Earnings Call Transcript - DUK Q2 2025

Operator, Operator

Hello, everyone, and thank you for joining the Duke Energy Second Quarter 2025 Earnings Call. My name is Sammy, and I'll be coordinating your call today. I will now hand over to our host, Abby Motsinger, Vice President of Investor Relations, to begin. Please go ahead, Abby.

Abby Motsinger, Vice President of Investor Relations

Thank you, Sammy, and good morning, everyone. Welcome to Duke Energy's Second Quarter 2025 Earnings Review and Business Update. Leading our call today is Harry Sideris, President and CEO, along with Brian Savoy, Executive Vice President and CFO. Today's discussion will include the use of non-GAAP financial measures and forward-looking information. Actual results may differ from forward-looking statements due to factors disclosed in today's materials and in Duke Energy's SEC filings. The appendix of today's presentation includes supplemental information, along with a reconciliation of non-GAAP financial measures. With that, let me turn the call over to Harry.

Harry K. Sideris, President and CEO

Thank you, Abby, and good morning, everyone. It's great to be with you today for our second quarter earnings call. We have a lot of exciting news to share this morning, starting with Brookfield Infrastructure's $6 billion minority investment in our Florida business. This transaction enables a material strengthening of our credit profile as we enter this period of significant growth, as well as the ability to grow our Florida utility at its full potential. We are now targeting FFO to debt of 15%, a 100 basis point increase versus our previous target. We are also increasing our Florida capital plan by $4 billion, funded by a portion of the sale proceeds. Brookfield is a highly regarded infrastructure investor, and we are pleased to have them as a long-term partner in Duke Energy, Florida. In further support of our capital funding needs, we announced the sale of our Tennessee LDC business to Spire last week. The premium valuation of $2.5 billion or 1.8x rate base reflects the high end of LDC asset sale precedents. We have been privileged to serve the Tennessee community for more than 40 years. And I know that under Spire's leadership, our teammates and assets will continue to operate with excellence and provide best-in-class service. Combined, these strategic transactions allow us to efficiently finance the record growth ahead of us and give us greater confidence in delivering our EPS objectives. Shifting to the second quarter results on Slide 5. We announced adjusted earnings per share of $1.25, building on our strong start to the year. These results were driven by top line growth across Electric Utilities. We move into the back half of the year with positive momentum and are reaffirming our 2025 guidance range of $6.17 to $6.42 and our long-term EPS growth rate of 5% to 7% through 2029. Moving to Slide 6. We continue to deliver on our strategic priorities, including advancing large-scale economic development projects and securing industry-leading regulatory and legislative outcomes. Starting with economic development. We operate in some of the most attractive jurisdictions in the country. Our states continue to thrive and grow, and the affordable, reliable power we provide plays a key role in bringing business into our regions. We've been partnering with our states to attract jobs and investments for decades, and that momentum continues to build. In fact, North Carolina was just named the top state for business by CNBC for the third time in four years, and most of our states ranked in the top 10. Our size and scale, together with an unwavering commitment to our customers and our demonstrated willingness to partner to do business, allow us to move with speed and agility to seize the opportunity ahead. To highlight a recent project win, Amazon Web Services announced in June that it plans to invest more than $10 billion to build a new data center campus in North Carolina. I'm proud to say that our team played an integral role in making this happen. AWS described North Carolina as being the perfect home for this investment and highlighted our efforts in putting the site on their radar. Our team continues to build on their track record of success, moving at pace with our customers to deliver what they need when they need it. To continue to bring in these significant wins in a competitive environment, we are working closely with our stakeholders. During