Duke Energy Corporation (Holding Company)

Good day and welcome to the Duke Energy first quarter earnings call. Today's conference is being recorded and at this time I'd like to turn the conference over to Mr. Brian Buckler, Vice President of Investment Relations. Please go ahead, sir. Thank you, Derek. Good morning, everyone, and welcome to Duke Energy's first quarter 2020 earnings review and business update. Leading our call today is Lynn Good, Chair, President, and Chief Executive Officer, along with Steve Young, 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 the securities laws. Actual results could differ materially from such forward-looking statements, and those factors are outlined herein and disclosed in Duke Energy's SEC filings. A reconciliation of non-GAAP financial measures can be found in today's materials and on dukenergy.com. Please note the appendix for today's presentation includes supplemental information and additional disclosures. As summarized on slide four, during today's call, Wren will provide an update on our response to COVID-19. She will also discuss progress on our strategic initiative and the company's long-term outlook. Steve will then provide an overview of our first quarter financial results and share an update on key regulatory activities. We will also provide insights into our economic and road growth outlook before closing with key investor considerations. With that, let me turn the call over to Lynn.

Hi, and thank you, and good morning, everyone. Let me open our call today by focusing first on our response to COVID-19. I know it is top of mind for all of you. First and foremost, our thoughts are with those who have been personally affected by I also want to express my heartfelt thanks to the healthcare and government workers, as well as those working countless hours to support the frontline professionals. This pandemic has no barriers. It has permeated the globe, our country, and the states in which we operate. It has altered our day-to-day lives and how we interact, the way we operate and serve our customers. But despite these dynamic conditions, Duke Energy and its employees have risen to the challenge. continuing to provide reliable service to our nearly 24 million electric and gas customers. The safety of our communities, customers, and employees is our top priority, and we took a number of steps to protect them. In March, we shifted nearly 18,000 teammates to remote operations. For teammates in critical roles that could not work remotely, we deployed the best available personal protection equipment, increased disinfecting between shifts, initiated split operations between primary and alternate locations to limit exposure, placed additional restrictions on those accessing our facilities, and implemented social distancing policies. These new safety protocols were particularly important during spring storm restoration and generation outages. So far, our teams have completed three nuclear outages and more than 30 fossil hydro generation outages, all while maintaining focus on safety and delivering on time and on budget. And in mid-April, our transmission and distribution team quickly responded to more than 900,000 outages across the Midwest and the Carolinas after severe thunderstorms and tornadoes. But Duke Energy's response has gone well beyond supporting our internal team. We were one of the first utilities in the country to suspend service disconnections for nonpayment and waive late payment and other fees for our customers. In addition, we donated approximately $6 million from the Duke Energy Foundation to fund relief efforts across our jurisdictions and provided critical PPE to several community organizations within our territory. We also accelerated the flow back of fuel adjustments and over-collections in Florida, resulting in a 20% reduction in residential bills in May. And we are working directly with our commercial and industrial customers to provide assistance. with payment options for those most impacted by current economic conditions. Our employees have been steadfast in ensuring our communities have power as they also respond and adapt to these changing times. The collective work of the healthcare and government professionals, as well as utility and other essential workers, demonstrate the power of working together to serve our communities. Now let me take a moment to walk you through slide six, which summarizes where our company stands financially. during these uncertain economic times. Today we announced first quarter adjusted earnings per share of $1.14 in line with our expectations but reflecting milder weather compared to normal and storm costs this winter totaling approximately 15 cents per share. We began to take cost mitigation actions in February as we saw the impact of the mild winter and we are building on those actions to address COVID-19. Our communities are experiencing a slowdown and we are beginning to see the impact on electric load in our jurisdiction. In a few minutes, Steve will share more on these customer load trends focusing on the month of April and a range of potential load trends over the balance of 2020. We are presently projecting a 25 cents to 35 cents reduction in revenue from COVID-19, which is consistent with stay-at-home policies for midsummer and a gradual economic recovery beginning in the third quarter and continuing over the balance of the year. In response to the pandemic and in recognition of mild weather entering the year, we are executing on a series of cost-saving initiatives totaling approximately $350 to $450 million, or 35 cents to 45 cents per share. We are also keeping our regulators informed about the specific costs we are incurring related to