speaker
Abby
Operator

Ladies and gentlemen, good day and welcome to the Duke Energy Second Quarter Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Brian Buckler, Vice President of Investor Relations. Please go ahead, sir.

speaker
Brian Buckler
Vice President of Investor Relations

Thank you, Abby. Good morning, everyone, and welcome to Duke Energy's Second Quarter 2020 Earnings Review and Business Update. Leading our call today is Lynn Good, Chair, President, and Chief Executive Officer of 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, here in today's call, Lynn will provide an update on our 2020 financial results and rate cases, as well as insights on the company's long-term strategy and investment outlook. Steve will then share an overview of our second quarter financial results. We will also offer insights into our economic and road growth outlook and long-term earnings projections before closing with key investor considerations. With that, let me turn the call over to Lynn.

speaker
Lynn Good
Chair, President, and Chief Executive Officer

Ryan, thank you, and good morning, everyone. Today we announced suggested earnings per share of $1.08 for the quarter, which is favorable to our internal projections, including COVID. The decline in load during the quarter was less significant than originally anticipated. with some of our states reopening and residential usage stronger than expected. Looking ahead and recognizing the uncertainties that remain, including the potential impact of a resurgence in the virus, we're maintaining our full year projection of a 3% to 5% decline in retail volumes. We are also closely monitoring the pace of economic recovery and will know more as the year progresses. We made great progress in mitigating operations and maintenance expense. I'm very proud of our demonstrated track record in managing our cost structure over many years, but I'm particularly proud of the work of the team this year. We have identified and launched significant efforts to reduce costs in 2020 by $350 to $450 million, matching the impact of mild winter weather, major storms, and the pandemic. The quarter reflects a portion of those savings, and we are on track to deliver the remaining savings over the balance of 2020. We remain steadfast in our 2020 financial commitment to shareholders and are reaffirming our full-year guidance range of 505 to 545. Through our aggressive approach to cost mitigation, which began early in the year, we are positioned to navigate through the uncertainties of COVID and to absorb the loss of earnings from the cancellation of ACP. As Steve will discuss in a moment, our year-to-date results, along with a strong July, position us to deliver in the lower half of the 2020 guidance range. The third quarter, our most significant one, is still ahead of us, and we will update expectations again during our third quarter earnings call. Let me also touch briefly on 2021. In July, we announced the cancellation of the ACP due to ongoing delays and increasing cost uncertainty. which threatened the economic viability of the project. We are disappointed in this outcome, but believe the decision to cancel is in the best interest of our shareholders and our customers, and we are actively pursuing other infrastructure plans to support eastern North Carolina, as I will touch on in a moment. There's a lot to be excited about as we head into 2021. We will enter the year with 95% of our future earnings and capital allocation in our regulated electric and gas utilities. Our utilities serve some of the most attractive jurisdictions in the country and provide our investors with a transparent, low-risk capital plan and annual rate-based growth of 6%. We will use every tool available to us to maximize 2021 earnings for shareholders and will remain steadfastly focused on delivering growth of 46% over the long term grounded in our regulated jurisdictional businesses. Steve will share more with you in a moment regarding our 2021 outlook. Before I talk about a recent regulatory activity and investment strategy, I wanted to share an update on our ongoing response to COVID and the social unrest that has gripped our communities. We are nearly six months into the pandemic, an unprecedented event that has required us to create new solutions for our customers and employees. In short order, we've adapted our workplaces, shifted to remote operations where possible, created new processes for customer interactions and more. while keeping the health and safety of our communities and employees paramount. We've also maintained reliable service for our customers and quickly restored 350,000 outages across Florida and the Carolinas as a result of the recent hurricane. Our employees continue to rise to the challenges associated with this pandemic, and I am so proud of our workforce's extraordinary response. And in the midst of the pandemic, our company, and indeed the nation, I've been challenged by the killing of George Floyd and his aftermath. Issues surrounding racial equity and social justice are front and center as they should be. A national movement has been ignited that demands much more than a debate. It deserves action. Our company is determined to work toward fair, responsible, and practical solutions. Times like these remind me of the importance of our company's values. We believe deeply that having diverse backgrounds, experiences, and skills allows us to serve our customers better. innovate, and attract the talent we need to be successful. Now more than ever, we are relying on these values to cultivate a workplace rooted in diversity and inclusion. As we power the lives of our customers, we will also continue to advocate for change, stand up for justice, and ensure the communities where we work and live are provided with equal opportunities. Turning to slide six, you can see that we've been active