Must-know: Understanding Duke’s strategy

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Duke’s focus on the utility business

In recent years, Duke Energy (DUK) made its intent very clear. It concentrates on its regulated utilities—its core business—instead of other areas. The regulated utilities business is Duke’s strength. It generates 86% of Duke’s revenues. This makes Duke’s earnings more stable than unregulated players in the industry—like NRG Energy (NRG) and Calpine (CPN).

Moves

Merger with Progress Energy Inc.

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In 2012, Duke merged with Progress Energy to become the largest power utility company in U.S. It has over seven million customers. Duke’s generating capacity increased to over 57,000 megawatts (or MW)—from 35,000 MW before the merger. Duke wanted to become a larger player in the utility business. It wanted to achieve economies of scale. In addition to a larger customer base, the merged entity also benefited from lower fuel costs and better access to financial markets.

Sale of Midwest commercial generation business to Dynegy

Late last month, Duke offered its Midwest commercial generation business to Dynegy Inc. (DYN) for $2.8 billion. It was part of Duke’s unregulated power generation business in the U.S. The Midwest commercial generation business is a small part of Duke’s assets. However, the sale reflects the company’s strategy to exit the volatile unregulated power business.

Adding renewable energy to its portfolio

Duke Energy is committed to renewable energy. It will comply with the government’s strict regulatory norms on emissions. It entered into contracts worth $6 billion to supply renewable energy to its customers.

Last week, Duke announced a $500 million investment in solar projects across North Carolina. This would create the largest solar plant in the eastern U.S.

Mergers and acquisition in the power industry are followed very closely by the Utilities Select Sector SPDR (XLU).

Visit the Market Realist Energy & Power page to learn more about the industry.

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