild.
So I actually believe we've got some in precision we've talked about this it's hard to figure out what's the economy and what's the weather and so we're talking about 30 <unk> of weather headwind, but that could be a bit higher than that some of the volume weakness in residential as weather related commercial has exceeded our expectations.
And so commercial is tracking exactly as we would expect and then industrial we've seen some pullback.
We've seen pull back in a couple of sectors.
But fundamentally over the long term because of all the growth we're seeing in our industrial and commercial sectors. We think the fundamentals they are strong.
So residential a little bit of a weather story commercial on track industrial or short term pullback is what I would leave you with and Brian How would you add to that yes, I would say in the industrial sector Jeremy.
We're in regular dialogue with our large customers, we talk to them we understand that.
The uncertain economic backdrop, there is theres, some prudent inventory management going on and we've gotten through a lot of the supply chain challenges over the past several years and inventory levels are healthier spot so they're like well.
As were looking forward there could be some clouds coming so let's just be prudent so we've seen a slight dialed down and usage, but.
We don't see that persisting.
The long term in the future. So I would just take it at that in the bottom.
The line is that the economic development investment in our in our territories is strong and it is going to produce increasing levels of demand for large customers as we look through the middle of the <unk> into the <unk>.
Got it that's very helpful. There and then just kind of come back to prior questions and bringing a finer point to it.
Ben Media stories talking about Duke's interests in P&C.
So based on what Youre, saying before Duke is not interested in <unk> or would that fit into your organic growth story.
Jeremy I don't think it's appropriate for me to comment on another company's process.
But what I would like to emphasize and have you take away is that our sole focus at Duke is on our organic growth plan.
Got it I'll leave it there thank you.
Thank you.
Thank you.
With our next question comes from Steve Fleishman from Wolfe Research. Your line is now open.
Good morning.
Hi, Hi, thanks.
My question. My question was answered there, but one other one just on the North Carolina in terms of.
Do you see case.
When.
When might we if youre going to be able to settle that one would be the timeline.
For potential settlement there.
Yes, Steve we're scheduled to be on the stand August 28, rebuttal testimony was filed at the end of last week. So this is the time frame.
For discussions and also in that timeframe, we're expecting an order on the <unk> case, so a lot of activity here in August and we will keep you informed every step of the way.
Great. Thank you that's it thank you.
Thank you.
We have no further questions on the line I'll now hand back to the good for closing remarks.
Very good well thank you all for.
Your questions today your interest in <unk> will have a chance to talk with many of you after the call and even visit some of you.
And active August in front of us and will be.
Anxious to share with you not only the results of the rate case, but we have important integrated resource plans being filed this month that again, we will confirm and underpin the investment thesis here Duke. So appreciate your interest in the company and look forward to talking soon.
Thank you ladies and gentlemen. This concludes today's call. Thank you for China you May now disconnect your lines.