Will Duke Energy Continue To Rely On Electric Utilities And Infrastructure Segment For Its Growth?

DUK: Duke Energy logo
Duke Energy

Electric Utilities and Infrastructure (EUI) has maintained its position as the largest revenue generating segment for Duke Energy (NYSE: DUK), despite growing at half the rate compared to the company as a whole, over recent years. Duke Energy Revenues (shows DUK’s key revenue components) have increased from $22.7 billion in 2016 to $24.5 billion in 2018, growing at a CAGR of 3.8%. During the same period, EUI saw its revenues increase from $21.4 billion to $22.2 billion, at a CAGR of 1.9%.

A] Division Overview

1) What Is On Offer?

  • EUI segment provides retail electric service through the generation, transmission, distribution, and sale of electricity to approximately 7.7 million customers within the Southeast and Midwest regions of the U.S.
  • Also, through various ownership interests and partnerships, Duke is engaged in designing, building, and operating transmission infrastructure.
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Who Is Paying?

  • Apart from residential and industrial customers, electricity is also sold wholesale to incorporated municipalities and to public and private utilities.

Customer Base?

  • The segment’s service area covers about 95,000 square miles with an estimated population of 24 million.
  • It provides services to approximately 4 million residential, commercial, and industrial customers, with over 151,600 miles of distribution lines and a 20,900-mile transmission system.

What Are The Alternatives?

  • The division competes in some areas with government-owned power systems, municipally owned electric systems, rural electric cooperatives, and other private utilities. Some of its competitors are: American Electric Power Company, Exelon Energy Corp, and Allegheny Energy.

You can view the Trefis interactive dashboard – How Important Is Electric Utilities & Infrastructure Segment For Duke Energy? – and alter the assumptions to arrive at your own estimate for the segment’s and company’s revenues and profitability. In addition, here is more Utilities data.

B] Revenue Performance

  • Electric Utilities and Infrastructure division has added close to $815 million to its revenue base from 2016 to 2018, led by higher sales volumes driven primarily by favorable weather in the current year, and increases in fuel rates billed to customers, which reflects higher average fuel prices.
  • Increase in retail pricing was primarily due to the favorable outcome of Duke Energy Progress and Duke Energy Carolinas North Carolina rate cases and Duke Energy Florida base rate adjustments.
  • Though revenues were adversely affected in the beginning of 2019 due to hurricane Michael, segment revenue is expected to grow in the near future, led by quick restoration of services and mitigation of storm impact, increase in customer count, increased rates, and higher rider revenue.

C] Largest Revenue Share

  • The division’s share in Duke’s total revenues has declined over recent years, about 94% in 2016 to a little over 90% in 2018.
  • Though, despite a rise in revenues, the segment share is expected to further decline over the next two years, mainly due to healthier growth in gas utilities and renewable energy.
  • However, electric utilities is still expected to contribute around 89% of Duke Energy’s revenues in 2020, with other divisions making only about 11%.
  • Thus, Duke is still likely to depend heavily on conventional electric supply for its revenue growth in the near term.

D] More Profitable Than The Company As A Whole

  • Despite higher revenue, Electric Utilities have lost around $0.6 billion in operating income between 2016 and 2018, mainly due to higher amortization of deferred coal ash costs, increase in fuel used in electric generation and purchased power, increase in operation, maintenance, and other expense primarily due to impacts associated with the Duke Energy Progress North Carolina rate case, and higher storm costs (mitigation of hurricane impact), and higher impairment charges.
  • However, the segment’s operating income margin has historically been higher than the company’s margins, due to higher expense levels in the gas utilities and renewables’ divisions.
  • Segment as well as Duke’s operating income margins are expected to decline further in the near term, due to a continued greater rise in expense level in spite of revenue growth.
  • However, electric utilities will continue to outperform Duke Energy as a whole, with greater operating margins, which would in turn prove to be a saving grace for the company due to its other low-margin segments.

E] Conclusion

Trefis estimates Duke Energy to add close to $1.6 billion in revenues over the next two years, out of which a little over $1 billion (62%) is expected to come from Electric Utilities and Infrastructure. As per Duke Energy Valuation (shows valuation analysis) by Trefis, we have a price estimate of $90 per share for DUK’s stock. Thus, due to a slower than expected pick-up in renewables, and gas revenues just beginning to rise, the primary factor for the company to report a healthy revenue growth rate, improved profitability, enhanced shareholder returns, and elevated stock price, is a solid and sustained performance in the Electric Utilities and Infrastructure division.


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