the quarter, we advanced four state and federal policies that enable us to meet the moment for our customers while at the same time supporting our credit profile, improving our regulatory constructs, and maintaining customer affordability. These outcomes show clear alignment between our company and policymakers on shared goals of delivering reliable and affordable energy to meet growing demand. On the federal side, the preservation of nuclear production tax credits in the final budget reconciliation bill was a significant win for our customers. Only well-run, cost-efficient reactors are eligible to receive the credit. Our 11-gigawatt nuclear fleet is the largest regulated fleet in the nation and earned $500 million of PTCs last year for the benefit of our customers. We appreciate the engagement from Congress, the administration, and stakeholders around our shared objective of supporting nuclear energy and lowering customer bills. In North Carolina, the Power Bill Reduction Act became law last week. As we ramp up generation investments to meet accelerating load growth, this legislation allows for annual recovery of financing costs for new baseload generation, supporting our credit profile and minimizing cost to customers. In South Carolina, the Energy Security Act was signed into law in May. The legislation supports our all-of-the-above strategy, recognizing the value of our dual-state system and, importantly, allows Electric Utilities to implement a rate stabilization mechanism similar to our Gas Utilities. This efficient mechanism allows for annual rate true-ups that reduce volatility for customers and support the credit quality of the utility. And finally, the Ohio legislation approved House Bill 15 in May as well. As outlined, the law replaces the electric security plan with a multiyear forward-looking rate-making process, reducing regulatory lag. Beyond legislative accomplishments, we continue to build our track record of regulatory execution. We recently filed rate cases in South Carolina for both Duke Energy Progress and Duke Energy Carolinas. We expect hearings to take place in the fourth quarter, with new rates in effect early next year, if approved. Later this month, we plan to file applications with the North Carolina and South Carolina Commissions and FERC to combine our DEC and DEP utilities. We expect the combination to generate significant customer savings of over $1 billion through 2038, as we simplify processes and add operational flexibility to our system. We are targeting January 27 for the effective date. And finally, we continue to advance regulatory approval processes for new generation investments and plan to file our next Carolinas resource plan in North Carolina by October 1. Focusing on our generation plans. As you can see on Slide 7, we are actively advancing all solutions to quickly meet the increasing demand coming to our service territories, including maximizing our current fleet while we build new capacity. And we're on track to add over 8 gigawatts of dispatchable power across our system through 2031. This includes uprate projects to efficiently increase the capacity of existing natural gas, nuclear, and hydro units. In aggregate, they represent over 1 gigawatt of cost-effective incremental capacity. Turning to new generation. We finalized the EPC agreement for our first combined cycle under development in the Carolinas, and construction is underway. We also announced the site location for the third combined cycle in Anderson, South Carolina. In Indiana, we reached two settlements in our Cayuga CPCN proceeding. The agreements with Reliable Energy and the Industrial Group provide key support for our request, including the request to recover financing costs as they are incurred. Hearings begin later this month, and we expect an order by November. These milestones demonstrate our progress in advancing these critical infrastructure investments. With turbines secured under our framework agreement with GE Vernova and gas supply contracted, we are confident in meeting the in-service timelines we have laid out for these new units. In closing, our strength in the first half of the year was driven by solid execution by our 26,000 teammates. This performance, coupled with our unwavering focus on operational excellence, demonstrates our ability to meet the unprecedented growth we see over the next decade and deliver value for shareholders and customers. With that, let me turn the call over to Brian.

