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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.
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.
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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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