Duke Energy Shutters Coal Plant, Open Renewable Window

Last week Duke Energy (DUK:  NYSE) closed its coal plant at Asheville, North Carolina.  In operation for over five decades, the plant with its tall smoke stacks had been a lightning rod for climate activists and proponents of renewable energy.  Shuttering of the Asheville plant is the company’s ninth plant closure and appears to be a critical step in returning Duke to its roots as a renewable energy company. 

Wateree Hydro Station, South Carolina

It is often overlooked that Duke was initially a hydroelectric utility.  The company’s first power produced alongside the Catawba River flowing through the Carolinas was sold to new textile plants springing up along the eastern seaboard.  Duke is now the owner of some of the longest running hydroelectric power plants in the U.S., including the Bridgewater Hydro Station on Lake James in North Carolina and the Wateree Hydro Station in Kershaw County, South Caroline.  Both began operation in 1919.  

Duke expanded over the decades, embracing both coal and oil fired technologies.  Its management team was no different than any other in deflecting criticism of its greenhouse gas emissions.  Even after closing the Asheville coal plant, the company still has seven coal-fired power plants in operation and one fuel oil plant.  

Nonetheless, Duke Energy has been a leader in pursuing renewable energy options.  The company was among the first in the U.S. to incorporate solar and wind power sources into its portfolio alongside its historic hydropower plants.  Its portfolio also includes nuclear and pumped-storage hydroelectric renewable energy technologies.  

Duke’s efforts to reduce its carbon footprint make the company an interesting case study for investors.  Duke’s changing financial profile provides investors with an opportunity to observe in real time the transition of a company from ‘carbon crisis culprit’ to ‘sustainable economy soldier’. 

In 2002, one of the earliest years Duke makes available financial performance data prior to its merger with Cinergy in 2006, coal provided 52% of the company’s power production. Nuclear provided 46% and hydroelectric a paltry 2% of the old Duke company’s production.  The company reported the delivered cost of electricity per kilowatt hour at the time was $0.0184 for coal and $0.0041 for nuclear power.  The cost figures help explain the company’s profit margins in 2002.  The portfolio took in $14.8 billion in operating revenue, providing $2.6 billion in operating income, representing an operating profit margin of 17.6%.

Renewable energy was not mentioned once in the company’s financial reports in the 2002 time frame.  It was not until 2006, that Duke first began its renewable energy effort.  Even then a wind farm under development in 2006 received only passing mention in the foot notes.

Duke’s annual report for 2018, reflects the company’s changing power profile.  In that year coal fired plants contributed 24.4% of the company’s total power generation and nuclear had been elevated to 26.0%.  Solar has made its way into Duke’s horizon and was lumped in with hydroelectric power in the company’s reporting scheme.  Unfortunately, even summed together the two constitute only 1.7% of Duke’s power portfolio.  The most significant change in Duke’s power production is the elevation of natural gas and oil fired power sources to 26.2% of the total in 2018.  In other words, Duke’s transformation is mostly a shift from the dirtiest of fossil fuels to another less dirty fossil fuel.

Costs per kilowatt hour in 2018 provide the punch line to Duke’s story.  The cost per kilowatt hour for coal has increased to $0.0282 while the cost of electricity from natural gas and oil sources was $0.0357.  Nuclear has remained fairly stable at $0.0050 per kilowatt hour.  There is still no disclosure on hydroelectric costs.

Even under the new cost dynamic the operating profit margin has increased to 19.2%. In 2018, operating revenue totaled $24.5 billion, providing $4.7 billion in operating income.  The company converted 29.3% of sales to operating cash flow, well above the sales-to-cash conversion rate of the old Duke in the mid teens.   For all the complaints about the heavy burden of air and water quality standards, it appears Duke has found ways to deliver strong value to its shareholders.

Technology may be aiding Duke in shaving costs from its operations.  The Internet provides means to save on customer relationship management.  Location services help keep monitor and track assets.  Combined cycle combustion engines have brought greater efficiency to power production using lower cost, cleaner burning natural gas.   

The cost savings is not coming from frugality in executive compensation.  In 2004, the old Duke paid 0.04% of its sales out as executive compensation for the top four players in its boardroom and its chairman of the board.  In 2018, the new and supposedly enlightened Duke Energy is now paying 0.11% of its sales to occupants of the same four seats.  Duke does not disclose its labor costs separately, so it is not possible to tell if the company is being as generous with its operations personnel as it has been to the ‘suits in the C-suite.’       

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.