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Duke Energy (NYSE:DUK) is a high quality-regulated utility company in the U.S. I reaffirm my bullish stance on the stock, as it has an impressive dividend yield of 4.80%, attractive valuations (shown below), and has a decent earnings growth potential of 4%-6%.

Rate base growth and the approval of requested rate cases remain important growth drivers for the company. DUK has a good history of achieving favorable approval of the requested rate cases. It has been moving forward in a productive manner with the filed rate cases. Earlier this week, the Public Service Commission of South Carolina (PSCSC) accepted the company's request to increase rates for its South Carolina customers. The approval of the rate case will result in a total rate increase of $118.6 million over a two year period. The recent rate increase of almost 8.2% over the two year period is built on an allowed return on equity of 10.2%, and a capital structure of 47% debt and 53% equity. The company initially requested an annual increase of 15.1%, or $220 million. Despite the fact that the settlement was below what DUK had requested, the outcome does eliminate a regulatory overhang on the stock.

The two year rate increase of $118.6 million includes a first year rate increase of $80.4 million from September 2013, followed by an additional rate increase of $38.2 million starting September 18, 2014. Also, under the arrangement, the company will not be able to implement another rate increase before September 2015. The table below shows the proposed rate increases by customer types.


(Click to enlarge)

Source: duke-energy.com

Optimization and strengthening of power generational portfolio also remains key to the company's future earnings potential, and it has been working to diversify and strengthen it. DUK has been undertaking initiatives to grow its renewable generational sources. Since 2007, the company has spent $3 billion to inflate its generational portfolio of solar and wind. It recently started constructing a solar power project, named the Washington White Post II Solar Power Project. The project is expected to be completed by the end of 2013.

On September 12, 2013, DUK presented at the Barclays Capital CEO Energy-Power Conference. During the presentation, the company's management updated investors on its ongoing cost saving efforts, long term growth drivers, financial objectives, and other important developments.

In relation to merger saving commitments, the company is on track to achieve 5%-7% in non-fuel operational and maintenance savings in 2014, and almost $685 million of fuel and joint dispatch savings over five years. DUK successfully achieved approximately $120 million of fuel and joint dispatch savings in 12 months ending through June 2013.

The company is eyeing long term adjusted EPS growth of 4%-6% through 2015. As more than three quarters of the company's earrings are derived from regulated operations, its regulated segment remains the main earnings growth driver. Continuous investment in regulated fleet is expected to result in earnings base growth of 4% through 2015. Moreover, to improve upon its earnings prospects, the company has been targeting to optimize its international operations. International market operations remain important for the company, as they are contracted businesses, which offer clear earnings potential visibility, offer strong earnings growth, and present earnings diversity for the company.


(Click to enlarge)

Source: duke-energy.com

The company remains committed to delivering its long term financial objectives. DUK anticipates earnings per share growth range to stay between 4%-6% from 2013-2015, along with continuous dividend growth with a 65%-70% target payout ratio. In the recent presentation, the company reaffirmed its EPS guidance range of $4.20-$4.45. Currently, the company is assigned Baa2 and BBB+ credit ratings by Moody's and Fitch Ratings, respectively, and the company's long term financial objectives include maintaining a strong investment grade credit rating.

Final Words

Earnings base growth rate, cost reduction measures and optimization of generation portfolio are the potential stock price catalysts for the company. Also, the company offers an attractive dividend yield of 4.80%. Moreover, DUK is currently trading at attractive valuations in comparison to its peers and industry averages, as shown below in the table.

Forward P/E

P/B

Dividend Yield

DUK

14.20x

1.10x

4.8%

Southern Company (NYSE:SO)

14.40x

2x

4.85%

Consolidated Edison Inc. (NYSE:ED)

14.35x

1.4x

4.4%

Average

14.35x

1.50x

4.65%

Source: Nasdaq.com and Calculations

Source: Duke Energy Outdoes Industry, Looks Ahead To Interesting Future