Brian D. Savoy, Executive Vice President and CFO

Thanks, Harry, and good morning, everyone. Moving to Slide 8. We finished the first half of 2025 with another strong quarter, with reported and adjusted earnings per share of $1.25. This is up from adjusted earnings per share of $1.18 in 2024. Within the segments, Electric Utilities and Infrastructure was up $0.10 compared to last year, driven by top line growth from the implementation of new rates across Carolinas, Florida, and Indiana. Partially offsetting these items were higher planned O&M and interest expenses. Gas Utilities and Infrastructure results were flat to last year, consistent with the seasonality of the LDC business. And finally, the Other segment was down $0.02, primarily due to higher planned interest expense. Overall, we are very pleased with the results we've achieved so far this year, which continue to reflect the strength of the regulatory outcomes and the operational performance we have consistently delivered, and we are on track to achieve our targeted EPS and credit objectives for 2025. Turning to Slide 9. Population migration in the Southeast and Midwest continues to drive sustained customer growth, led by more than 2% in the Carolinas. As expected, rolling 12-month volumes moderated in the quarter, driven by a very strong second quarter of 2024, particularly in the residential class. First half results reflect a shift in mix across retail classes compared to our original assumptions. We are closely monitoring these trends but continue progressing toward our 1.5% to 2% volume growth expectations for the year. As we look ahead, we continue to expect load growth to accelerate in the latter years of the plan as large load projects come online and begin to ramp. Our economic development pipeline remains robust, and we continue to take a risk-adjusted approach as we evaluate which projects to include in our forecast. As a reminder, our pipeline includes a diverse mix of customers, including advanced manufacturing projects across multiple sectors as well as data centers. I've talked about how we're streamlining our processes to accelerate economic development projects through the pipeline, and these efforts are yielding tangible results. The $10 billion AWS data center investment in North Carolina is an incredible economic development win for Richmond County and the entire state of North Carolina. The data center will support both cloud computing and AI infrastructure and is expected to create at least 500 new high-skilled jobs. This announcement is a major public milestone for the project, and it highlights our team's continued focus on speed, creativity, and execution as we help move the project through the development process. The site selected for this project was part of our site readiness program, which helps our state, regional, and local economic development partners make potential industrial land more attractive. By identifying sites that already have robust transmission infrastructure and capacity, we could proactively accelerate the timeline of getting power delivery to a site. That strategic groundwork has paid off, and I'm proud of the work the team continues to do to consistently meet our customers' needs. Turning to Slide 10. Proceeds from the minority investment in Duke Energy, Florida, and the sale of our Tennessee LDC business strongly position us for the transformational generation modernization investments ahead. A portion of the proceeds will be used as efficient funding to de-risk our equity plan. And the remaining proceeds will displace long-term debt, materially strengthening the balance sheet. Enabled by these transactions, we announced today that we are raising our long-term FFO to debt target to 15%. This new target will provide a 200 basis point cushion above our Moody's downgrade threshold and 300 basis points above our S&P downgrade threshold. We are also delivering on all credit supportive initiatives and are firmly on track to achieve 14% FFO to debt this year. Focusing on the equity plan, the deal valuations represent significant premiums to our common stock. We'll use about half of the proceeds or $3.5 billion to displace common equity, including funding the incremental capital we're investing in Florida. We expect to issue the remaining $4.5 billion of common equity through the DRIP and ATM programs in the '27 to '29 time frame. Moving to Slide 11. We remain confident in delivering our 2025 earnings guidance range of $6.17 to $6.42 and 5% to 7% earnings growth through 2029. Proceeds from the accretive transactions solidify our credit profile and provide further confidence in our potential to earn at the top half of the range as load growth accelerates in the back end of the plan. Along with supportive legislation in place and our track record of constructive regulatory outcomes, we are well positioned to achieve our growth targets, which combined with our attractive dividend yield, provide a compelling risk-adjusted return for shareholders. With that, we'll open the line for your questions.

Operator, Operator

Our first question comes from Julien Dumoulin-Smith from Jefferies.

Julien Patrick Dumoulin-Smith, Analyst

Absolutely. Maybe just to kick it off here a little bit. I mean, obviously, a series of constructive data points here, whether it's the Carolinas legislation, the transaction in Tennessee, or now this in Florida. How do you think about this positioning yourself within the EPS CAGR, right? I only see net accretive actions before us. Are there any offsets otherwise said?

Harry K. Sideris, President and CEO

The way I'd look at this, Julien, is this really just gives us even more confidence in our 5% to 7% range that we've mentioned many times before and also gives us confidence in earning in the top half of that range in 2028 and 2029 at the back end of the plan. The $4 billion investment in Florida is going to come in that time frame. So I'd look at all these transactions and this movement as really solidifying us in that range and in the top half of that range towards the back end of the plan.

Julien Patrick Dumoulin-Smith, Analyst

Excellent. Can you provide more details about how the latest Carolinas legislation affects your plan? Specifically, are there any changes to your expectations regarding earned returns or spending? This is a new development.

