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Investment Overview for Duke (NYSE:DUK)

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1. Expansion of renewable energy services
   • Duke Energy has considerably expanded its renewable energy portfolio in recent years, through the acquisition of REC Solar Corporation and Phoenix Energy technologies. The company's renewable energy businesses include services in non-regulated markets, which is a significant departure from its traditional presence in regulated electricity markets.

2. Passing on tax savings to consumers through lower rates
   • Duke Energy has significantly benefited from the latest tax reform bill and has therefore been determined to pass on these benefits to its customers. The company had announced $38 million in tax savings to be passed on to its customers through its electric and gas bills in Ohio and Kentucky, starting April and May 2018 and has further proposed for lower electric rates across various of its operating regions.

3. Latest Earnings
   • Duke Energy reported revenue of $6.16 billion in Q1 2019, marking a y-o-y growth of 0.5% over Q1 2018. Revenue growth was driven by an increasing customer base due to higher construction activity and improving housing starts, higher pricing power, higher demand for renewable energy, increase in gas utility revenue due to grid modernization, and improvement initiatives of the company, and higher rider revenues. Adjusted diluted earnings came in at $1.24 per share in Q1 2019, lower than $1.28/share in the year-ago period, while reaffirming its 2019 earnings guidance range of $4.80 to $5.20 per share. Lower earnings were driven by unfavorable weather and share dilution, partially offset by growth from investments at the electric and gas utilities.

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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 $68 in 2012 to $84.40 in 2018, 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 $91 per MWh, as energy demand picks up in the wake of an economic recovery and also as the company is awarded new rate increases. However, if rates increase at a faster pace than expected to around $97 per MWh by the end of the forecast period, it would represent an upside of around 9% to our price estimate.
• Duke's Number of U.S. Customer: Duke's Number of U.S. Customers have increased from around 7.10 million in 2011 to around 7.66 million in 2018. Going forward, we expect Duke's Number of U.S. Customers to increase at a moderate pace and reach 8.21 million by the end of the Trefis forecast period. However, if the customer growth rate is lower than expected and this figure rises to only 7.7 million by the end of the forecast period, it would represent a downside of 8% to our price estimate.

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Duke is one of the largest electric power companies in the United States, supplying and delivering energy to approximately 7.7 million U.S. customers. It has over 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.

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Monopoly position

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.

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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 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.

Rising gas prices

Prices of natural gas declined significantly following the shale gas boom in the U.S. Though prices declined considerably in recent years, they have started to pick up from 2017 as a result of improved demand conditions including rising U.S. LNG exports. 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?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. 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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