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Investment Overview for Duke (NYSE:DUK)
Duke is one of the largest electric power companies in the United States, supplying and delivering energy to approximately 7.3 million U.S. customers. It has approximately 50,000 megawatts of electric generating capacity in the Carolinas, the Midwest and Florida, and natural gas distribution services in Ohio and Kentucky. Its commercial and international businesses own and operate diverse power generation assets in North America and Latin America, including a portfolio of renewable energy assets.
Below are key drivers that present opportunities for upside or downside to the current Trefis price estimate for Duke:
- Duke's U.S. Revenue per MWh: Duke's U.S. revenue per MWh increased from around $83 in 2009 to $86 in 2014, largely due to an increase in energy prices, reflective of an increase in input costs. We anticipate Duke's U.S. Revenue per MWh to increase steadily throughout the Trefis forecast period to over $100 per MWh, as energy demand picks up in the wake of an economic recovery and also as the company is awarded new rate increases. If Duke's U.S. revenue per MWh increases to $110 by the end of our forecast period, there could be a marginal upside to the Trefis estimate. On the other hand, if the figure decreases to $80, it represents an approximate 30% downside to the Trefis estimate for Duke.
- Duke's Number of U.S. Customer: Duke's Number of U.S. Customers has increased from around 7.10 million in 2011 to around 7.30 million in 2014. Going forward, we expect Duke's Number of U.S. Customers to increase at a moderate pace and reach 8.4 million by the end of the Trefis forecast period. If the number of customers in the U.S. rises to over 9 million by the end of our forecast period, there can be a 10% upside to our price estimate for Duke. On the other hand, if the figure stays flat at around 7.4-7.5 million, there could be a 15% downside to the Trefis price estimate.
Regulated Utilities Division enjoys strong revenue per MWh
Although the U.S. Franchised Electric & Gas and International Energy divisions have similar profit margins, the revenue per MWh for the U.S. division is nearly 30% higher that of the International Energy division and around double that of the Commercial power business. Total MWh is around 7 times that of the International Energy division. These factors make the U.S. division the most valuable division for Duke.
As a regulated utility, Duke essentially faces no competition in its markets. Accordingly, it has been able to maintain its customer base while steadily increasing prices. Going forward, we believe that the company should be able to pass on increases in input costs to consumers which will allow it to maintain its healthy margins.
Progress merger increased scale
The acquisition of Progress Energy, completed in July 2012, greatly increased Duke's scale and customer base. The company is now the largest utility in the U.S. The company should be able to realize substantial synergies from the merger which will improve its margins. However, we expect significant regulatory scrutiny going forward as a result of the combined entity's new found scale in addition to the controversy surrounding the management changes upon the closing of the acquisition. We expect that the company will face significant regulatory roadblocks when trying to expand further.
Low commodity prices
Prices of fossil fuels have declined significantly following the shale gas boom in the U.S. Though they are low right now, we do expect a long-term increase in prices of coal and natural gas, key inputs for electricity generation. This will result in higher costs of production for Duke. If the company is unable to pass these costs along to customers in the form of higher rates (due to regulation) it will impact margins.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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