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Duke blames Q4 earnings drop on higher asset expenses, storm costs

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Houston — Duke Energy told analysts Thursday that its fourth-quarter earnings decline was from higher depreciation and amortization expenses on a growing asset base, as well as higher storm-related costs.

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The Charlotte, North Carolina-based utility holding company reported Q4 adjusted diluted earnings of 84 cents/share, down from 94 cents/share in Q4 2017.

On its earnings call, Duke executives expressed concern over litigation and permit delays of one of its biggest projects, the planned 600-mile Atlantic Coast Pipeline. Analysts were told that the company hopes it can resume construction of the line in the fall when it will pursue a phased schedule, with the first phase of the line in service by late 2020 and the second in 2021.

The estimated cost of the pipeline has risen to $7.8 billion from $7 billion, Duke Energy chairman and CEO Lynn Good told the analysts. "We have work to do around court challenges," she said.

Good also noted that the utility holding company spent about $1 billion addressing two named hurricanes and a winter storm in 2018.

She added that responding to two named hurricanes in 2017 -- Matthew and Irma -- also cost about $1 billion.

Good said Duke Energy has been able to finance the response costs to hurricanes Florence and Michael and the winter storm because of the company's "strong balance sheet." The company issued $2 billion in common equity in 2018 to support the balance sheet.

It is difficult to see a particular trend line in Duke Energy's exposure to natural disaster liability, Good said, or that storms are becoming more or less severe. She noted, for example, that Florida and the Gulf Coast were particularly hard hit by hurricanes in the 2000s.

Asked if she is concerned about the future impact on Duke of global warming, Good said, "We take climate change as a risk."

DUKE PUTS 2019 CAPITAL SPENDING AT $11.1 BILLION

Executive Vice President and CFO Steven Young said Duke Energy will spend about $11.1 billion in 2019 on projects in the Carolinas, Florida, Indiana and Ohio.

Yong said that the spending will be part of a $37 billion, five-year growth capital plan. There is also a $12 billion-$13 billion operations and maintenance five-year spending plan that pushes the holding company's total capex for 2019 through 2023 to roughly $50 billion.

"We are spending approximately $10 billion per year over the next five years," Young said.

Young said that a portion of 2019 spending will go toward buying turbines and solar and battery storage equipment for its Western Carolina Modernization Project, for solar installations in Florida, and approximately $500 million for Midwest grid modernization.

SEEKING MINORITY PARTNER FOR RENEWABLES GROUP

Between 2011 and 2018 Duke retired about 6 GW of coal-fired generation and it intends to retire another 1 GW by 2024, a company presentation said.

In 2005, coal- and oil-fired generation made up 61% of Duke's megawatt-hour output, which dropped to 31% in 2018 and believes its coal and oil-fired generation will be 15% of its fuel mix in 2030.

Good told analysts that Duke is targeting a 40% reduction in CO2 emissions by 2030 from 2005 levels, and is "evaluating" the prospects of applying for 20-year-license extensions for its 11 "zero-carbon" nuclear units.

It will build 700 MW of solar in Florida and is increasing solar in North Carolina, with the first RFP for 680 MW of solar underway, analysts were told. Duke Renewables said February 8 that it will begin building in March its 100-MW Lapetus Solar Energy facility in the Permian Basin in West Texas.

Good told the analysts that Duke was continuing to look for a minority owner in its Commercial Renewables division. "We have seen strong interest and if we reach an agreement, we could announce in the spring and close by summer," she said.

-- Jeffrey Ryser, jeffrey.ryser@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com