What’s Powering Duke Energy’s Earnings Growth?

by Trefis Team
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Duke Energy (NYSE:DUK), one of the the largest utility holding companies in the United States, expects its earnings to grow by between 4% to 6% over the next 3 years. These forecasts come despite the fact that the broader utility sector in the United States is poised for relatively slow growth going forward, with load growth (normalized for weather) expected to come in at around 0.5% to 1% per year, due to an increasing focus on energy conservation and a middling economy. Below we take a look at some of the other factors that could potentially drive the company’s EPS growth going forward.

Trefis has a $72 price estimate for Duke Energy, which is almost in line with the current market price.

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Operation and Maintenance Costs: Operation and maintenance expenses are one of Duke’s most significant costs, standing at around 25% of revenues, or about $5.9 billion, as of 2013. [1] However, since Duke closed its merger with Progress Energy in mid-2012, it has indicated that it was able to keep these expenses flat, owing partly to better management of its corporate costs. The company now aims to maintain these costs at current levels through 2016 owing to through work eliminations and efficiency improvements, headcount management and reduced use of contract workers. This could possibly help the company expand margins.

Generation Capacity Growth Investments: Duke Energy expects its investments in expanding its regulated fleet to contribute as much as 4% to its earnings growth over the next three years. Some of the possible avenues for this growth include the company’s plans to purchase about 700 megawatts (MW) of stake that the North Carolina Eastern Municipal Power Agency owns in some Duke Energy Progress plants. [2] Additionally, over the next three years, the company says that it expects to invest around $3.4 billion on new generation growth projects in the Carolinas and Florida. [3]

Wholesale Business Should Be Earnings Accretive : The wholesale electricity business entails short-term and long-term contracts to provide electricity to municipalities and cooperatives within the areas where Duke Energy operates. Duke expects this business to grow faster than its broader regulated utility business, with net margins rising by around 6% annually through 2016, owing to some new long term contracts, many of which are located in the Carolinas. Since most of these contracts are long term, they should provide some additional revenue stability for the company. The company expects wholesale net margins to stand at around $1.1 billion for 2014.

Divestiture of Midwest Generation Assets: Duke Energy intends to divest its Midwest electricity generation assets, as it seeks to reduce its exposure to the volatile merchant power business. Prices on the PJM Interconnection market, on which Duke’s Midwestern assets sell their output, have dropped by nearly 50% since 2008  due to lower gas prices and lackluster industrial demand. This has brought about significant volatility in the earnings of Duke’s commercial power business. For instance, the segment’s adjusted earnings stood at around $6 million in Q1 2013 after which they swung to a loss of around $3 million in Q2 and recovered to around $15 million during Q3. The company expects the reinvestment of the sales proceeds, which could stand at between $1.5 and $2.5 billion, to be accretive to earnings (see Why Duke Energy Plans To Sell Its Midwest Generation Business).

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Notes:
  1. Duke Energy Form 10-K []
  2. Earnings Review and Business Update, Duke Energy, February 2014 []
  3. Duke Energy Q4 2013 Earnings Call Conference Transcript, Seeking Alpha, February 2014 []
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