Duke Energy:
High Quality Utility with Catalysts

Duke Energy (NYSE: DUK) is a fresh money Buy for income-investing expert Roger Conrad’s Conservative Income Portfolio.

Conrad writing in the Conrad’s Utility Investor newsletter noted that back in 2003, Conservative Holding Duke Energy was a sprawling utility conglomerate. Its global portfolio of assets included real estate management, an Ecuadorian wireless phone and Australian natural gas pipelines.

“That’s when management began a long transition back to its regulated electric utility roots, selling assets, paring debt and investing in rate base. And later this year, Duke will finish the journey by selling its commercial renewable energy business, turning the company’s focus squarely on its $145 billion, 10- year utility CAPEX plans.

That includes $65 billion targeted through 2027, which management now expects to fund without issuing equity. Spending is already largely approved by regulators in the states Duke serves – the Carolinas, Florida, Indiana, Kentucky and Ohio – with the company in late April announcing a partial settlement in its omnibus North Carolina rate case.

Utility CAPEX is the primary driver of the company’s target annual 5 to 7 percent earnings growth, with commensurate dividend growth. And management has now extended that guidance though 2027.

Roughly half planned CAPEX is devoted to renewable energy expansion. The rest will go to grid modernization, including electrifying transportation and upgrading gas distribution utilities that now contribute roughly 10 percent of profits.

Located in five pro-natural gas states with supportive regulators and robust customer growth, these are also possible sale candidates down the road to fund electric utility rate base growth.

Absent an estimated negative impact of 22 cents per share from mild winter weather and stripping out non-recurring credits and charges, Duke’s Q1 earnings per share advanced 13.9 percent from the year ago quarter. Asset expansion was the primary driver, with the company bringing 150 megawatts of solar project into service in Florida this week. And management was also successful controlling costs, with operating and maintenance expense cut – 15.4 percent.

The 26.5 percent Q1 boost in interest expense demonstrates the challenge of controlling finance costs with hefty CAPEX, $5.2 billion of maturing debt through the end of 2024 and $6.9 billion in variable rate borrowings. But conversely, Duke has many levers to pull for substantial debt reduction, including the pending sale of its renewable energy unit and possibly gas utilities.

Success would be a meaningful upside catalyst for the stock. With a still discounted valuation, Duke is a buy up to 100.”

Editor’s Note: Income-investing expert Roger Conrad has covered utility stocks and essential-service companies for more than two decades. Conrad’s Utility Investor maintains 3 model portfolios that are tailored to different risk appetites. His assessment of 200 essential-service stocks, vital statistics and proprietary Quality Grades helps investors gauge the risk associated with each name. Download a sample issue at www.ConradsUtilityInvestor.com.