in the regulatory space over the past few months and are engaging stakeholders to reach balanced solutions for our customers. In late June, the Indiana Utility Regulatory Commission issued a constructive order in our base rate case supporting our long-term investment strategy for the Midwest. As you will recall, we filed our case last July, marking the first case DEI filed in 16 years. We received approval for an overall base rate increase of $159 million or a 6.2% average rate increase. The rate increase, which is based on the modernized forward test year, will be implemented in two steps, with step one rates already effective and step two rates will be implemented in Q2 2021 and then trued up with carrying costs to January 1st of 2021. The commission ordered a 9.7% ROE and a requested capital structure of 53% equity. We were also pleased with the decisions on full recovery of and return on historic coal ash costs, and inclusion of the Edwards Ford IGCC plant in base rates. Importantly, the Commission approved shortened depreciable lives for our coal fleet, a key step in our transition to a cleaner energy future and consistent with the IRP we filed in 2019. Shifting to North Carolina, we recently reached constructive partial settlements in both our DEC and DEP rate cases. The settling parties include a broad group of interveners from large customers to community groups, and most recently, the public staff. Illustrated, the focus our company places on stakeholder engagement. Key terms of the agreement with public staff include a 9.6% ROE and 52% equity component of the capital structure, along with deferral treatment and a return on approximately $1.3 billion in grid improvements from 2020 to 2022. The settlement terms are subject to approval by the North Carolina Utilities Commission, with hearings set to begin on August 24th. The delay in hearings provides sufficient time for the parties to review our updates to capital and service data and other revenue requirement inputs for May 31st. These changes will increase the annual revenue requirement request by approximately $70 million. And lastly, I'd like to point out our filing to implement interim rate changes for both DEC and DEP. These temporary rates are designed to protect our ability to earn on investments, consistent with the originally requested effective dates, while avoiding a rate change for customers during this interim period. This innovative approach by our North Carolina regulatory team was made possible by utilizing the flowback of excess deferred income taxes and ensures we maintain our financial strength as we make these investments. We look forward to sharing more updates on our North Carolina rate cases and other regulatory proceedings in the months to come. Now turning to slide seven and eight, Duke Energy's strategy to modernize and strengthen the energy grid, generate cleaner energy, and expand smart energy infrastructure across our footprint is underpinned by a robust five-year, $56 billion capital plan. It also provides a clear line of sight to tremendous capital deployment opportunities for our communities well past 2024. Our financial and capital planning process is underway, and we continue to see ample capital investment opportunities, including emerging infrastructure needs for the Piedmont natural gas system in eastern North Carolina, ongoing grid upgrades and infrastructure to support economic growth, and renewable expansion, and additional solar investments in Florida and the Carolinas. We're also finalizing our work on the integrated resource plan in the Carolinas, the IRP, which we will file in early September. In the IRP, we will outline alternatives to achieving our carbon reduction goals, as well as the North Carolina governor's executive order to achieve a 70% reduction by 2030. This IRP filing follows a comprehensive stakeholder engagement process, which worked to identify the best potential paths forward to achieve carbon reduction targets, while also balancing reliability and affordability for our customers. We are also engaged in a separate stakeholder process led by the state of North Carolina focusing on establishing a clean energy plan for the future. We see this engagement and our IRP filing as complementary, and we believe they will serve as foundational elements in our investment planning over the next decade. Retirement of coal plants and investment in replacement generation coupled with investments in battery storage, the energy delivery system, energy efficiency, and demand-side management will underpin the state's transition to a cleaner energy future, and Duke Energy's investment plan for customers and shareholders. We look forward to sharing more with you as the year progresses. This line of sight to an extensive runway of investment opportunities in the Carolinas, as well as our other states, gives us confidence to deliver on our long-term rate-based growth rate of 6%, not only through 2024, but into the next decade. As I reflect on 2020 and where we're headed, Duke Energy is very well positioned. Time and again, we adapt, innovate, and deliver, creating value for customers and shareholders alike. As we continue to respond to the pandemic, we are looking to the future and executing on our long-term plans, advancing a smarter energy future for our communities. I hope you'll join us for our inaugural ESG Analyst Day on October 9th to learn more about our Carolinas IRP filing, long-term strategy, and specific focus around the environment, social issues, and governance. We've included more information on slides 27 and 28 in the appendix, which illustrate our strong progress on transitioning our generation portfolio to carbon-free resources, including renewables. These are important topics, and we look forward to further discussions with you at the ESG Day. With that, let me turn the call over to Steve.

