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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. In early February 2020, the company outlined a new five-year capital plan of about $56 billion, that prioritizes clean energy, grid, and natural gas infrastructure investments.

2. Latest Earnings and Impact of COVID-19
   • Duke Energy reported its Q1 2020 results recently, posting revenues of $5.95 billion, a 3% decline year-over-year, although GAAP EPS remained almost flat at $1.24. The revenue decline was driven partly by weaker revenue from the company's regulated utilities, which saw demand from industrial customers wane amid the COVID-19 pandemic, although this was partially offset by higher residential sales. Things could get worse in the second quarter, as the impacts of the April shutdowns are factored into the company's Q2 results.

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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 $88 in 2019, 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 about $95 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 $100 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 7.8 million in 2019. Going forward, we expect Duke's Number of U.S. Customers to increase at a moderate pace and reach 8.3 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 8 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 51,000 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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