Harry K. Sideris, President and CEO

Yes. The passage of that bill really enhances the attractiveness for growth in the state. It had bipartisan support, and we definitely support a growing state. And like I mentioned, North Carolina is #1 for business ranked by CNBC. So a lot of good things going on in North Carolina with AWS and other things. So our plan is still intact with the bill. It gives us some credit help with CWIP being able to recover annually. But I would look at it as our plan is still along the same lines of the all of the above that we filed in the multiple RFPs that we've done. We'll be filing another one here this fall and just really looking at all resources that can support the growth that we're seeing in North Carolina, and this bill just helps us manage that, but also manage the customer affordability portion.

Operator, Operator

Our next question comes from Nick Campanella from Barclays.

Nicholas Joseph Campanella, Analyst

I just wanted to ask, this is the second time, I guess, you've done a noncontrolling interest stake in the business. You just did Tennessee. Just how are you kind of thinking about any additional opportunities across the portfolio to just knock out that remaining $4.5 billion? Or are you kind of done here for now?

Harry K. Sideris, President and CEO

The reason we did these deals is they're just very efficient use of equity. So we feel comfortable in what we've done so far. And we also feel comfortable with the equity plans that we've laid out to cover our growth. So I would look at it as for now that we're going to stick and get these transactions done and implementing our plan and continuing our growth trajectory that we have.

Nicholas Joseph Campanella, Analyst

Okay. That's very clear. And then just you're outlining an increased FFO to debt to 15% long term. What's the feedback from the agencies been? And then can you just clarify what year you expect to get to that 15% range? Is it '27? Or maybe you can provide more clarity there?

Harry K. Sideris, President and CEO

Yes. Nick, I'll kick that off and then Brian can add some color. The rating agencies have always been supportive of our metrics at where they were. This is just going to enhance that. We just recently had a meeting in April with them, and they were supportive of our plans, our regulatory outcomes that we have in the states that we serve around storm securitization and storm recovery. Those tools that we have really help them feel comfortable with where we are today at 14%, and they're only going to be more comfortable at a higher level, obviously. Brian, do you want to add anything to that?

Brian D. Savoy, Executive Vice President and CFO

Yes. I would add, Nick, I mean, we have several strategies in play to improve FFO to debt even before these transactions were announced, right? The legislation that Harry just spoke to in North Carolina with quick recovery, the South Carolina Energy Security Act has more efficient and credit positive aspects of the regulation. And in Ohio, the multiyear rate plan structure. It's going to take some time to get those wheels turning. But once they do, there's a more efficient cash recovery. And these transactions kind of give a booster shot to that FFO. So I would say we're tracking really strongly to the 14% this year without any of those things in place, just strong cash flow and execution of the business as expected. And within the 5-year plan, we'll clearly be in the 15%, and we'll refresh the financial plan in February, Nick, with more details as we absorb timing and use of proceeds in a more granular way.

Operator, Operator

Our next question comes from Steve Fleishman from Wolfe Research.

Steven Isaac Fleishman, Analyst

Maybe just following up on the last question. Should we assume you need to kind of complete the Florida sell-down steps to get to the 15%?

Brian D. Savoy, Executive Vice President and CFO

Steve, I would say, as it progresses, maybe not all the tranches, but we need to progress through the deal to be right at the 15%.

Steven Isaac Fleishman, Analyst

Yes, okay. In considering the past, I believe you have provided a general ratio of how much of the increased capital would be funded through equity. Will this change when we look to refresh later this year using these new metrics, or will it remain about the same?

Harry K. Sideris, President and CEO

We've always targeted between 30% and 50% depending on what recovery mechanism we have, and we'll continue to look at that as we refresh our plans.

Brian D. Savoy, Executive Vice President and CFO

And I would add this balance sheet strengthening obviously gives us more flexibility in timing of the equity component of that capital investment and the like. But the 30% to 50% is a good planning range.

Steven Isaac Fleishman, Analyst

Makes sense. And then lastly, just maybe it might be helpful to get a little more color on your views on kind of resource preferences as we head into the next update there. And I guess, specifically, any updates on your thinking on new nuclear?

