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Progress Energy Carolinas, a subsidiary of Duke Energy Corporation (DUK - Analyst Report) has filed for annual base revenue increase of 12% or approximately $387 million with North Carolinas Utilities Commission ("NCUC"). The increase is the result of low-emission power generation and higher operating expenses.

If the NCUC approves the rates, the rates would increase more for residential customers in comparison to commercial and industrial customers. However, a consequent change in the portion of retail rates that pays for energy-efficiency and demand-side management programs would reduce the revenue request to approximately 11.0% or $359 million per year.

For an average residential customer using 1,000 kilowatt-hours (kWh) per month, total net increase would be 14.2% to $119.94 from $105.15. This includes an increase in the standard customer charge from $6.75 to $13.50 per month. However, the average net increase for commercial and industrial customers would be approximately 9%.

Current allowed ROE in North Carolina is 12.75% and this request would result in an allowed return on common equity ("ROE") of 11.25%. From the date of hearings to the final decision, North Carolina retail rate base is expected to be approximately $6.9 billion. If approved, then the filing requests new rates will be effective from mid-2013.

Of late, the company had been planning for this revenue increase request. It is neither the consequence of the recent merger nor does it include recovery of employee severance costs associated with the merger. The primary portion of base rate is retail customer rates. The other components are cost of fuel, energy-efficiency programs and renewable energy investments.

The main reason for the company to file a rate increase is its investments for the modernization of the power system. Progress Energy Carolinas is retiring and replacing 12 coal-fired units at five sites in the Carolinas with low-emission and natural gas-fueled combined-cycle plants. Over the last 16 months, the company has invested more than $1.3 billion and has brought on-line two gas-fueled plants in Richmond and Wayne counties. One more combined-cycle plant is under construction near Wilmington in North Carolina and is expected to be completed in late 2013.

This is the first rate increase filing after 1987. Since then, the company has invested approximately $11 billion in the power systems. Over the last two decades, the company has invested in a number of additional gas-fueled power plants and has made significant investments in the transmission and distribution systems.

Effective July 2, 2012, Duke Energy had merged with Progress Energy Inc. (“PGN”). The recently merged company includes two N.C. utilities, Progress Energy Carolinas and Duke Energy Carolinas. However, this request will affect the customers of Progress Energy Carolinas. In 2013, Progress Energy Carolinas is also planning to file a base rate request in South Carolina. Also, Duke Energy Carolinas intends to file general rate cases in both Carolinas in the near term.

Though the company has filed for rate increase, it keeps itself committed to mitigate the effects of increased electricity costs on its customers with the help of energy-efficiency programs and assistance for low-income customers. Over the last three years, the company has developed more than a dozen new energy-efficiency programs that have helped the customers in saving more than 357 million kWh. This is equal to the annual energy consumption of 25,000 households. The company has also been assisting its customers through payment plan options and Energy Neighbor Fund to mitigate rate increase effects.

Moreover, this merger would benefit the Carolinas customers by $650 million in guaranteed savings. Moreover, by making the utilities more efficient in day-to-day operations, it would offset the impact of future rate increases.

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.

Duke Energy Corporation’s U.S. electricity and gas operations spread over the Carolinas, Florida, Indiana, Kentucky and Ohio generate a relatively stable and growing earnings stream. Going forward, its key growth drivers include its recently concluded merger proceedings with Progress Energy paving the way for the largest U.S. utility. In addition, the company’s strong balance sheet, and ongoing capital expansion projects add visibility to the story.

However, we prefer to remain on the sidelines due to the present unfavorable macro backdrop, predominantly fossil-fuel based generation assets, tepid demand for electricity, a sudden change of its CEO and pending regulatory cases. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

The company mainly competes with PPL Corporation (PPL - Analyst Report) and American Electric power Co. Inc. (AEP - Analyst Report).

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