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Sale of Ind. utility stake 'nice fit' to solve equity needs, Duke CEO says

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Essential Energy Insights - February 2021

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Sale of Ind. utility stake 'nice fit' to solve equity needs, Duke CEO says

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Duke Energy Chair, President and CEO Lynn Good speaks in October 2020 at the company's virtual ESG Investor Day.
Source: Duke Energy Corp. livestream

Duke Energy Corp. has no current plans to sell more stakes in its regulated utilities, but management indicated the company would consider such sales depending on capital needs.

"We always look for what is the most effective way to finance growth because that just makes good common sense," Duke Energy Chair, President and CEO Lynn Good said in a Feb. 11 phone interview prior to the company's fourth-quarter 2020 earnings call.

Duke Energy announced Jan. 28 that it will sell a 19.9% indirect minority interest in Duke Energy Indiana LLC to GIC Pte. Ltd. affiliate EPSOM Investment Pte. Ltd. in a $2.05 billion all-cash deal.

The transaction with the Singaporean sovereign wealth fund is expected to close in two phases and will allow Duke Energy to forgo previous plans to raise $1 billion in common equity.

In conjunction with the transaction announcement, Duke Energy announced an adjusted EPS guidance range for 2021 of $5.00 to $5.30 based on a midpoint of $5.15. The company increased its long-term adjusted EPS growth rate to 5% to 7% through 2025 from 4% to 6%.

Duke Energy said proceeds from the transaction will fund an increased $59 billion five-year capital plan for 2021 through 2025 focused primarily on grid and clean energy investments.

"When you think about an aggressive investment strategy like this, financing is always part of the picture," Good told S&P Global Market Intelligence. "So, with the transaction with GIC, we have an opportunity to partner with a recognized infrastructure investor at an attractive valuation that gives us an opportunity to eliminate any Duke common equity out of our five-year plan. So, it's a creative form of financing that gives the company a really solid foundation for 5[%] to 7% growth on this capital plan."

Duke Energy, which operates electric and gas utilities in seven states, decided a sale of a minority interest in Duke Energy Indiana made the most sense.

"As we did our work around how are we going to bring that equity into the company, Indiana was a nice fit because of the risk profile, low risk, growth around clean energy transition, cash flow producing," Good said.

"I think Indiana is a very well-run utility," Duke Energy Executive Vice President and CFO Steven Young said. "We got through an important rate case in 2020, which kind of positioned us well [going] forward."

Management stopped short of indicating that it would use this strategy again in the near future to support the company's growth plans.

"[We are] always looking for the lowest cost of capital ... is what I would leave you with," Good said. "We have no specific plans to do any more transactions. We've got a five-year runway with this one that gives us an opportunity to invest without any common equity. But, you know, if sometime in the future we were in a position to look again at financing, we always look for the lowest cost. But no specific plans today."

The deal is subject to approval by the Federal Energy Regulatory Commission and the completion of a review by the Committee on Foreign Investments in the United States.

Coal ash settlement

In what Wall Street has viewed as another positive development for the company, Duke Energy on Jan. 25 announced that its North Carolina utilities will forgo recovery of about $1.1 billion in coal ash management costs as part of a settlement agreement the utilities reached in their electric rate cases.

The agreement with the public staff of the North Carolina Utilities Commission, North Carolina Attorney General Joshua Stein and the Sierra Club resolves "all coal ash prudence and cost recovery issues" in rate cases filed in 2019 for Duke Energy Carolinas LLC, or DEC, (NCUC docket E-7, Sub 1214) and Duke Energy Progress LLC, or DEP, (NCUC docket E-2, Sub 1219). The agreement also resolves the public staff's equitable sharing proposal in the utilities' 2017 rate cases.

Duke Energy said the settlement is expected to reduce coal ash cost recovery in the pending rate cases by 60%. As a result, DEC and DEP each incurred a pretax charge to earnings of about $500 million in fourth-quarter 2020 results.

Good noted that the agreement came about largely because of a recent North Carolina Supreme Court ruling involving the 2017 rate cases that found that coal ash management costs are recoverable. The court also remanded the case back to state regulators for reconsideration of the public staff's "equitable sharing" proposal.

"I think the decision by the Supreme Court really put some clarity around next steps in a way that allowed the parties to come together," Good said. "I believe that the settlement accomplishes a number of objectives for customers. It provides not only an immediate benefit because the reduction in costs for the customer occurs right away ... it also provides long-term benefits for them in that the return that the company will be entitled to earn is lower than the allowed return that might be offered on other assets.

"And for Duke, it provides an opportunity for certainty, which is important for our investors. For the next 10 years, we've got a clear path and understanding of how these costs are going to be recovered."

Good noted that the settlement could "slow the process a bit" of the commission issuing orders in current rate cases for DEC and DEP.

"We do expect orders to come in the next probably month or so for both DEC and DEP," the CEO said.