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Duke Energy Ohio, a unit of Duke Energy Corporation (DUK - Analyst Report), has reached a settlement with the Staffs of the Public Utilities Commission of Ohio ("PUCO") over its Jun 2012 request to hike its rates.

Under the latest agreement, the annual increment in revenue for the Cincinnati-based utility is $49 million for an average 2.9% increase in electric bills. This is equivalent to a monthly hike of $3.72 for a normal Ohio residential electric customer. After the necessary permit, the electric rate increases would take effect mid-year. The recourse to rate hike applications is a usual practice by energy companies to recover the huge capital investments they make.

However, the settlement leaves gas rate increases unresolved due to the lawsuits over environmental remediation costs related to Duke Energy’s former manufactured gas plant locations.

Per the approval, PUCO has approved a return on equity (“ROE”) of 9.84% for both the electric and natural gas distribution cases. The approval includes a capital structure of 53.3% equity and 46.7% debt. This is in line with the company’s present capital structure. Duke Energy Ohio has also decided to set aside about $700,000 annually for its low income weatherization and fuel fund.

This rate hike approval will aid the company to recover its investments. Over the last couple of years, Duke Energy has exhausted a substantial amount to improve the natural gas delivery system. This is essential for improving efficiency, cutting fuel consumption and, thereby, lowering the cost of operations.

Recently, another affiliate of Duke Energy Corporation − Duke Energy Carolinas − requested the South Carolina Utilities Commission (“PSCSC”) to make a 15.1% rate increase. If approved, the rate increase is expected to generate $220 million more from the customers.

We view Duke Energy − the largest electric power holding company in the U.S. − as a well-managed and high-quality energy provider in high-growth areas. However, the present unfavorable macro backdrop, predominantly fossil-fuel based generation assets, tepid demand for electricity, and pending regulatory cases keep us on the sidelines.

Duke Energy presently retains a short-term Zacks Rank #3 (Hold). Other stocks worth considering are Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), Edison International (EIX - Analyst Report) and Empresa Nacional de Electricidad S.A. (EOC - Snapshot Report). All of these utility companies carry a Zacks Rank #1 (Strong Buy).
 

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