Duke Energy’s (NYSE:DUK) U.S. Franchised Electric and Gas (USFE&G) business had a reasonably good 2013 despite sluggish load growth and relatively mild weather. The division’s operating margins have seen some improvement owing to rate increases as well as due to synergies relating to the merger with Progress Energy. Below we provide a brief overview of some of the factors that we believe will drive the performance of the company’s USFE&G division going into 2014. 
Trefis has a $74 price estimate for Duke Energy, which is roughly 7% ahead of the current market price.
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Effect of 2013 Rate Increases Will Be More Pronounced: About 85% of Duke’s revenues come from regulated services in the United States. The outlook for load growth in the electric utility industry is relatively sluggish given the increasing focus on energy conservation, and during the first 9 months of 2013, Duke’s USFE&G division saw its total load rise by just about 2% year-over-year. Given the low load growth environment, Duke is dependent on state regulators for rate increases to offset the costs of adding new capacity or upgrading its fleet. Over the last few months Duke’s Ohio subsidiary received approval to increase its rates by around 2.9%, while Duke’s Progress subsidiary in North Carolina saw a 5.5% rate increase. In September, the firm was awarded a 5.1% rate increase for its Duke Energy subsidiary in North Carolina and a 8.2% rate increase for its South Carolina operations. While these rate increases have partially helped the firm’s Q3 2013 revenues and margins, there effect will be more pronounced in 2014 when the company will realize the full benefit.
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Merger Synergies Will Continue To Boost Margins: It has been more than a year since Duke closed its merger with Progress Energy to form the largest electric utility company in the United States. Following the merger, Duke has been able to improve its operational efficiency by eliminating some duplicate functions and reducing its headcount, increasing scale in power generation, renegotiating fuel contracts and combining its dispatch centers. As of Q3 2013, the company said that is has achieved cumulative fuel and joint dispatch savings to the tune of $145 million. The company is on track to achieve around 5 to 7% in non-fuel operation and maintenance savings in 2014, and close to $700 million of fuel and joint dispatch savings in the next 5 years. 
Wholesale Business Could Prove A Bright Spot: The wholesale electricity business entails short-term and long-term contracts to provide electricity to co-operatives and municipalities within the areas in which Duke Energy operates.  Duke expects this business to grow at a rate of around 8% per year over the next two years, which is significantly higher than the estimated 4% revenue growth for the USFE&G division. Duke signed several new wholesale contracts during 2013, most of which are in North Carolina and South Carolina. Since some of these contracts are long term, it should provide additional stability for the company’s revenues.Notes: