Duke Energy Corporation (NYSE:DUK) Q4 2022 Earnings Call Transcript

Duke Energy Corporation (NYSE:DUK) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning. Thank you for attending today's Duke Energy Fourth Quarter and Year-end 2022 Earnings Call. . I would now like to pass the conference over to your host, Abby Motsinger, Vice President of Investor Relations. Thank you. You may proceed.

Abby Motsinger: Thank you, Joel, and good morning, everyone. Welcome to Duke Energy's Fourth Quarter 2022 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 within the meaning of securities laws. Actual results may be different than forward-looking statements, and those factors are outlined herein and disclosed in Duke Energy's SEC filings. The appendix of today's presentation includes supplemental information and disclosures, along with the reconciliation of non-GAAP financial measures. So with that, I'll turn the call over to Lynn.

Lynn Good: Abby. Thank you, and good morning, everyone. Today, we announced adjusted earnings per share of $5.27, closing out a successful 2022. We achieved results solidly within our updated guidance range while making significant progress on our strategic goals, responding to external pressures and delivering constructive outcomes across our jurisdictions. As a result, today, we're reaffirming our 2023 guidance range of $5.55 to $5.75 with a midpoint of $5.65. We're also reaffirming our 5% to 7% growth rate through 2027 off the midpoint of our 2023 range. This reflects the strength of our regulated businesses, our disciplined approach to cost management and a robust $65 billion capital plan that supports our thriving jurisdictions.

Before I turn to our regulated utilities, let me provide a brief update on the sale of our Commercial Renewables business. The sales process continues to progress. But as with the sale of any large-scale business, the timing tends to evolve. We remain on track to exit both the utility scale and the distributed energy businesses and now anticipate proceeds in the second half of the year. We will continue to keep you updated along the way. Turning to Slide 5. We've reached a significant milestone in our clean energy transition. On December 30, the North Carolina Utilities Commission issued an order adopting an initial carbon plan. This constructive order is the culmination of years of work with policymakers and stakeholders to chart a responsible path for the energy transition.

The order recognizes the value of an all-of-the-above approach to achieving carbon reduction targets in a manner that balances affordability and reliability for customers. The near-term action plan provides approval of 3,100 megawatts of solar and 1,600 megawatts of storage as well as transmission upgrades to support the integration of these renewable resources. The commission also approved limited development activities associated with longer lead time investments, including small modular nuclear reactors, pumped hydro and transmission related to offshore wind. And as part of an orderly transition out of coal by 2035, the commission supported planning for approximately 2,000 megawatts of new natural gas generation to maintain reliability. Through its order, the commission reinforced the importance of maintaining a diverse generation mix while conducting an orderly clean energy transition and was clear that ensuring replacement generation is available and online prior to the retirement of existing coal units is a shared priority.

The carbon plant provides a constructive road map that delivers on our strategic priorities and supports the needs of our customers and communities today and into the future. It supports our capital plan and provides the clarity we need to advance critical near-term investments. We look forward to continuing our progress through our updated carbon plant filing in North Carolina later this year. Moving to Slide 6. We're making meaningful progress on our strategic initiatives in each of our jurisdictions. In North Carolina, we filed our first performance-based rate application for our Duke Energy Carolinas utility on January 19, which followed a similar filing for our DEP utility last fall. The request includes a multiyear rate plan to fund system improvements to meet the growing needs of our customer base, including $4.7 billion of capital projects that are expected to go into service over the 3-year period.

These investments are primarily T&D-related projects that support the security and reliability of the grid as well as approximately $300 million of solar and storage investments consistent with the carbon plan order. Our request is mitigated by a reduction in operating costs since our last rate case, evidence of our continued ability to manage costs to keep customer rate increases down. Evidentiary hearings are expected to begin in the third quarter and consistent with past practice, we intend to implement temporary rates in September, subject to refund. If approved, we expect year 1 revised rates to be effective by early 2024. In South Carolina, we were very pleased to reach a comprehensive settlement in January with all parties in our Duke Energy Progress rate case.