COVID-19. For example, a potential increase in bad debt expense. And we'll seek recovery of these costs at the appropriate time. Taking these measures into consideration, we are affirming our 2020 adjusted earnings per share of guidance range of 505 to 545. We will continue to update you as we move forward. It's important to recognize that we are only two months into this event. We are and we will continue planning for a range of outcomes. and we will know more as the economies that we serve reopen. The third quarter, which is our most significant one, is also still ahead of us. Over the long term, we maintain our confidence in the strength of the communities we serve and in our ability to deliver on the $56 billion infrastructure investment plan that is critical to our customers and communities. I will speak more to our business fundamentals in a moment. Turning to slices. Seven, we remain committed to our long-term vision and value creation for our communities and our shareholders. We're putting our five-year $56 billion capital plan to work as we generate cleaner energy, modernize and strengthen the energy grid, and expand natural gas infrastructure. Since announcing this updated plan in February, we've made progress advancing these goals. Last September, we announced our comprehensive plans to address carbon across our footprint, reaching at least a 50% reduction by 2030 and net zero by 2050. Our updated climate and sustainability reports issued in April provide more clarity and detail around the measures we're taking to achieve these milestones, including doubling our renewable portfolio over the next five years. Our climate report outlines our plans over the longer term to retire more coal, further expand renewables, energy storage, and natural gas. We also emphasize the importance of research and development focused on those following carbon-free resources. We believe these new technologies are essential to reach our net zero goal by 2050 and plan to share more updates in this area when we host our ESG day later this year. On the grid, in April, we filed our 10-year, $6 billion Florida Storm Protection Plan. These investments will generate meaningful customer benefits by enhancing reliability while reducing restoration costs and outage times associated with extreme weather events. Further, details on the progress we're making in these areas are outlined on the slide. Before I close, let me touch on the Atlantic Coast Pipeline. You can reference the status summary on slide 18 in the appendix. We expect a decision from the Supreme Court regarding the Appalachian Trail crossing in the coming weeks. We're also awaiting the biological opinion and incidental take statement from the U.S. Fish and Wildlife Service as their detailed analysis continues to ensure that a durable permit is issued. We expect the agency to reissue the permit in mid-2020 and to date have not seen any significant delays in the progress of the work from COVID-19. Successful resolution of both of these items will be important to restart construction. Importantly, ACP has finalized revised commercial terms with the major pipeline off-takers, balancing value to customers and a fair return to project owners. Finally, we are also closely monitoring developments on the nationwide Permit 12. The recent decision related to the Keystone Pipeline by the District Court in Montana has potential implications to ACP. Just yesterday, the judge amended his April 15th ruling limiting the debiture to new oil and gas pipeline projects. He also denied a stay pending appeals. We are evaluating this ruling and the impact it will have on the existing timing and cost of the project. Assuming the issue is resolved in a timely manner and we can take advantage of the November through March tree-selling season, we believe ATP can maintain the existing schedule and cost estimates. We remain committed to this important infrastructure project and the economic benefits we expect it will drive for our communities in the Carolinas, and we'll continue to update you as progress is made. As I reflect on our long-term strategy, I'm confident in our investment priorities. They continue to deliver value, capitalize on the complementary nature of our electric and gas franchises, and meet our customers' growing and evolving energy needs. Looking ahead and in the context of the uncertain economic environment in our country, We will be thoughtful in the pace at which we deploy capital, balancing affordability for our customers and value creation for our investors. Turning to slide 80, even in the midst of the economic impact of the stay-at-home orders, the fundamentals of our business remain strong. Importantly, our employees' commitment to our customers and communities shines through during the hardest of times as we generate and deliver reliable, increasingly clean energy across our service territories. There are several distinguishing factors that make our company an ideal long-term investment for shareholders. First, our size and scale and diversity of operations is unmatched, allowing us to deliver consistent short-term returns and long-term investment opportunities. Furthermore, we operate in constructive regulatory jurisdictions that oversee our operations in arguably the most attractive communities on the East Coast. In our five-year, $56 billion plan to invest in cleaner energy, grid improvements, and other infrastructure, It's critical to the customers and communities we serve and will create meaningful shareholder value for many years to come. These are the strong business fundamentals that give us confidence to deliver on our long-term earnings growth rate of 4% to 6%. And with that, I'll turn it over to Steve.