speaker
Steve Young
Executive Vice President and Chief Financial Officer

Thanks, Lynn, and good morning, everyone. I'll begin with a summary of our quarterly results, highlighting a few of the key variances to the prior year. For more detailed information on earnings drivers and a reconciliation of reported to adjusted results, please refer to the supporting materials that accompany today's press release and presentation. As shown on slide 9, we reported the second quarter loss of $1.13 per share and adjusted earnings of $1.08 per share. This is compared to reported and adjusted earnings per share of $1.12 last year. The difference between the reported and adjusted earnings in the current period was due to the cancellation and write-off of the Atlantic Coast pipeline. Within the segments, electric utilities and infrastructure was down $0.08 quarter over quarter. Weather was the primary driver, given it was $0.08 favorable in the prior year and closer to normal this year. We also had higher depreciation and amortization expenses. We continue to grow our asset base. And as expected, electric volumes were down across each of our service territories due to the pandemic. However, these headwinds were offset by significant cost mitigation, base rate increases in South Carolina and Florida, and higher rider revenues in the Midwest. Our gas utilities and infrastructure results were one cent higher, driven by new retail rates in North Carolina, as well as cost mitigation. Our LDC gas businesses continue to produce outstanding results. contributing 9 cents of growth in 2020. The commercial renewables segment was also up 1 cent. The increase was primarily due to benefits from new projects brought online this quarter. Finally, other was up 3 cents for the quarter, principally due to lower income tax expense and higher investment returns in non-qualified benefit plans. Overall, we are very pleased with the results in the quarter. We took swift action to mitigate the impacts of COVID-19 and weather on year-to-date results, and this dedication across the entire enterprise is positioned as well to deliver in the lower half of our 2020 earnings guidance range, despite the loss of 13 cents of earnings from ACP. As we think about earnings drivers in the second half of the year, we expect solid growth over 2019 from new base rates in Indiana, North Carolina, Kentucky, and Piedmont, as well as continuing benefits from our Florida multi-year rate plan and SOBR investments. Our impressive cost mitigation efforts in the quarter have created momentum that we will build on during the remainder of the year. We are also pleased to see July results coming in favorable to our plan. We had a very warm month with strong operational performance, and July sales volumes continue to trend favorable to our post-COVID expectations. We expect lower retail electric volumes as well as lower ACP earnings of $0.13 to partially offset these growth factors. Moving to slide 10, while our second quarter retail electric volumes were down 6%, this was favorable compared to our original post-COVID expectations of a 9% decline for the quarter. There were a few favorable trends that we continue to watch. First, we have experienced strength in the residential sector across our service areas in excess of our original expectations. In addition, our commercial and industrial volumes are recovering reasonably well, with nearly three-fourths of our largest CNI customers resuming operations. Adding to these data points, July 2020 weather normal volumes were also favorable by 3% to 4% compared to our COVID-19 updated forecast. Residential volumes were particularly strong in July, up approximately 6.5% compared to July a year ago. As we look ahead, we are still watching the pace of the economic recovery across each of our service territories, and we'll adjust our expectations as we learn more. Our volume expectations for the full year continue to be a retail decline of 3% to 5%, with earnings headwinds of 25 to 35 cents. While recent results have been favorable, this is clearly a dynamic situation and one we will closely monitor. In the midst of the pandemic, we continue to see strong customer growth across each of our jurisdictions. Year-to-date, we've seen a 1.7% increase in new electric customers and 1.5% growth in gas distribution customers. Beyond organic movement into our attractive service areas, we continue to proactively seek out and support economic development. Even with the current economic challenges and uncertainties, multiple corporations have announced decisions to locate new facilities or expand existing facilities within our service territories. They've not only committed significant capital investment, but they've also committed to expanding jobs in our communities. For example, Centene, a Fortune 50 company, announced a new East Coast regional headquarters and technology center in Charlotte. It