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Progress Energy Carolinas, a subsidiary of Duke Energy Corporation (DUK - Analyst Report), received regulatory nod from North Carolina Public Staff to increase its base rates. The company had made the request in Oct 2012. However, all issues in the request have not been approved yet.

As per the settlement, the net increase for customers in the first year would come to $151.4 million and an additional $183 million in the second year. Overall, it translates into a 5.7% hike at the end of the second year. The company had originally asked for an 11% or $359 million raise in average retail revenues.

Per the approval, North Carolina Public Staff has approved a return on equity (“ROE”) of 10.2% as against the requested ROE of 11.25%. The approval includes a capital structure of 53% equity and 47% debt. The company had requested a 55.4% equity component. Also, the company will get support for the proposed nuclear levelization accounting and for a new coal inventory rider. This will allow the company to recover carrying costs on coal inventory levels above those included in base rates.

The company plans to contribute an additional $20 million to help low-income customers in North Carolina (NC) to pay their energy bills and provide training to improve the quality of the workforce. Progress Energy Carolinas will thus be permitted to reduce its cost of removal liability by $20 million.

However, there were a few unresolved issues. These include allocation of the overall rate increase among residential, commercial and industrial customers, the company's change to a single coincident peak cost allocation factor, industrial economic recovery rider proposed by the company and resolution of the deferral request for combined cycle units at the Smith Complex in Richmond County, N.C. These unresolved issues are expected to be heard on Mar 18, 2013 in Raleigh by the North Carolina Utility Commission.

The company had requested to get the new rates effective from Jun 1, 2013.

We note that the company’s filing for revenue increase request is neither the consequence of the recent merger with Progress Energy nor does it include recovery of employee severance costs associated with the merger. The primary portion of the base rate is to increase retail revenue while the other components include cost of fuel, energy-efficiency programs and renewable energy investments.

The main reason for the company to file a rate increase is the recovery of 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. Of late, 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.

Duke Energy focuses on core utility operations to build its rate base through capital expenditure investments. Additionally, the company is proactively and effectively mitigating long-term environmental-related risks through investment plans and constructive dialogue with policymakers. 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, and pending regulatory cases. The company presently retains a short-term Zacks Rank #3 (Hold).

Charlotte, North Carolina-based Duke Energy Corporation 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.

Other stocks worth considering are The AES Corporation (AES - Analyst Report), ALLETE, Inc. (ALE - Snapshot Report) and CenterPoint Energy, Inc. (CNP - Analyst Report), all with a Zacks Rank #2 (Buy).

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