Duke Energy Earnings: North Carolina Outcome Supportive of Improving Regulatory Environment

We are maintaining our $105 fair value estimate for narrow-moat Duke Energy DUK after the company reported third-quarter adjusted earnings per share of $1.94 compared with $1.78 in the year-ago period.

Management narrowed its full-year EPS guidance to $5.55-$5.65 from $5.55-$5.75. Its long-term 5%-7% annual earnings growth expectation through 2027 is unchanged. We expect the utility to achieve the midpoint of that growth range.

While Duke has erased its valuation discount to peers and now trades in line with the sector’s 16 median price/earnings, we think it should trade at premium, given its better-than-average regulation and clear sight into its fully regulated five-year $65 billion capital investment plan. The company’s 4.5% dividend yield is a 60-basis-point premium to the group, though we expect dividend growth to trail earnings growth, given Duke’s higher payout ratio.

Supporting our view of Duke’s improving regulatory environment is the critical positive decision in the Duke Energy Progress North Carolina rate case, the first underperformance-based legislation. The subsidiary received a 9.8% allowed return on equity, above its utility peer median, and a 53% equity capital structure. This is a notable increase from its current 9.6% allowed ROE and 52% equity capital structure. The decision also supports capital investment at the utility.

Duke Energy Carolinas’ rate case in the state remains ongoing, and we expect a similarly constructive outcome. We also view Duke’s Florida and Indiana regulatory environments positively.

Recently filed resource plans in North Carolina and South Carolina support a long runway of growth in the region. The filing maintains optionality to achieve carbon neutrality by 2050 while retiring remaining coal generation by 2035.

Earnings in the quarter benefited from higher customer rates, customer growth, and cost mitigation measures, partially offset by higher interest expense.