plans to invest approximately a billion dollars and create 3,200 jobs over the next 12 years. This marks one of the longest largest economic development projects in North Carolina's history. As we continue to see more population migration into our desirable service territories, we believe Duke Energy's long-term load growth fundamentals will be some of the strongest in the industry. Moving to slide 11, we've made tremendous progress across the organization to identify and implement substantial cost mitigation initiatives. I am extremely proud of the collaboration and focus of our employees and management teams to deliver on our 2020 shareholder earnings commitment, despite the significant headwinds we've discussed. We set an aggressive cost mitigation range of 350 to 450 million in 2020. We began to tackle this by rescoping and delaying some generation plan outages, making risk-informed decisions about the best schedule moving forward. Additionally, we are retraining and redeploying our own workforce to perform projects historically executed by contract labor and taking advantage of natural attrition. With regards to employee expenses, we have paused any travel that is not business critical and moderated all discretionary spending. On a year-to-date basis, we have already achieved $170 million in cost reductions, representing 40% of our full-year target. We will build on this momentum and are confident in our ability to reach the high end of the range if necessary. Cost mitigation, the ability to respond quickly to unforeseen circumstances has become a core competency at Duke Energy. Our operational teams and industry-leading business transformation group continually utilize our digital and automation playbook to turn many of these changes in work practices and even lower cost structure to benefit future years. We will share more on this front in the coming months as the team makes further progress on their work. Let's move to slide 12, where I'd like to provide some early considerations for 2021. Prior to the cancellation of ACP, we built a financial plan that was trending toward an EPS midpoint of approximately $5.50 in 2021. Included in this projection was a $0.35 contribution from ACP. The math, therefore, points us to around $5.15. and our regulated utilities, commercial renewables operations remain on track for 2021. We will be refining this 2021 earnings estimate as we move through the rest of the year, considering regulatory proceedings and our analysis of economic conditions. We believe that 2021 electric load will be impacted by longer-term economic impacts of COVID-19, and we expect to manage our own end costs to offset this impact, as we have in 2020, Although we cannot immediately replace the ACP earnings, we have identified incremental capital projects across our businesses that will provide growth over the five-year period. We will reset our earnings base in 2021 and deliver growth of 46% from our low-risk regulated capital investments over the long term. We will provide 2021 earnings drivers in November and the earnings guidance range in February along with an updated five-year capital plan. As Len mentioned, we will use every tool at our disposal to maximize shareholder value in 2021, and our strong 6% rate-based CAGR will provide a transparent, low-risk platform for 4% to 6% long-term GPS road off of that 2021 base. Turning to slide 13, our strong balance sheet underpins our $56 billion capital plan. After we announced the cancellation of the Atlantic Coast Pipeline, Both S&P and Moody's maintain the current rating and stable outlook at the holding company. Our stable outlook is supported by our $500 million DRIP and ATM program in 2020 through 2022 and the proactive $2.5 billion equity offering that was priced last November to mitigate all potential impacts of ACP. We believe this amount of equity is adequate to support our balance sheet and capital plan. Finally, we understand the value of the dividend to our investors. This year marks the 94th consecutive year of paying a quarterly cash dividend and the 14th consecutive annual increase. The recent increase of 2% is consistent with our strategy to grow the dividend, but also moderate our payout ratio within a sustainable range of 65% to 75%. Finally, let me wrap up on slide 14. 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. We are well positioned to manage through COVID-19 and remain confident in our ability to deliver in the lower half of the earnings guidance range in 2020, overcoming significant headwinds. As we expect to enter 2021 with one of the most valuable and low-risk shareholder investment propositions in the industry, And we look forward to sharing more with you in the coming months. And as Lauren mentioned, we look forward to sharing more details about our ESG vision and long-term strategy during our ESG day on October 9. With that, we'll open the call to the questions.