The settlement, which is subject to commission review and approval includes a 9.6% ROE, the continuation of deferrals for grid and coal ash spend and supports accelerated retirement dates for certain coal units. In fact, the settlement is on the commission's agenda for this afternoon. And if approved, new rates are expected to be implemented in April. We also plan to file an updated IRP in South Carolina later this year, which will take into account the carbon plan and the Inflation Reduction Act. Turning to Florida. On January 23, we filed a petition to adjust customer rates for deferred 2022 fuel costs, less the impact of lower forecasted fuel prices in 2023. We are also flowing back IRA tax savings to our Florida customers as of January 1.

In Indiana, we're updating our IRP to reflect results of the 2022 RFP process, regional transmission operator requirements and the Inflation Reduction Act. We expect to begin filing for certificates of need for new power generation in the second quarter. In Ohio, the commission approved in full our electric rate case settlement in December, which supports the recovery of grid investments to improve reliability and service for our customers. In December, we also filed an electric rate case in Kentucky. The request reflects more than $300 million in investments we've made to strengthen the generation and delivery systems as well as updated retirement dates for our Kentucky fleet. As we advance our regulatory strategy, affordability remains top of mind.

Brian will go into more detail on steps we're taking across our jurisdictions to lower costs for customers. Finally, I want to highlight a well-deserved recognition for our Piedmont Natural Gas team. In December, J.D. Power ranked Piedmont #1 in residential customer satisfaction for natural gas service in the Southeast. This is the first time Piedmont has received the #1 ranking and is a testament to the commitment to our customers. In summary, 2022 was an extraordinary year for Duke Energy as we made strong progress executing our strategy, responding to difficult external pressures and advancing our clean energy transformation. Our path forward remains clear. As we continue to navigate our energy transition, we will do so responsibly, preserving affordability and reliability for our customers and remaining good students -- stewards of communities.

I'm confident that our strategy will continue to deliver consistent and lasting benefits to our customers, communities and investors. With that, let me turn the call over to Brian.

Photo by Frédéric Paulussen on Unsplash

Brian Savoy: Thanks, Lynn, and good morning, everyone. Turning to Slide 7. 2022 marked a year of solid growth for our utilities. We achieved full year adjusted earnings per share of $5.27, above the midpoint of our updated guidance range. These adjusted results exclude our Commercial Renewables business, which was moved to discontinued operations in the fourth quarter. The classification of these assets as held for sale triggered a valuation adjustment of $1.3 billion, which is reflected in discontinued operations and GAAP reported results. This adjustment relates to the combined utility scale and distributed generation businesses and was within our planning range for the sales processes. Moving to our adjusted results for the year.

In the Electric segment, earnings per share increased by $0.36 in 2022, primarily due to higher volumes, favorable weather and rate increases in North Carolina and Florida. Partially offsetting these or higher interest expense and storm costs. Absent storms, O&M was flat to prior year, which was in line with our guidance. In the Gas segment, earnings per share increased $0.07 and was primarily due to the Piedmont, North Carolina rate case and riders. In the Other segment, unfavorable returns on investments and higher interest expense drove results lower by $0.15. Turning to Slide 8. We are reaffirming our $5.55 to $5.75 guidance range for 2023 with the midpoint of $5.65. Within Electric, we expect retail volume growth in 2023 of roughly 0.5%.

We also entered the year with updated rates for Ohio and Florida already in effect and we'll see growth from 3 Carolinas rate cases as we move through the year. Additionally, we will continue to see growth from the grid investment riders in the Midwest and Florida, namely the Indiana TDISC and Florida SPP plans approved in 2022. Moving to cost mitigation. We've identified $300 million of savings in 2023, which is primarily related to rationalizing our corporate and business support cost structures. Examples include streamlining IT support and reducing our real estate footprint. These cost reductions will be realized ratably over 2023 with approximately 75% of the savings being sustainable into future years. Partially offsetting these favorable drivers are higher financing cost as well as depreciation and property taxes on a growing asset base.

