On Jun 10, 2013, we maintained our long-term Neutral
Duke Energy Corp.
) based on its diversified portfolio and ongoing expansion
projects. However, unfavorable macro backdrop and predominantly
fossil fuel based generation assets partially offset the
positives. The company currently has a Zacks Rank # 3 (Hold).
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Why the Reiteration?
Charlotte, North Carolina based Duke Energy is a diversified
energy company with a portfolio of domestic and international,
natural gas and electric, regulated and unregulated businesses
which supply, deliver and process energy for customers in North
America and selected international markets. The company's stable
electricity and gas operations will enable it to generate a
relatively steady and growing earnings stream in the future.
The company remains focused on core utility operations to build
its rate base through capital expenditure investments. Of late,
the company has been investing in new plants, retiring older
plants as well as working on modernization of plants to reduce
emissions across its service area. Since 2007, the company has
invested approximately $6 billion in new plants and has retired
up to 6,800 megawatt (MW) of older coal capacity. All the more,
it has invested another $7.5 billion for plant upgrades.
Moreover, Duke Energy is also making investments to acquire
assets that promise profitability. Its recently concluded
acquisition of fellow North Carolina based utility, Progress
Energy Inc. spread the new entity's stable U.S. electricity and
gas operations over 7.1 million electric customers in Carolinas,
Florida, Indiana, Kentucky and Ohio.Post merger, Duke Energy
) to become the the largest U.S. utility. It also helped Duke
Energy to build more power plants to meet future greenhouse-gas
emissions limits. We expect the merger to be a strategic fit and
keep the company's long-term goal of 4-6% earnings growth in good
In Mar 2013, a Duke Energy and American Transmission Co. joint
venture, Duke-American Transmission Co. ("DATC"), entered into a
purchase sale agreement with
Atlantic Power Corporation
). Per the agreement, DATC will acquire Atlantic Power's 72%
interest in the Path 15 transmission line. Pacific Gas &
Electric, a subsidiary of
), has an 18% interest in the project through its ownership and
operation of the connecting Los Banos and Gates substations. The
remaining 10% interest is owned by Western Area Power
Administration, which will continue to operate and maintain the
With a capacity of approximately 1,500 MW of power, the line is
fully integrated into the California Independent System Operator
grid. Moreover, it plays an important role in maintaining
regional electric system reliability and market efficiency.
Looking at the earnings surprise history, the company has
steadily beaten the Zacks Consensus Estimate in the past three
out of four quarters. The average positive surprise in the
trailing four quarters comes to 3.6%.
However, valuation continues to be restrained by the present
unfavorable macro backdrop, fossil-fuel based generation assets,
tepid demand for electricity, foreign currency exchange
volatility, and pending regulatory cases. Thus we believe the
stock will perform in-line with the broader market indices.