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When is an asset a liability? – Certainly when it’s a coal ash mountain

We have been struggling to write up the results of Duke Energy since this time last week. It’s not simple. The ostensible numbers are fairly straightforward – revenue for Q1 $6.1 billion; costs $4.79 billion, so operating income of $1.37 billion, and a net profit of $900 million. That’s a 15% net margin, a comfortable performance that does not suggest a business under stress.

And it should stay that simple really – in that it is mostly regulated revenue – if its cost go up, it puts up its prices to counteract that, and it continues to make money. Under $1 billion is unregulated, where it takes on gas and renewables projects and has to find the income for them – in most cases not too much trouble.

The problem is perhaps more acute when you look at its balance sheet. It claims to have current assets of around $9 billion, and total assets of $151 billion. When much of your generation is in coal power plants, and there is currently a staunch, coal loving Republican as President, it is fair to see things as healthy. But there are two things that can change – the President for one, and the climate change regulation that goes with that, and already Duke has a major coal ash problem.

The thing is that it has paid scant attention to renewables – and just $100 million in commercial renewables in its accounts and its recent sale of 49% of its renewable energy portfolio shows that it thinks of renewables as something disposable – you create them, and then sell – not assets for keeping. It just did this with $415 million of assets including 37 wind, solar and battery storage assets and 33% of 11 further solar assets across in the US.

Back to that coal ash problem. Coal ash is held in ponds and landfills at 14 Duke Energy coal power plants, throughout North Carolina and the Department of Environmental Quality says they are all hazardous and need to be excavated. Duke says it should just be able to cheaply cap these, as they only contain ash, but the regulator has tested and found massively unsafe levels of arsenic, thallium and chromium inside the ash. These elements tend to end up in groundwater, and some of it has been found dumped into lakes with no explanation from Duke.

Duke says “great we can harvest those and sell them,” but it has put in an appeal, because just excavating one of these will cost well over $1 billion and the total will be in excess of $10 billion and it wants two things – 1) to not bother, and 2) If it has to bother, it wants to charge its regulated customers. Initial decisions have gone against it and it plans to ask the Supreme Court.

No wonder it could not agree in May to make its political donations transparent – it has to spend $ millions to try to get a good decision on this by buying any President that is going.

Even if Donald Trump wins the next election, he may find himself chastened on the climate change front – unable to make jokes about climate change because voters actually do care about it – and even he may not be able to help Duke.

So take that $10 billion off its balance sheet, then also take off the $19.3 billion of  goodwill it has on its books, from building plants, which it has not yet amortized. Now also take away the $7.3 billion it has set aside for shutting up shop in the nuclear industry – and in total you have crimped some $36.6 billion of its balance sheets assets. It also has $53 billion in debt, so if you had to replay this, you have a negative shift of some $90 billion. That is assets which are not assets, balanced against debts which are all too real.

The company is current worth $64 billion in stock market capitalization, though we cannot see how. If you accept that the world is heading aggressively for a carbon free future, Duke will have to close down virtually all of its coal assets, and they will become overnight unsaleable. They go from being assets, to being liabilities, bleeding the company dry. It is true that legislation cannot leave those customer high and dry, but it could direct Duke to build out renewables, and then it has a cashflow issue – funding $ billions in renewables with debts held against defunct assets.

Had Duke begun 10 years ago to shift its mix to renewables, it would not be where it is today, untrusted, unloved, and one political decision away from disaster.

Instead on its earnings call it said it has plans to modernize its grid, generate cleaner energy, and expand natural gas infrastructure. But by that it means carry on R&D in Carbon Capture and Sequestration, replace coal plants with gas plants, which again will rely on carbon capture, which at present it not working and it has added 400,000 smart meters, so it can introduce remand responses systems soon. It has however filed for the next wave of solar generation projects in Florida. CEO Lynn Good also claimed Duke is working on 1,250 MW of regulated and commercial renewable projects. We shall see.

The problems is that wherever we look at US energy operations we see the same, assets which have goodwill, which are in fact liabilities, and which under another administration would cause them massive embarrassment and renewable efforts at far too low a level. Tick tock.

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