Thanks, Lynn, and good morning, everyone. I'll start with a brief discussion on our quarterly results, highlighting a few of the key variances to the prior year. For more detailed information on variance drivers and a reconciliation of reported to adjusted results, please refer to the supporting materials of the company's press release and presentation. As shown on slide 9, our first quarter reported earnings per share were $1.24, and our adjusted earnings per share were $1.14. This is compared to reported and adjusted earnings per share of $1.24 last year. The difference between reported and adjusted earnings was due to the partial settlement in the DEC North Carolina rate case, permitting recovery of 2018 sevens costs. Within the same, electric utilities and infrastructure was down six cents compared to the prior year. We saw the expected benefits from base rate increases in South Carolina and Florida and higher rider revenues in the Midwest, along with forecasted regulatory lag in North Carolina. However, these fundamental improvements in our segment results were offset by mild winter weather along with severe storms that impacted much of the Carolinas. Shifting to gas utilities and infrastructure results were three cents higher, driven primarily by new retail rates in North Carolina and higher margins at the LDC. These items were partially offset by the one-time income tax adjustments related to ACP that favorably impacted the prior period results. In our commercial renewables segment, results were up 6 cents for the quarter. The increase was primarily due to ongoing benefits from projects brought online in 2019, as well as favorable wind resource and pricing this year. Finally, out of the down 12 cents for the quarter, principally due to plant costs of borrowings and lower investment returns in non-qualified benefit plans, causing an approximate $0.06 year-over-year difference. Returns on these plan assets are partially rebounded for the month of April. Overall, our first quarter financial results were not materially affected by the COVID-19 pandemic. Aside from the unseasonable weather and related storm costs, the first quarter was consistent with our internal plan. Given the softer weather, we began planning mitigation actions in February and further enhanced and accelerated those plans upon the full onset of COVID-19, which I'll describe in detail in a few moments. Turning the slides again, we continue to execute on our regulatory agenda. As Lynn mentioned, we recently filed our storm protection plan in Florida that provides much-needed storm hardening in the state. We also have modernized regulatory mechanisms for investments in both Florida and Ohio that are providing timely recovery of our investments in clean generation and a more modernized grid. We currently have three rate cases underway. Our Duke Energy Indiana case continues as planned. The hearings were held in January, and the record is now closed, and we expect the order around mid-year. The Duke Energy Carolinas and Duke Energy Progress. The written pre-hearing record is substantially closed. In the DEC case, we reached a partial settlement for storm costs, allowing us to pursue securitization as well as other adjustments. The hearings for both cases have been delayed. We continue to work with all stakeholders to identify options to safely and efficiently conduct the hearings, and we expect a revised procedural schedule to be released in the coming weeks. Just last week, we filed with the Commission a proposal to combine the hearings of the two cases in July, which is supported by the public staff. If this procedural schedule is approved, it will help to limit the delay in obtaining the general rate case orders. A slight delay in the decisions for both of the North Carolina cases is not expected to have a significant impact on our 2020 financial plan. and the Commission has a variety of mechanisms that they can implement to help balance the interests of customers and shareholders. With regard to COVID-19 and the expected impacts across our jurisdiction, we are tracking the financial effects on our utilities, including elevated bad debt expense and wage fees for customers. This is an extraordinary time that has and will continue to require our utilities to incur costs on behalf of our customers and the employees who operate our business. Similar to what others are doing across the country, we will work with our regulators to identify the best solutions to recover these costs to support the ongoing financial health of our utilities, while also recognizing the unique needs of our customers during this unprecedented time. Shifting now to our response to the COVID pandemic, Slide 11 highlights the well-timed steps we've taken to bolster our liquidity and financial strength. to position us to manage through a variety of potential outcomes. As of April 30, we have a strong available liquidity position of $8.2 billion, which provides the company valuable flexibility as we plan our remaining capital markets transactions in 2020. In addition, provisions within the recently enacted CARES Act provide meaningful cash benefits in 2020. by accelerating our remaining AMT credits of approximately $285 million into the current year. This additional cash benefit will help to mitigate lower revenues and give us added confidence in our ability to deliver our consolidated credit metric targets for the year. Finally, our 2020 capital and financing plan remains on track. We will closely monitor the capital markets and strategically time our issuances to achieve the best outcomes possible. to both our customers and shareholders. Moving to slide 12, in addition to our large size and scale, our retail customer mix is diverse and anchored by our growing residential customer class. The Southeast remains a very