Harry K. Sideris, President and CEO

Yes, Steve, I'll take that one. We've always had the all-of-the-above strategy. So we look at a wide range of resources, including nuclear. Like we've said many times, we operate the largest regulated fleet of nuclear plants in the country. We think nuclear has a place to play and a lot of promise in the future. But before we go down that path, we're going to have to have some things figured out. We're going to have to have the first-of-a-kind risk, design, supply chain, and workforce resolved for SMRs and even bigger reactors, how we're going to handle that. We're also going to have to have overrun protection from the federal government or others to be able to protect our customers and our investors from any overruns on these projects. And then lastly, we're going to have to have a means to make sure that we're protecting the balance sheet as we're building these facilities. So until we get those items resolved, we're still looking at solar, gas, and upgrading and getting everything we can out of our current assets.

Operator, Operator

Our next question comes from Jeremy Tonet from JPMorgan.

Jeremy Bryan Tonet, Analyst

So maybe following up a little bit here. I appreciate where we are in the Carolinas IRP process. But could you share any high-level thoughts coming into the filing here beyond nuclear? Just wondering if there's any other points you'd like to highlight.

Harry K. Sideris, President and CEO

Yes. We'll be filing that in October. Again, we're looking at all of the above. With the new bill, it takes the 70% of carbon and moves that out. But we've always been focused on reliability and affordability as being kind of the regulators for what we put in our plan. So you'll see a lot of the same that you've seen in the previous IRPs around gas, batteries, uprates that I mentioned earlier as well as continued solar as we move forward. We are looking at nuclear when that makes sense, like I mentioned just a minute ago, but a lot of things will have to be determined before we go forward with that.

Jeremy Bryan Tonet, Analyst

Got it. That's helpful there. And I was just wondering, as far as current load trends are progressing through the quarter, I was wondering if you could provide us just maybe a little bit more detail on what you see on the ground ahead of you that gives you confidence in the full year guide at this point.

Brian D. Savoy, Executive Vice President and CFO

Yes, Jeremy, I'll take that. This is Brian. We anticipated a challenging comparison for Q2 of 2024, as it was a strong quarter with residential growth exceeding 2% and total retail growth at Duke reaching 1.9%. Given that, we expected to be behind where we were in Q2 of 2024. However, some of our larger customers are adopting a very cautious approach. The uncertainties surrounding tariffs and tax policy during the quarter are influencing their decisions. These customers are not overproducing; they are focusing on fulfilling their firm orders. We are maintaining close communication with these customers, and we believe that once some of these uncertainties are resolved—particularly the progress made on tariffs recently—they will gain more confidence in their supply chains and associated costs. We are currently tracking growth in line with our estimate of 1.5% to 2% for this year, and we view this situation as more of a temporary challenge.

Operator, Operator

Our next question comes from Anthony Crowdell from Mizuho.

Anthony Christopher Crowdell, Analyst

Just a heads up Mizuho sells sporting equipment. But congrats on the transaction. Just curious on the selection process, why the Florida subsidiary and not Ohio or Carolina or South Carolina? What made the company lean towards the 20% sale in Florida?

Harry K. Sideris, President and CEO

Anthony, good to hear from you. We don't need any sporting goods right now. But we look at our entire portfolio, and we look at where we can get the best value and an efficient use of raising funds and Florida fit that bill. It's a premium asset. And obviously, by our valuation, we got a premium price for it. So it was a natural fit. It's a great jurisdiction to do business in, and I think people realize that, and we had a lot of interest in that.

Operator, Operator

Our next question comes from Carly Davenport from Goldman Sachs.

Carly S. Davenport, Analyst

Maybe just on the Amazon announcement that you mentioned in North Carolina. Can you just provide any color on how we should think about the timing of those investments and the impact it could have on your CapEx expectations? Is that something that we should expect to be included in the capital plan update on the 4Q call?

