Morningstar | Duke Completes North Carolina Regulatory Calendar; Reports 2Q Earnings
We are reaffirming our $87 per share fair value estimate and stable, narrow-moat ratings after Duke Energy reported second-quarter operating earnings of $0.93 per share compared with $1.01 in the same year-ago period. Management reaffirmed 2018 earnings guidance of $4.55-$4.85 per share, in line with our expectations. Management reaffirmed its 4%-6% growth rate target through 2022, also in line with our 5% forecast. Duke Energy remains one of our most attractive utilities, trading at a 7% discount to our fair value estimate and 4.5% dividend yield.During the quarter regulators took a harder line on Duke Energy Carolinas' rate case outcome, but overall the outcome allows for continued investment in the area, supporting capital growth in the region. The company took a special one-time $136 million charge in the quarter related to regulators denying recovery of Lee Nuclear Project costs and a $70 million management penalty reducing coal ash recovery. Recovery of remaining coal ash costs are deferred over five years at the company's cost of capital. Future recovery of coal ash costs will be done through normal rate cases, which we include in our forecasts. The rate case allows for a 9.9% allowed return on equity, slightly above the peer average. Constructive outcomes on the treatment of tax reform should allow the company to attain its 15%-16% FFO/debt a year earlier in 2019.
The Atlantic Coast Pipeline remains on track for an end-of-year-2019 in-service date, a key component of the company meeting our earnings growth target. Other large capital projects, such as the Citrus County combined cycle gas turbine and Western Carolinas modernization project, remain on track.
For the quarter, the lower interest tax shield, higher depreciation, and increased operating expenses had a negative impact on earnings. Partially offsetting these negatives were warmer weather and incremental revenue from the Duke Energy Progress rate case.
For further detailed analysis of Duke Energy, please see our April 2018 report "Duke Energy's 3G Value Plan: Green, Gas, Grid."
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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