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Why Duke Energy Is a Good Investment Despite Its High Valuation

August 08, 2014 | About:

Duke Energy (NYSE:DUK) has been delivering solid results. It has shown strong operational efficiencies by delivering excellent and affordable services to customers. Further, though the company looks overvalued with a trailing P/E of 26.47, its forward P/E of 15.20 and an impressive earnings CAGR of 4.19% indicates that the company can still deliver in the long run. However, Duke might face some problems due to litigations because of coal ash spills in the Dan River. Still, the company is optimistic about its long-term performance.

A solid start

On the financial front, Duke was impressive in the first quarter with EPS of $1.17. Despite challenges and stiff weather conditions, Duke justified its guidance and came up with some remedial action regarding the Dan River spill issues that occurred as a result of accidental discharge of coal ash in the river due to a pipe break under an ash basin in February.

Ash management remains an important area for Duke. The Dan River spill incident has accelerated revaluation of Duke’s ash management strategy. Out of a total of 676 ash basins across the nation, Duke manages 69 of them, which makes it important for it to establish safety practices cost effective measures. Duke is using its engineering expertise to implement both long-term and short-term decisions to retire inefficient ash basins. It has specific plans to retire four basins, including Dan River, Riverbend, Sutton and Asheville.

Duke is expecting its strategies in ash management to be complete by the end of year. The company has a strong capital expenditure plan of $5 billion to $6 billion for pending air, water and waste regulation. Cost recovery is another aspect on which Duke is working. However, the State Utility Commission currently determines cost recovery, but the company is making moves to deliver prudent, environmentally sound, and cost effective solutions.

Better times ahead

Also, Duke was severely impacted by two significant winter storms, which led to about 900,000 outages across the Carolinas. Its employees and workforce suffered a challenging situation due to fallen trees and power lines. However, the company managed to safely deliver restoration services.

Moving on, Duke is seeing benefits arising from the Progress Energy Merger, which took place in 2012. Duke generated about $85 million in fuel and joint dispatch savings from its customers, which was the best outcome since the merger closed in mid-2012. During the first five years of the merger, the company plans to save around $687 million in guaranteed savings.

Duke is also pleased with some important regulatory decisions. In April, the IURC issued its order approving its most recent quarterly fuel adjustment clause, which will help the company improve in this segment. The commission also approved a request by interveners to create a sub-docket to examine negative generation of the site in the fall of last year.

Besides these initiatives, Duke is focusing on various aspects to improve its profitability. It is closing down strategically unfit programs such as merchant generation business, which was announced in February. Moving ahead, Duke’s plan includes 6,100 megawatts of coal and gas capacity serving the PJM wholesale markets as well as the competitive retail business.

Duke’s marketing strategies are on track as well. The company is expecting the redeployment of proceeds to be accretive to its adjusted earnings per share. On the international front, Duke is expecting a lot from Latin America and hydro generation in Brazil, which represents 10% to 15% of Duke’s earnings mix. However, the company is anticipating low reservoirs and higher electric demand, and it has reduced its targeted 2014 contracted percentage for hydro generation.

Duke Energy has also entered into an agreement under which it is building a major interstate gas pipeline in North Carolina, which will help it meet the growing demand for natural gas in that region .


So, despite being expensive, Duke Energy is making good moves that will justify its valuation going forward. As a result, investors should continue holding on to the stock as it can still rise going forward.

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