Harry K. Sideris, President and CEO

Carly, yes, the Amazon deal is a big deal for us. It does have ramping like all these data centers do. So it will start coming in in the '27, '28 time frame, and it will ramp in through the next part of the next decade. We anticipate that they will also look at ways to add to it. Typically, when they build a data center campus, they have plans for longer term as well. So we anticipate some additional items coming in towards the middle part of the 2030s as well from them. But you'll see a ramp, and that will be built into our plans as we do our updates.

Carly S. Davenport, Analyst

Great. Okay. And then just one quick one on the Brookfield transaction. I think you had mentioned that there's an option for them to fund the total investment sooner. Is that something that's just up to their discretion? Or are there any sort of considerations or gating factors there to keep in mind?

Harry K. Sideris, President and CEO

Yes. It is up to their discretion. They do have to do it quarterly, and they have to notify us if they're going to do that. But what we've laid out in our plans is laying out the dates as we've announced with the tranches.

Operator, Operator

Our next question comes from Andrew Weisel from Scotiabank.

Andrew Marc Weisel, Analyst

Congratulations on all the updates and thank you for the information. What motivated these sales? Was it to enhance the balance sheet, to access more CapEx, or something else? I'm curious about what influenced these decisions, particularly since they happened in quick succession.

Harry K. Sideris, President and CEO

Yes. I would say, Andy, we always seek the most efficient ways to fund our growth, and we have significant growth ahead of us. We're adding $4 billion, which allows us in Florida to maximize that opportunity and grow that utility to its full potential. This led us to those fundings, as well as our focus on the generation build and the data centers coming to our states. It provides us an efficient method to fund that growth, supports our balance sheet for the future, and enables us to achieve that 5% to 7% return, particularly in the top half of our plan.

Brian D. Savoy, Executive Vice President and CFO

I want to add that in our capital allocation process, we have been making choices that have limited some of these businesses from reaching their full growth potential. We are confident that Spire will develop the Tennessee business to its maximum capabilities. However, we have had to shift capital from Tennessee to other areas due to the generation modernization effort, as well as focus on Florida. This situation will help us unlock the portfolio we will manage in the future, and it presented a compelling opportunity for capital recycling in both cases.

Andrew Marc Weisel, Analyst

Okay. That makes a lot of sense. Then forgive me if I missed it, but the $4 billion upside to CapEx, is that entirely going to Florida? And if so, can you give us any details on the timing and what types of investments that's going to be going into?

Harry K. Sideris, President and CEO

Yes. That is all in Florida. And I would think about it at the end of our multiyear rate plan, so starting with our next multiyear rate plan, which will be '28 and '29 is when those investments would go in. There'll be grid investments, generation investments, ways to serve our customers better and handle the growth that Florida is experiencing as well.

Andrew Marc Weisel, Analyst

All of the above, more of everything kind of story?

Harry K. Sideris, President and CEO

That's a good way to think about it.

Brian D. Savoy, Executive Vice President and CFO

Yes.

Andrew Marc Weisel, Analyst

Okay. Great. Then one last one, if I may. I see the slides still say targeting a 60% to 70% dividend payout ratio. With a stronger balance sheet and pointing to a little bit faster earnings growth, any thoughts on the pace of dividend growth? Any philosophical tweak to the thinking there?

Brian D. Savoy, Executive Vice President and CFO

Andrew, we like the growth the last couple of years. Our Board has approved a 2% growth in the dividend. We feel like that's appropriate given the capital allocation and investment cycle we're attacking into. So we will continue to drive down the payout ratio as that level of dividend growth remains through the planning period.

Operator, Operator

We currently have no further questions. At this time, I'd like to hand back to Harry Sideris for some closing remarks.

Harry K. Sideris, President and CEO

Thanks, Sammy. I just wanted to wrap up today's call by saying we're entering the second half of the year with strong momentum, a very clear strategy, and a team that continues to deliver. We have materially improved our credit profile, and our financial results reflect the strength of our business and the outcomes we have achieved. We're very confident in our ability to meet the evolving needs of our customers while delivering long-term value to our shareholders. I wanted to thank you again for joining us today and for your investment in Duke Energy. Thank you.

Operator, Operator

This concludes today's call. We thank everyone for joining. You may now disconnect your lines.