On Jun 10, 2013, we maintained our long-term Neutral recommendation on Duke Energy Corp. (DUK - Analyst Report) based on its diversified portfolio and ongoing expansion projects. However, unfavorable macro backdrop and predominantly fossil fuel based generation assets partially offset the positives. The company currently has a Zacks Rank # 3 (Hold).
Why the Reiteration?
Charlotte, North Carolina based Duke Energy is a diversified energy company with a portfolio of domestic and international, natural gas and electric, regulated and unregulated businesses which supply, deliver and process energy for customers in North America and selected international markets. The company’s stable electricity and gas operations will enable it to generate a relatively steady and growing earnings stream in the future.
The company remains focused on core utility operations to build its rate base through capital expenditure investments. Of late, the company has been investing in new plants, retiring older plants as well as working on modernization of plants to reduce emissions across its service area. Since 2007, the company has invested approximately $6 billion in new plants and has retired up to 6,800 megawatt (MW) of older coal capacity. All the more, it has invested another $7.5 billion for plant upgrades.
Moreover, Duke Energy is also making investments to acquire assets that promise profitability. Its recently concluded acquisition of fellow North Carolina based utility, Progress Energy Inc. spread the new entity’s stable U.S. electricity and gas operations over 7.1 million electric customers in Carolinas, Florida, Indiana, Kentucky and Ohio.Post merger, Duke Energy dethroned Chicago-based Exelon Corporation (EXC - Analyst Report) to become the the largest U.S. utility. It also helped Duke Energy to build more power plants to meet future greenhouse-gas emissions limits. We expect the merger to be a strategic fit and keep the company’s long-term goal of 4–6% earnings growth in good stead.
In Mar 2013, a Duke Energy and American Transmission Co. joint venture, Duke-American Transmission Co. (“DATC”), entered into a purchase sale agreement with Atlantic Power Corporation (AT - Snapshot Report). Per the agreement, DATC will acquire Atlantic Power’s 72% interest in the Path 15 transmission line. Pacific Gas & Electric, a subsidiary of PG&E Corp. (PCG - Analyst Report), has an 18% interest in the project through its ownership and operation of the connecting Los Banos and Gates substations. The remaining 10% interest is owned by Western Area Power Administration, which will continue to operate and maintain the line.
With a capacity of approximately 1,500 MW of power, the line is fully integrated into the California Independent System Operator grid. Moreover, it plays an important role in maintaining regional electric system reliability and market efficiency.
Looking at the earnings surprise history, the company has steadily beaten the Zacks Consensus Estimate in the past three out of four quarters. The average positive surprise in the trailing four quarters comes to 3.6%.
However, valuation continues to be restrained by the present unfavorable macro backdrop, fossil-fuel based generation assets, tepid demand for electricity, foreign currency exchange volatility, and pending regulatory cases. Thus we believe the stock will perform in-line with the broader market indices.