Duke Energy (DUK) has declared a quarterly cash dividend of $0.78 per share. The dividend is payable on March 17th, 2014 to shareholders of record by February 14th, 2014. This marks the 88th consecutive year that Duke Energy has paid a quarterly dividend on its common stock. Going forward, I believe that the company has the potential to maintain its history. In this article I will be discussing the key developments that led me to believe in the company's future earnings.
Duke Energy is one of the largest electric power companies in the United States, supplying and delivering energy to approximately 7.1 million U.S customers. The company has approximately 58000 MW of electric generating capacity in the Carolinas, the Midwest and Florida and natural gas distribution services in Ohio and Kentucky.
Approved Rates will come into Effect 2014
The revenues from regulated operations accounted for almost 85% of the company's total operations. As a regulated utility, the company is dependent on the state regulators to increase rates to offset the company's investment for adding new capacity. The company has recently received approval for incremental rate increases during the last few months. The Ohio subsidiary of Duke Energy received an approval to increase its rates by around 2.9%. Similarly, Duke's Progress subsidiary in North Carolina saw a 5.5% rate increase.
During September 2013, the company received a 5.1% rate increase for its Duke Energy subsidiary in North Carolina and an 8.2% increase in the rate for the operations in South Carolina. The approval of incremental rate increases has helped the company to post higher revenues and improved margins during the third quarter but the net effect and full benefit of these approvals will be realized next year.
The company has experiencing low cost operations. It is on track to reduce its non-fuel operations and maintenance savings by 5% - 7% in 2014 and also plans to resume low cost operations going forward. The operational efficiency is mainly supported by the company's merger with Progress Energy. Following the merger, the company's customer base was immensely expanded and offered the chance for better pricing power. Also, the company has been able to eliminate duplicate functions and reduce its headcount.
Source: Investor Presentation
Investor's returns are capped by the state PUC boards unlike in the merchant business in which the electric output is sold to the open market. The typical regulated utility will sell to retail and commercial customers but merchant power producers sell the output to independent power producers, municipalities etc. Due to difference in characteristics merchant businesses are considered to be less risky.
Consistent with the Industry Trends
Duke Energy is planning to sell over 12 plants in the Midwest. The bidding process of the sale is expected to begin early 2014. The sale of these plants is expected to generate proceeds of $1.5- $2.0 billion. The sale proceeds are most likely to be utilized to strengthen the company's regulated operations and to pay off its debt.
The step of scaling down the merchant business is consistent with the current trends in the industry. It will likely benefit the company in the long term as the anticipated lower electricity prices would offset the company's earnings from the regulated operations.
As a regulated utility, Duke does not face serious competition. Going forward, it will be able to maintain its customer base and steadily increasing prices. The company will also be able to maintain healthy margins as it will pass on any increase in input costs to customers.
- Revenue per MWh
Duke has been very consistent in increasing its revenue per MWh from $77.4 in 2008 to $91 in 2013. The increase was mainly due to an increase in the electricity prices backed by an increase in input costs. Going forward, the analysts at trefis.com are expecting revenues per MWh to increase to $103 by the end of 2020.
- MWh per customer
The metrics give us an outlook of electricity demand. Growth in energy usage is highly linked to population growth coupled with the pace of economic activity. A customer mix heavily weighted to commercial customers would lead to higher usage. The MWh per customer of Duke Energy for 2013 was 33.4. However, a consistent increase in residential demand due to population growth and commercial activity will result in an increase in the MWh per customer to 35.2 by 2020. Similarly, the number of customers is estimated to increase at a moderate pace and will reach 7.73 million by the end of 2020.
- Estimated margin improvement
Coal-fired plants are getting phased out due to lower efficiency and to keep up with the rules and regulations of the Environment Protection Agency (EPA). The renovation of old plants coupled with the installation of new plants will help the company to reduce its cost and will result in improved margins.
Duke Energy has been very consistent in paying dividends. It is currently offering a dividend yield of 4.60 percent. The company's forward yield of 4.60% ($3.12) coupled with its ability to continuously increase its distribution over the last several years makes this particular energy stock a highly attractive option. Moreover, the company intends to strengthen its regulated operations further to provide earnings stability and visibility.
Based on the aforementioned arguments I believe that in addition to the stable and regular income stream the company also provides growth opportunity. It has been successfully putting an effort into improving its top line and bottom line growth as well.