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Is Duke Energy Transitioning to a Pure-Play Regulated Utility?

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Duke Energy: Segment-wise operating income

Duke Energy (DUK) already generates more than 90% of its operating income from its Regulated business. After exiting its Latin American Generation business and its Piedmont Natural Gas acquisition, Duke’s operating income may become completely dependent on its Regulated business operations. Many utilities are seeking to increase their regulated business as it provides stable earnings and predictable cash flows.

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Regulated utilities

Duke Energy’s (DUK) management is expecting flat operating expenses through 2020, which may bode well for its earnings growth. Duke’s return on equity from its regulated utilities is estimated to grow by 100 basis points, which may uplift consolidated annual earnings by 40 cents.

Among Duke’s diversified customer classes, weaker global economies and a stronger dollar could affect the industrial sector. In particular, metals could negatively impact its operating income. However, in 2016, projections of normal weather can create room for improved earnings from utilities compared to 2015’s earnings drag due to unfavorable weather.

On the other hand, changing crude oil (USO) prices and foreign exchange rates are expected to drive earnings from its international operations. Also, a 1% change in interest rates is expected to change Duke’s consolidated earnings by $0.07.

Duke Energy’s transition over the years

Duke Energy (DUK) is a one-of-a-kind utility in the industry, as it occasionally realigns its business portfolio and improves its risk profile. Its acquisition of Progress Energy in 2012, the timely divestment of weaker merchant generation segments, entering into the regulated pipeline business, and the Piedmont acquisition all have improved Duke Energy’s position to face the sector’s challenges. Duke’s transition toward a 100% core business lowers its risk and supports its improved quality and stable earnings growth going forward.

Duke Energy is a top holding of the iShares US Utilities ETF (IDU) and forms 7.5% of the fund’s portfolio. Among its peers, NextEra Energy (NEE), Dominion Resources (D), and Southern Company (SO) account for 7.5%, 6%, and 6.3%, respectively, of IDU’s holdings.

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