Morningstar | ACP Costs Rise; Duke Energy Reports 2018 Earnings
We are reaffirming our $87 per share fair value estimate and stable, narrow moat ratings after Duke Energy reported full-year operating earnings of $4.72 per share compared with $4.57 in the same year-ago period. Management's 2019 earnings guidance is $4.80-$5.20.Duke extended its 4%-6% growth rate target one year through 2023. Both are in line with our estimates. We now expect 3.5% annual dividend growth given management's new guidance to be at the midpoint of its 65% to 75% payout ratio. Duke is currently at the high end of that range.
The Atlantic Coast Pipeline, or ACP, was recently dealt another setback after the U.S. Court of Appeals for the Fourth Circuit denied ACP’s motion for clarification on the court’s stay of the revised U. S. Fish & Wildlife Service’s Biological Opinion. Duke now expects ACP to cost between $7 billion and $7.8 billion, up from the previous estimate of $6.5 billion to $7.0 billion. This assumes construction recommences on the full route in the 2019 third quarter and goes into full service in 2021.
We expect the pipeline capacity contracts with subsidiaries of Duke, Dominion, and Southern Company will allow for higher rates due to additional environmental costs, but we also expect there will be regulatory pushback on allowed returns given the rising costs. Our fair value estimate includes our expectation for lowered returns on capital for the project, which we currently estimate at 9%.
For 2018, our largest concern was the regulatory calendar in the Carolinas. Duke ended up receiving constructive rulings supporting our view that the Carolinas will continue to be an average regulatory jurisdiction supporting the company's capital plan. Beyond ACP, investors should focus on management's ability to execute on its five-year $37 billion capital plan.
Duke Energy is a holding company. Through its subsidiaries, the company operates as an energy company. The company's segments include: Electric Utilities and Infrastructure, which provides retail electric service through the generation, transmission, distribution and sale of electricity to customers within the Southeast and Midwest regions of the United States; Gas Utilities and Infrastructure, which conducts natural gas operations, as well as owns, operates and has investments in various pipeline transmission and natural gas storage facilities; and Commercial Renewables, which acquires, develops, builds, operates and owns wind and solar renewable generation throughout the continental United States.
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