EUR 850.00 For Business Accounts Only

Morningstar | Duke Energy's Focus Remains on Regulation in Carolinas as It Reports 1Q Earnings

We are reaffirming our $88 fair value estimate and stable, narrow moat ratings after Duke Energy reported first-quarter operating earnings per share of $1.24 compared with $1.28 in the same year-ago period.

Management reaffirmed its 2019 EPS guidance of $4.80-$5.20, in line with our estimates. Higher customer rates and investment at the regulated utilities offset earnings drag from unfavorable weather and share dilution in the quarter.

We continue to watch legislation in North Carolina that would improve the state's regulatory framework. Identical bills recently were introduced in the Senate and House and already passed in the Senate. Key parts of the legislation would allow regulators to consider multiyear rate plans, bands for allowed returns on equity, and storm cost securitization. We view North Carolina's current regulatory framework average at best.

In April, North Carolina environmental officials ordered Duke to excavate all low-priority coal ash basins in the state. Duke estimates this could increase state coal ash basin costs by $4 billion-$5 billion over decades, including $200 million-$400 million during the next five years. This is relatively small in Duke's $40 billion five-year capital expenditure plan, but its ability to recover those costs from customers and manage its growth capital plan could affect our fair value estimate.

In South Carolina, we expect a final rate case decision in the coming weeks. State regulators' recent directives were concerning. A lower 9.5% allowed return on equity would reduce rates despite a higher 53% allowed equity. The allowed ROE would be one of the lowest in the United States. A less constructive regulatory environment could lead management to direct capital investment to its other utilities.

Management reaffirmed the $7.0 billion-$7.8 billion cost estimate for the Atlantic Coast Pipeline, but we wouldn't be surprised if costs went higher. This could result in a fair value estimate cut.

The ACP partners--Duke, Dominion Energy, and Southern--are working to address environmental concerns and orders, which we think could push back the completion date or raise costs. We continue to believe the project will be completed, given the economic benefits it will bring to the region through lower gas prices.

If costs do rise, we expect the ACP partners will be able to adjust pipeline capacity contracts to recover the additional environmental costs. However, we also expect regulators could consider lower allowed returns to offset the rising costs. Lower returns would lower our fair value estimates.