attractive part of the country. It continues to experience strong growth of new residential customers at a rate of approximately 1.7% year over year. With the recent stay-at-home policies, volumes in our residential customer class have been strong, particularly in Florida, and we expect this trend to continue into the summer currency. The higher residential volumes provide a partial offset to declines in the commercial and industrial classes. Within commercial, much of the service sector has been closed or limited operationally, including schools and universities, bars and restaurants, and other retail establishments. Certain sectors within commercial remain resilient, such as data centers and hospitals, that continue to provide frontline services to fight against the pandemic. The temporary closures and curtailments of certain industrial customers are beginning to give way to plans to restart production as states in our service territories are relaxing stay-at-home policies and workers are preparing to come back to work gradually. Turning to slide 13, as we compared build sales in April to the prior year, we were able to see how the full stay-at-home policies have impacted retail electric volumes across each of our customer classes. Commercial and industrial usage was down 10% and 13% respectively for the month. But as expected, the higher margin residential class was up 6%. Overall retail sales were down 5%, and these results were slightly favorable to our revised forecast for the month. As a reminder, the earnings sensitivities do vary across retail customer classes, and we've included those here for you. Looking ahead, we expect a 3% to 5% decline in total retail volumes for the full year. We are forecasting the deepest declines in volumes compared to 2019. in both the second and third quarter, with a gradual economic recovery beginning in the latter half of the third quarter and extending beyond the end of the year. With these forecasted ranges and on a weather-normalized basis, we are forecasting a full-year 2020 negative EPS impact of 25 to 35 cents. As our communities are beginning measured reopening, We are hearing from a large number of our industrial customers that they are planning to increase their level of operations in the mid to late May timeframe. At the same time, we expect higher residential volumes until stay-at-home policies are fully relaxed. Moving now to slide 14, we've activated several initiatives to mitigate the impacts of COVID-19. Our annual non-rider O&M budget is nearly $5 billion, providing us a formidable leverage to address revenue headlines. As I mentioned, we began our mitigation plans in February and have greatly expanded those efforts with the COVID-19 onset. Over the past five years, we have demonstrated our core competency in managing our O&M, observing increases for inflation as well as nearly $300 million of O&M associated with the Piedmont acquisition. We have also demonstrated the ability to strategically manage costs between years. taking advantage of strong rains in some years, so strengthen periods where unexpected costs rise. Based on the tremendous focus and commitment of our teammates, we are confident we can reduce our O&M and other expenses by approximately $350 to $450 million in 2020. Our target is not merely aspirational, but it's underscored with discrete actions, of which we have a clear line of sight and are already taking action. For example, as our generating assets are expected to run less during the year, we are optimizing the timing and scope of our 2020 plant outages. In addition, we are aggressively managing all expenses, including our contract labor, overtime, non-essential projects, and a broad range of discretionary spending. We are also suspending external hiring while sharing existing resources in a virtual manner in order to optimize labor costs. Let me be clear, we are highly confident in our ability to deliver on this goal of $350 to $450 million of 2020 cost reductions. Although we are still early in the year, based on a forecast of a gradual economic recovery beginning this summer and the significant cost mitigation actions that we have put into motion, we are affirming our 2020 target to deliver within our original earnings per share guidance range. Finally, we understand the value of the dividend to our investors. Approximately 40% are from our retail investors, and many of whom count on our dividend as a source of income during these uncertain times. 2020 marks the 94th consecutive year of paying a quarterly cash dividend. Throughout the past nine decades, including during the financial crisis of 2008 and 2009, we have protected our quarterly cash dividends. Our excellent businesses that operate in some of the best jurisdictions in the country give us confidence to continue paying and growing the dividend consistent with our long-term target payout ratio of 65% to 75%. Before we open it up for questions, let me turn to slide 15. Our attractive dividend yield coupled with our long-term earnings growth from investments in our regulated utilities provide a compelling risk-adjusted return for shareholders. As a company, we are well positioned and confident our vibrant and growing communities will resume strong economic growth as we emerge from this pandemic. With that, we'll open the line to your questions. Thank you. And ladies and gentlemen, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to signal for questions. And we'll take our first question from Char Paraita with Guggenheim Partners. Please go ahead. Hey, good morning, guys. Hi, Char. So we see a big mitigation plan that was announced. How much of the 35 to 45 cents is sort of cemented? And if COVID is more protracted than your current 3 to 5% low degradation, do you have incremental levers? And I do have a quick follow-up.