Our rating on Duke Energy Corp. (NYSE: DUK) is HOLD based primarily on valuation. Above the average multiples for comparable electric utilities and the company’s own five-year historical average of 16.2.
The 2012 addition of Progress Energy continues to generate cost synergies, and we see the same with the 2016 addition of Piedmont Natural Gas Co.
On August 10, Duke Energy reported a 2Q20 GAAP loss of $1.13 per share, compared to adjusted and reported EPS of $1.12 in 2Q19. The 2Q20 results reflected costs associated with the abandonment of the company’s Atlantic Coast Pipeline (ACP) project.
Electric Utilities and Infrastructure posted 2Q20 reported and adjusted income of $753 million, down from $809 million in 2Q19. This represents a year-over-year decrease of $0.08 per share, excluding share dilution of $0.01. The decline in O&M reflected lower employee expenses and other cost mitigation efforts in response to COVID-19.
Reflecting the abandonment of the ACP investment. These charges were treated as a special item and excluded from adjusted earnings. On an adjusted basis, Gas Utilities and Infrastructure recognized 2Q20 adjusted income of $50 million, up from $40 million in 2Q19.
On a reported and adjusted basis, the Commercial Renewables segment posted 2Q20 segment income of $90 million, compared to $86 million in 2Q19. The increase was driven by renewable projects placed into service in 2Q20.
The narrower loss reflected lower income tax and unrealized investment gains, partly offset by higher financing costs.
EARNINGS & GROWTH ANALYSIS
The company will report 3Q20 earnings on November 5.
Reflecting the impact of the pandemic, kilowatt-hour sales growth has slowed to an annualized 1.1%-1.2% in 2020, down from a pre-COVID-19 rate of 1.5%-1.6%. However, sales have still grown in four of the company’s five service territories. Looking ahead, we expect Duke to benefit from future rate case filings in North and South Carolina, cost-savings programs, and infrastructure improvements.
FINANCIAL STRENGTH & DIVIDEND
While the company’s plant construction and upgrade schedule will require some external financing, we expect relatively little pressure on the balance sheet. Indeed, the company’s overall financial position has steadily improved. Additional positive factors are the efficiency of the company’s nuclear generating units, which are among the highest-rated in the industry; focused cost controls; high-quality earnings; and balanced regulation. We expect the company to increase its dividend 3.0%-3.5% annually over the next four to five years with a targeted payout ratio of 65%-75%. Our dividend estimates are $3.86 for 2020 and $3.92 in 2021.
MANAGEMENT & RISKS
Lynn J. Good is president and CEO of Duke Energy and the vice chairman of the board. Prior to assuming her current role in July 2013, Ms. Good served as EVP and CFO. Steven K. Young is EVP and CFO, and is responsible for the controller’s office, treasury, risk management, as well as corporate strategy and development. Mr. Young joined Duke Power in 1980 as a financial assistant.
In terms of its nonregulated operations, management decided to lower the company’s profile in the competitive energy business due to relatively low power prices.
Duke Energy, the largest electric power holding company in the U.S., has a market cap of approximately $67 billion, with total assets of more than $151 billion. Its regulated utility operations serve approximately 7.7 million electric customers in six states in the Southeast and Midwest. Including Piedmont, the company now has approximately 1.6 million.
The shares trade at 17.6-times our 2020 EPS estimate and 16.6-times our 2021 estimate, above the average multiples for comparable electric utilities and the company’s own five-year historical average of 16.2. Despite solid fundamentals, including a favorable regulatory environment and an expanding rate base, we see an unexciting total return potential for DUK over the next 12 months.
At the same time, we are maintaining our long-term BUY rating.