Within our Gas segment, growth drivers include the Ohio rate case currently underway, cost mitigation efforts and customer growth, partially offset by higher interest expense. Finally, we expect the Other segment to be unfavorable due to higher interest expense. Turning to retail electric volumes on Slide 9. In 2022, we saw load growth of 2.5%. These strong results were driven by residential customer growth of 1.8%, higher usage per customer from hybrid and remote work and a continuation of the post-COVID rebound in the commercial class. Our total retail load in 2022 was about 2% higher than 2019 pre-pandemic levels. This is equivalent to an average annual growth rate of around 0.5% when smoothing out the year-to-year fluctuations. In 2023, total retail load growth is projected to be roughly 0.5%.

Based on 2022 U.S. Census Bureau data, 3 states within our regulated footprint were in the top 6 for net population migration. This illustrates the robust customer growth experienced in our territories, which we expect to continue in 2023. We expect load growth in the commercial class to moderate this year following 2 years of significant growth. But the upside in industrial as easing supply chain constraints fuel a continued rebound for certain large manufacturers. Longer term, we expect annual load growth to be about 0.5% through 2027. Turning to Slide 10. I'd like to provide an overview of our 5-year capital plan, which has increased to $65 billion. When compared to prior periods, the capital plan has steadily increased as we move further into the clean energy transition.

This increase is net of removing almost $3 billion of commercial renewables capital, including the previous 5-year plan. This means that we've increased the regulated plan by approximately $5 billion, resulting in a 7.1% earnings-based CAGR through 2027. While the investment needs of our utilities continue to accelerate, customer affordability remains front and center. Affordability has consistently been a pillar that governs our planning, and we have several tools to help keep rates low and assist customers who are struggling to pay their bill. First, the benefits of our cost mitigation efforts go back to customers over time, easing bill impacts as we recover capital investments. As I mentioned, we expect 75% of our 2023 cost mitigation efforts to be sustainable.

Additionally, we are targeting flat O&M from 2024 through 2027. Our long-term O&M trajectory is supported by smart capital investments within our plan, including modernized equipment and technology investments that will help reduce fuel and operating costs. Next, the Inflation Reduction Act provides substantial benefits for carbon-free resources, including nuclear and solar PTCs and other renewable tax credits. We are beginning to incorporate these benefits and updated resources plans and rate adjustments. Over the next decade, we will fully leverage IRA benefits across all of our jurisdictions in order to maintain low cost for customers as we execute our clean energy transition. Finally, assisting vulnerable customers has always been an area of focus.

But since the pandemic, we worked even more closely with our communities and customers in need. For example, in 2021, we created a specialized team that partnered with agencies across our service territories and help connect customers to nearly $300 million in energy assistance funding over the 2 years. Moving to Slide 11. Our ability to execute our robust capital program is underpinned by a healthy balance sheet, and we remain committed to our current credit ratings. In December 2022, we received $1 billion in cash proceeds upon the closing of the second tranche of the Indiana minority stake sale. We expect to receive proceeds from the Commercial Renewables transactions later this year, which will be used for debt avoidance at the holding company.

Turning to FFO to debt. We ended 2022 below our 14% target, largely due to deferred fuel balances. We have started recovering these amounts through established recovery mechanisms and we'll continue to file using mechanisms in place for the remaining balances. As we recover deferred fuel costs over the next 1 to 2 years, we expect FFO to debt to steadily improve and return to our long-term 14% target, demonstrating our commitment to our current credit ratings. As we look ahead, about 90% of the electric investments in our capital plan are eligible for modern recovery mechanisms, which is critical to maintaining a strong balance sheet, mitigating regulatory lag and smoothing rate impacts. With the steps we've taken to reposition our business and improve our cash flow profile in the years ahead, we are not planning to issue equity through 2027.

Moving to Slide 12. Our robust capital plan, strong customer growth and constructive jurisdictions provide a compelling growth story. And our commitment to the dividend remains unchanged. We understand its importance to our shareholders and 2023 marks the 97th consecutive year of paying a quarterly cash dividend. We intend to keep growing the dividend balancing our targeted 65% to 75% payout ratio with the need to fund our capital. As we begin 2023, we are well positioned to tackle the challenges ahead and look forward to updating you on our progress throughout the year. With that, we'll open the line for your questions.

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