By John Downey
A financial analysis group with an environmental bent says Duke Energy (NYSE:DUK) can foot the up to $10 billion bill to change how it stores and processes coal ash without rate increases.
The Institute for Energy Economics and Financial Analysis says in a new report that Duke could pay for the multibillion-dollar cleanup of its ash operations by additional borrowing, using cash from operations or the dividend and by putting off some capital projects.
“Given recent rate increases, Duke Carolina and its parent Duke Energy do not require additional rate relief to offset cleanup costs,” Tom Sanzillo, director of finance for the organization, writes in his new report. “Taken as a whole, cleanup of coal ash sites should not have any material impact on long term stock performance.”
Regulatory issue
Duke replied with a prepared statement that says the report “greatly oversimplifies the requirements and complexities of operating a regulated utility. “The group ignores the company’s legal responsibility to maintain a highly reliable electric system,” the statement says. “The group also fails to accurately consider the negative, long-term financial implications on electric customers of its proposed recommendations.”
Duke’s position has been that modernizing its ash storage and treatment processes is part of the cost of delivering power. Under North Carolina law, it says, those costs are routinely paid by customers and should be in this case.
In an interview, Sanzillo says he believes regulators should require Duke to pay for the changes. His report is meant to prove — to regulators and to shareholders — that Duke can bear the expense without harm to the company.
Dan River
Duke (NYSE:DUK) has 33 coal ash ponds at 14 sites across North Carolina. It announced it would close those ponds and move at least some of the ash to lined landfills in response to massive spill from one of its ponds into the Dan River in February.
Duke has committed to pay for cleaning up the environmental damage from the spill out of shareholder money. But it has announced it would seek to charge customers the cost of overhauling the company’s coal ash storage.
Sanzillo contends that is a false distinction.
“Now that this breach has occurred, the state of North Carolina has reason to be concerned about the ash disposal all across the enterprise,” he says.
“You can argue Dan River is one thing and that the change in ash policy is another,” he says, but he does not think regulators have to accept that. “This becomes in the best sense of the word a political question.”
Many options
Duke has estimated the costs for that overhaul at $2 billion to $10 billion, depending on regulatory requirements and the new storage methods that are chosen.
Sanzillo’s report argues that the parent Duke Energy Corp. and the utility Duke Energy Carolinas have plenty of options for meeting those costs without rate increases.
It says some funds could be come from delaying some capital projects — which total about $21.9 billion over the next three years. Some could be allocated from the planned sale of the company’s Midwest commercial generation fleet — expected to sell for $2 billion to $2.5 billion — and the sale of other assets.
The report contends Duke’s low interest rates and relatively low debt total — compared with industry averages — means there is room to borrow as much as an additional $2.2 billion. And the company could take set aside money from the $7.7 billion in operating cash flow it expects generate over the next three years.
Lower dividends
If necessary, Sanzillo says, the company also could take some of the $6.8 billion in anticipated dividends over the next three years. He says that would likely be a last resort.
Sanzillo contends Duke could easily pay $5 billion out of corporate funds over the next three years to pay for ash pond cleanup. If the costs are close $10 billion, that would be more difficult, he says.
But Duke has said the $10 billion cleanup of its current ash operations would take 30 years. That would require it to bury all its current waste in lined landfills, making the process take much longer. It would take less time if the company could instead just dry the water out of its ash ponds and cover unlined ponds with a waterproof seal and several feet of soil. But that would still take several years.
Safe and proper
Sanzillo says if the cleanup takes more than three years, it becomes even easier for the company to pay those costs without a rate increase.
And he insists that is also the right regulatory result. He contends Duke’s customers have been paying all along for safe, proper disposal of ash waste. He says the Dan River spill, caused by the failure of a pipe under an ash pond at the Dan River Steam Station, shows that the current processes are not safe. Therefore, he contends, Duke should fix it at its own expense.
“The customers have already been paying for a good system of waste disposal,” he says. “If they were not good systems, then the company should pay for them.”
See original story here.
