Duke’s Core Business To Drive Its Value Going Forward

by Trefis Team
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Duke Energy (NYSE:DUK), one of the largest utility companies in the US, has had a decent run in 2017. Despite the disruption created by Hurricane Irma, the company has maintained a strong operational performance and managed to bring down its costs notably. Consequently, the company expects its adjusted EPS for 2017 to be in the range of $4.50 and $4.60 per share, and aims to grow its earnings at a steady rate of 4%-6% until 2021, backed by its continuous and regulated investments and attractive service offerings in key regions. Thus, in this note we discuss how Duke Energy plans to achieve its earnings growth target in the coming years. We have a price estimate of $84 per share for the company, which is slightly higher than its current market price.

See Our Complete Analysis For Duke Energy Here

Strengthening Its Core Business

Duke Energy earns a major portion of its revenue from generation, transmission, distribution, and sale of electricity to approximately 7.5 million customers in North and South Carolina, Florida, Ohio, and Indiana. Thus, it derives a large chunk of its total valuation from its Electric Utilities and Infrastructure division. According to our estimates, the division accounts for more than 80% of Duke’s valuation. Hence, it is rational for the company to try and build on its core strength.

At its recent investor meeting, Duke Energy announced its plans to invest around $3 billion over roughly the next 10 years in South Carolina to strengthen the energy grid in the region, while boosting the state’s economy in the coming years. The program, known as Power/Forward Carolinas, will include upgrades that will safeguard the existing systems against storms and outages, and protect it against cyber attacks and physical threats. More specifically, the initiative will allow Duke to better serve its customers by:

  • Shifting targeted power lines underground to help reduce outages;
  • Enhance grid technologies to self-identify problems and reroute power, decreasing outage numbers and duration;
  • Advance smart metering infrastructure to enable more bill-lowering tools;
  • Protect against physical and cyber-security threats and keep the grid safe; and
  • Support the sustainable growth of renewable energy and emerging technologies.

The South Carolina initiative is an extension of Duke’s North Carolina one, announced earlier this year. The previous initiative was a $13 billion, 10-year project aimed at modernizing the state’s electric system. The program had similar objectives to the recent South Carolina initiative, such as strengthening the system against storms and outages, and making it safer and more resilient against cyber-attacks and physical threats, while boosting the economic growth in the region. Both these programs together are expected to reinforce Duke’s presence in the North and South Carolina region and enhance its top-line growth going forward.

Apart from strengthening Duke’s core business, the new program will also generate jobs and stimulate economic growth in the region. Based on the findings of University of South Carolina Research economists, the initiative is expected to generate 3,300 jobs per year, translating into $315 million in new salaries and wages each year. Further, it is likely to result in a tax revenue of more than $116 million in new tax revenue for the state and an economic output of more than $5 billion over the next decade. Given the positive impact of the programs on the society, we expect Duke’s influence, and in turn, customer base, to improve sizeably in the region, boosting its revenue from its core business division.

In addition to the investment programs in the Carolina region, Duke recently announced its plans to install 13 megawatts (MW) of batteries, spread across 2 sites as part of its Western Carolinas modernization project. The company further aims to install a 5-MW battery in Indiana as part of its micro grid at Camp Atterbury. Since Duke is actively investing to strengthen its core business, we expect its core electricity generation and transmission business to continue to drive the majority of its value in the coming years.

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