speaker
Abby
Operator

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you would like to ask a question. And we will take our first question from Michael Weinstein with Credit Suisse.

speaker
Michael Weinstein
Analyst at Credit Suisse

Hi, Steve, Glenn. How are you doing? Good morning. Good morning. Good morning. Hey, great. Can you talk about some of the main things that you're looking at that will affect the 2021 guidance and, you know, how you're thinking about rebasing that 46% going forward. You know, right off the bat, you know, everybody can see the impact of ACP is definitely a factor. COVID-19, how long that lasts is a factor. Maybe the coal ash settlement or coal ash proceedings, that's probably a factor. How do all these things weigh in your minds right now as you're thinking about 2021?

speaker
Lynn Good
Chair, President, and Chief Executive Officer

Sure, Mike, and I appreciate that question. I think it's on everyone's mind, and we really worked hard in our remarks and with our slide today to give you some visibility into what we're thinking about. I think there are three important points that I would emphasize here. First of all, that the regulated and commercial renewables businesses remain on track. And I think what's important there is we talk about rate case outcomes or coal ash recovery, etc., we always plan for a range of outcomes. That was contemplated in the projected 550. It's also contemplated in the projected 515 that Steve walked you through the map on. The second important point is that we are committed to mitigating COVID economic effects as we did in 2020. We don't yet know how much they're going to be. You know, we're looking at a range of economic forecasts, but our commitment is that the declining load will be offset with O&M. And then the third thing I think is important is we've already begun to identify additional capital projects that will fill in the roughly $2 billion that had originally been planned for ACP, and we've reflected a few ideas for you on slide 12. So we're trying to give you the sense, this is the visibility, this is what we're looking at, regulating utilities on track, COVID to be mitigated, capital plan in tact. And so over the balance of the year, we'll continue to monitor what's going on with the economy. We should receive orders from the NCUT on the pending cases. We're also going to be closely following the IRP and Clean Energy Plan resolution and feedback because those two initiatives represent opportunities for us to continue to identify capital that we'll spend over the next five years and the next decade. So we will give you more visibility on all of these things in the third quarter, including drivers and then, of course, the complete capital, cash flow, earnings range in February as we historically have.

speaker
Michael Weinstein
Analyst at Credit Suisse

Great. Hey, one more on coal ash. If you were to receive, let's say, a moderately negative order on coal ash or a negative order on coal ash, would that require any additional equity, block equity issuance or secondary equity? I know you said that you do not need it for ACP cancellation, I just wanted to confirm.

