The Power of the Balance Sheet

Power company Duke Energy outperformed the utility index despite a drop in sales volume and a pending regulatory approval. CFO Lynn Good preaches the virtues of a strong balance sheet during a downturn.

During the second quarter, sell-side analysts noted, the stock of Duke Energy Corp., the third-largest electric-power company in the United States, outperformed the utility index. Yet in that quarter, Duke reported flat earnings before interest and taxes compared with the same period last year, while sales volume slumped 6%.

Why does the market like Duke? Great execution of the finance strategy and a strong balance sheet, says its new CFO, Lynn Good, who was named to the position in July.

As an electric-power company — with 75% of its business regulated — Duke Energy has strong cash flow, but significant capital requirements. So the challenge is raising capital during a recession, and working to offset the recent decline in sales volume. To that end, CEO Jim Rogers and Good have announced some cost-cutting measures, and explained the company’s strategy of separating its capital needs for the next five years into three buckets: committed capital, so-called ongoing capital, and discretionary capital. According to Good, the bucket strategy keeps the company nimble.

Ongoing capital, which includes maintenance and programs to add customers, provides Duke with some flexibility as to when it can be spent. Discretionary capital, which affords the company even more flexibility in terms of timing expenditures, “allows us to respond to trends in our businesses by either delaying or not spending the dollars,” noted Good in a recent earnings call.

As a power-industry veteran, Good, 50, knows quite well which capital levers to pull and when, and no doubt a slow economic recovery will put her to the test, although her background could not have better prepared her for the task. Before being named finance chief at Duke Energy, she spent 18 months as president of the company’s nonregulated business, which includes power generation in the United States and Latin America as well as the telecommunications and renewable energy units.

Good’s electric-power roots can be traced back to the early days of her career. After graduating from Ohio’s Miami University, she signed on as an auditor with Arthur Andersen and was soon assigned to electric-power company clients. After being named a partner at Andersen, Good moved to Deloitte & Touche in 2002 before making the leap into the industry as vice president of financial-project strategy for Cincinnati-based Cinergy. She quickly was named controller, and in two years’ time was appointed CFO of the company.

Duke Lynn Good“In this environment, the reductions are prudent. Costs are the one thing we can control. We don’t control the weather. We don’t control the economy. But we can be good stewards of our resources.”Duke Energy CFO Lynn Good

Within a year, everything changed. In April 2006, Cinergy merged with Duke, and Good was tapped to be treasurer, paving the way for her recent appointment as finance chief. Today, Duke generates $13 billion in annual revenues, and at the end of 2008 reported net income of $1.4 billion.

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