Duke Energy Corp. executives said the decision announced Aug. 4 to evaluate strategic alternatives for its commercial renewables business was driven by a desire to focus on the superior growth trajectory of renewables within its regulated segments.
Since 2007, Duke has built a portfolio of about 5,000 MW of commercial wind, solar and battery projects across the U.S., Chairman, President and CEO Lynn Good said during a call to discuss second-quarter 2022 earnings. While its commercial renewables business represents less than 5% of Duke's earnings, it is among the top 10 largest U.S. renewables companies, Good added.
"But as we look forward to the remainder of this decade and beyond, we have line of sight to significant renewable grid and other investment opportunities within our faster growing regulated operations," Good said. "As we execute the industry's largest clean energy transition, we believe this is the appropriate time to review the ongoing strategic set of commercial operations as we prepare for an acceleration in capital spending within our regulated businesses."
With a mounting pipeline of regulated utility investment, Good said it was "the right time to step back and really look at the strategic fit" of the commercial renewables business "because there's going to be competition for capital at Duke."
Duke has been considering a strategic review of its commercial renewable business "for some time," Good said, and expects to complete the review later in 2022 or early 2023.
Good believes there will be a robust market for the commercial renewable assets and project pipeline of about 1 GW to 1.5 GW of near-term projects. The value of the assets is about $4 billion, including about $1 billion in tax attributes and $1.6 billion in project debt, Executive Vice President and CFO Steven Young said.
While Duke has largely secured its regulated supply of solar panels, more supply chain challenges for its commercial solar projects have shifted projects from 2022 to 2023. Some could be pushed back even further.
A sale of the commercial business could also help postpone future equity needs, though Good said the company is focused primarily on using potential sale proceeds to avoid debt and contend with high interest rates, inflation and other economic uncertainties.
"I do think it strengthens the balance sheet at a moment when we see accelerated capital, and that would lead to a period in which we could delay any further equity issuances," Good said. "If we are successful in executing a robust transaction — which we have every confidence we will — then Duke Energy lessens volatility, we increase transparency [and] we draw focus and attention to this regulated business."
Duke executives said they are working to respond to rising interest rates and inflation. They are targeting cost mitigation of $200 million across the enterprise beginning in 2023, focusing on employee-driven productivity and cost-savings initiatives, digital automation, leveraging size and scale to reduce supply chain costs, tax optimization and reducing regulatory lag through capital expenditure timing, Young said.
"We believe much of this will be sustainable, similar to what we achieved in 2020 [operations and maintenance] response to COVID," Young said, adding that for every dollar of operations and maintenance the company eliminates, it can invest about $7 of capital without increasing costs for customers.
Carbon reduction plan
In May, Duke filed a Carolinas carbon reduction plan in North Carolina outlining multiple portfolios with coal retirement timelines and substantial renewable additions such as solar and battery projects, onshore and offshore wind, and small modular nuclear reactors for its regulated business that will help reach state-mandated emissions goals. While environmental advocates intend to file an alternative plan, after calling Duke's proposal too reliant on fossil fuels, Duke executives said the plan is a flexible option to further its clean energy transition and slash carbon emissions according to state requirements and its internal goals.
"It's hard to put forth a plan that's going to make everybody happy," Young said in an interview with S&P Global Commodity Insights on Aug. 4. "There will be groups that want to see as little natural gas as possible, but that impacts reliability potentially, and it could impact costs, so we've got to balance those things."
Duke told state regulators in its filing that it had no single preferred portfolio option. Instead, it wants approval to proceed on near-term steps in its proposal that must be taken regardless of which option the North Carolina Public Service Commission ultimately chooses.
"We have asked for authority to move on the 'no regrets' elements of the plan, not to lock into any specific one, allow things to continue to mature, prices on certain technologies to continue to decline," Good said. Hearings on the plan are set for mid-September. Good also said capital plans in the Carolinas will be fine-tuned as the carbon plan in North Carolina solidifies.
Coal retirements are a key component of Duke's carbon reduction plan, and Good said supply chain issues and higher fuel prices have not necessarily shifted the company's plans since coal supply issues exist. Duke expects to file its proposal in a future resource planning docket with the South Carolina Public Service Commission, where earlier proposals to aggressively scale back coal reliance were met with resistance.
"There's going to be some pace of retirement of coal regardless," Young said.
Results
Duke reported second-quarter adjusted net income of $893 million, or $1.14 per share, compared to $898 million, or $1.15 per share, for the same period in 2021. The S&P Capital IQ consensus normalized EPS estimate for the second quarter was $1.08.
Duke reaffirmed a 2022 adjusted earnings per share guidance range of $5.30 to $5.60 and adjusted earnings per share growth rate of 5% to 7% through 2026 off the 2021 original midpoint of $5.15.
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