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The leading utility company in the U.S., Duke Energy (DUK) offers high quality earnings as approximately 85% of earnings are generated through regulated operations. I reiterate my 'buy' rating on the stock, as the company has attractive valuations, a solid dividend yield of 4.6%, and a healthy long term earnings growth potential of 4%-6%. Also, the approval of pending rate cases remains a key driver for future earnings growth.

The approvals of pending rates cases and rate base growth fuel earnings growth of regulated utilities, as they recover their investment spending through the filing of a rate increase. Recently, DUK has been able to get approval of several rate increases, which will help the company expand its future earnings. Last week, DUK got an approval from The North Carolina Commission (NCUC) to increase rates by 5.1%, or by $235 million. The allowed 5.1% rate increase is divided into two parts; in the first two years, DUK is allowed to increase rates by 4.5%, or by $205 million, followed by another rate increase of 0.6% or $30 million. Along with the rate increase approval, the commission also approved a return on equity of 10.2%, and a capital structure of 47% debt and 53% equity. Earlier this week, DUK also got the approval of recovery charges from the Florida Public Service Commission (PSC). PSC approved an increase of $0.89 in the company's nuclear cost recovery charges.

DUK has been successful in obtaining approval of rate cases, which remains positive for the stock price and future earnings. Last month, DUK got an approval of a $118.6 million rate increase over a 2-year time period from the Public Service Commission of South Carolina (PSCSC). The recent approval of pending rate cases removed regulatory overhang from the stock.

Following the recent rate case increase of $235 million, Moody's upgraded DUK's long term credit rating. Debt securities worth approximately $22 billion were upgraded by Moody's to Baa1 senior unsecured from Baa2. Two other credit rating agencies, S&P and Fitch, have assigned BBB+ credit ratings to DUK.

DUK has been working to optimize its power generating fleet. Since 2007, DUK has spent $6 billion to expand and improve its generational fleet and infrastructure. Also, the company has been aggressively working to expand its renewable energy portfolio, and has spent approximately $3 billion on solar and wind energy projects. Consistent with the company's plan to strengthen its renewable generational fleet, last week, the company announced to build 2 wind power facilities in South Texas. The two wind facilities are called Los Vientos III and IV Windpower projects. Each facility will produce 200MW of electricity. Construction of the two facilities will begin in the ongoing fourth quarter of 2013. Los Vientos III and IV are expected to be in service in early 2015 and mid-2016, respectively.

Final Words

The optimization of the power generation fleet, approval of pending rate cases in the future, and rate base growth are key stock price catalysts for DUK. Also, the company offers a solid dividend yield of 4.6%, which makes it an attractive investment prospect for income-seeking investors. Moreover, the stock is trading at attractive valuations in comparison to its peers. DUK has a cheap forward P/E of 14x in contrast to its peers' average of 14.2x. The company also has an attractive P/BV of 1.15x as compared to its peers' average of 1.5x. Therefore, I reiterate my 'buy' rating on the stock.

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Source: Yahoo Finance and Calculations

Source: All Signs Go For Duke Energy's Bright Future