speaker
Lynn Good
Chair, President, and Chief Executive Officer

Sure. And this is an important question and will really be the centerpiece of testimony on the implications to credit, my goal of coal ash recovery. I talked about the earnings implications contemplated in our plan, but on cash flow and metrics, we will be on the stand August 24th talking about the importance of of a strong balance sheet, important to our customers, not only for growth, but for, you know, potential disruptions in the market, the fact that the customers lean on our balance sheet during hurricanes and COVID and other things. And our hope and expectation is that given the magnitude of this issue at Duke and the fact that we have a very strong, well-reasoned order from 2018, that we'll receive fair and appropriate treatment. from the Commission on this item. The North Carolina Commission has been constructive over many years, and we will put a very strong case in front of them. But I think it's important to focus specifically on coal ash, and if we were to receive an order consistent with Dominion, and absent any other provisions within the order that would be credit supportive, our balance sheet would be weakened. And Moody's has been very clear on the treatment of coal ash If there's no return, it would be a direct reduction or deduction from FFO to debt. And frankly, we believe there are no viable options to address over 100 basis point impact to FFO to debt, which is basically the impact that that ruling would have. It's too big to solve with equity issuances. It's too big to solve with operational responses. And I don't say this lightly. We don't want this outcome. We don't think it's in the best interest of customers or the state. And I can never speak for the agencies, but I think the consideration will not only be the quantitative math I just walked you through, but the qualitative assessment of is this order constructive and is the downgrade threshold for Duke at the appropriate level. So we look at this as an important issue, as I said, a centerpiece of our testimony in August. We have reached a settlement with the state on the method of closing. We saved customers money. We're meeting all the deadlines. We're delivering consistent with the rules and regulations. And our hope and expectation is for a constructive order. As you noted in your comments about equity, we believe the amount of equity in the plan is adequate to support our capital and our balance sheet. And that's the way we're approaching it at this point.

speaker
Michael Weinstein
Analyst at Credit Suisse

Okay. So just to be clear, it doesn't sound like you'd be inclined to issue additional equity even in the event of some kind of negative order on Folesh Recovery.

speaker
Lynn Good
Chair, President, and Chief Executive Officer

You know, Mike, we will evaluate the whole of the order because I think it will be important to look at what else is in the order. Are there any other credit supportive elements? but we stand by the equity that we've included in our plan is adequate to support our credit and our capital plan, and we don't believe that equity will solve a potential quantitative and qualitative assessment on coal ash. So as I said, we'll put a strong case on. We expect and hope for fair treatment from the commission, and we'll continue to keep you posted as we move through these proceedings.

speaker
Michael Weinstein
Analyst at Credit Suisse

Thank you very much. I'll cede the floor.

speaker
Lynn Good
Chair, President, and Chief Executive Officer

Thank you.

speaker
Abby
Operator

And we will take our next question from Char Braza with Guggenheim Partners.

speaker
Cody Clark
Representative for Char Braza with Guggenheim Partners

Hey, it's actually Cody Clark on for Char. Good morning. Good morning. So just to follow up on the last question, just wanted to get a better sense of the moving pieces here. I know you aren't in the position to give 2021 guidance, but given your capital spending guidance, no need to raise equity. yet and healthy rate case outcome in the Carolinas, upcoming filing in Florida O&M levers, and additional projects in lieu of ACP given your gas needs, is there any reason to believe that when you issue that 2021 guidance that it would imply growth lower than the historical midpoint for 6%?

speaker
Lynn Good
Chair, President, and Chief Executive Officer

So what we are pointing to in the analysis is we were targeting $5.50. ACP is worth about $0.35. So the math points to about 515, and that implies the reg business and commercial renewables on track, implies that we'll offset any economic deterioration with O&M, and also implies that we'll continue to rebuild that capital from ACP. So that's the way I would respond to it. Steve, would you add anything to that?

speaker
Steve Young
Executive Vice President and Chief Financial Officer

You know, our rate base is growing at 6% for our businesses, so I think we're going to robustly grow our four to six range, hopefully, with potential behind of the range from where we reset in 2021. Got it.

speaker
Cody Clark
Representative for Char Braza with Guggenheim Partners

Okay. Thank you. And quickly, looking forward to the ESG day, do you plan on providing the incremental long-term capital spending opportunity associated with the Carolinas IRP at that point, or will you wait for a full capital plan update in February to roll in any CapEx?

speaker
Lynn Good
Chair, President, and Chief Executive Officer

You know, I believe February is going to be better timing for that, and the reason is the IRP is filed in early September. The Clean Energy Plan reaches its natural resolution in the form of a report to the governor at the end of December. So I think what we'll be able to do is share some of the scenarios within our IRP, what the capital would look like in those scenarios, what the impact to customer rates, and it will have

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-