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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 7.1 million U.S. customers. It has approximately 58,000 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. The recent merger with Progress Energy increased Duke Energy's customers in its regulated business from 4 million to 7.1 million.
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 20% higher that of the International Energy division and around 30% higher than the Commercial power business. Total MWh is around 7 times that of the International Energy division. These factors make the U.S. division by far Duke's most valuable division.
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 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 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 its newfound 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 increase rates or expand further.
Increasing commodity prices
Prices of fossil fuels have recovered somewhat since plummeting during the economic downturn. Though they remain low, 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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