Tax reform to stunt Duke Energy earnings, growth rate in 2018, CFO says

Duke Energy Corp. will issue $2 billion in equity this year as it compensates for the near-term hit to earnings and its EPS growth rate caused by federal tax reform.

The Tax Cuts and Jobs Act of 2017 lowers the corporate income tax rate to 21% from 35% beginning in the 2018 tax year.

"The lower tax rate will lower the tax benefit or tax shield at our financing node, our holding company. The tax shield from that debt will decrease from 35% to 21%, so that will hurt earnings a bit there," Duke Energy Executive Vice President and CFO Steven Young said in a Feb. 20 interview shortly before the company's fourth-quarter 2017 earnings call. "Additionally, we plan to issue equity to help maintain our balance sheet and support our existing credit ratings. That equity issuance will cause some dilution of earnings per share, and we've incorporated that into our 2018 numbers."

Duke Energy initiated a 2018 adjusted EPS guidance range of $4.55 to $4.85 with a midpoint of $4.70.

"That's a lower growth rate than where we would've been headed for, absent tax reform," Young said. Duke Energy anticipated a guidance midpoint of $4.83 in 2018.

The company, however, reaffirmed and extended its long-term adjusted EPS growth rate range of 4% to 6% to 2022, anchored to the midpoint of the original 2017 adjusted EPS range of $4.60.

"So, we'll be able to recover from these near-term impacts of tax reform. The main reason we'll recover from that is that our rate base grows in regulatory constructs. As deferred taxes decrease, which they do from tax reform, our earnings base or our rate base will grow," Young said. "We'll be able to recapture those earnings over our five-year plan and return well within our 4[%] to 6% original earnings targeted rate."

Duke Energy expects to return to its guidance range in 2019 and be at the mid to high end of the range in 2020 and beyond.

Young added that Duke Energy will also evaluate how to pass along benefits from the lower tax rate to its customers.

Duke Energy Florida LLC dropped its request to recover $513 million in Hurricane Irma restoration costs from ratepayers as a result of savings from tax reform. The utility will also use some of the benefits from tax reform to offset the accelerated depreciation of aging coal plants.

"That will effectively lower future rate increase requests because those assets, those coal plants, will have a lower book balance in the future," Young said.

Duke Energy plans to implore similar offsets in other jurisdictions, but the method will likely vary.


Young did not confirm or deny Duke Energy's interest in acquiring South Carolina utility Santee Cooper. Duke Energy is one of several private companies that have been mentioned as potential suitors for Santee Cooper, known legally as South Carolina Public Service Authority.

"We can't comment on any M&A activities that might be underway. I would say our first focus point is on our franchise in South Carolina," Young said.

Santee Cooper is a government-owned electric and water utility that also owns land and lakes, which could present a hurdle for a private company.

"They're structured quite differently as a public power entity compared to a private entity such as ourselves," Young said, while acknowledging that there are also consistencies between the companies.

"There are differences and similarities. We're aware of those," he said. "We're monitoring the situation, but nothing specific I can discuss at this point."

The CFO also said Duke Energy does not see a need for M&A as part of its five-year growth plan.

"We have a very solid organic growth plan," Young said. "So, M&A activity does not underpin anything that we have in our plan. We'll always keep our eye on the marketplace, but our organic growth profile is very compelling."