Duke Energy, representative of monopoly energy companies

Duke Energy

Features of Duke Energy

A regulated monopoly

Duke Energy (NYSE: DUK ) is a regulated monopoly. For investors who may not be in North Carolina, who is Duke Energy, and what does a regulated monopoly position mean for investment?

Duke Energy enjoys a legal monopoly from North Carolina. With very few exceptions, state law does not allow third-party vendors to sell electricity at all. For example, solar companies cannot directly sell their products because Duke Energy controls the distribution and transmission infrastructure. In exchange for the ability to control that market, the government steps in and regulates prices and regulates the amount of profit that a company like Duke Energy or another type of utility can generate. So they want to make sure Duke Energy doesn’t use that monopoly power to hurt consumers and charge exorbitant prices.

Power Generation Ratio of Various Energy Sources

Duke Energy, they are engaged in power generation business, coal, natural gas, nuclear power plants, 45% come from natural gas and fuel oil. Only 2% is currently used for hydro and renewable energy. One would think that over time the share of electricity generation from renewable sources should start to increase. But even nuclear power generation is actually only 35% of its business.

Market capitalization is equal to company’s liabilities

They are relatively diverse across the energy spectrum. The current market value of Duke Energy is about $76 billion, but coincidentally, Duke Energy is also saddled with $76 billion in debt. The company owes a lot of debt. The high debt is because building a utility generating facility is extremely expensive, with considerable costs involved. There is a constant need for companies to issue different types of bonds in order to continue to provide the business with sufficient funds for capital expenditure plans.

Business and Capital Indicators

Revenue and Dividends

28 billion revenue, 4 billion operating income, 96 quarterly cash dividends, and the current yield is 4%. For those looking for a healthy dividend that increases over time, Duke Energy is really interesting, and it trades at a relatively low price-to-earnings ratio. We’re actually trading or only around 17 times, probably forward earnings, which isn’t necessarily unique in this industry, most utility energy companies trade around 17, 18, 19 times forward earnings. It’s not unique in this regard, but its multiple is relatively low compared to other more growth investments.

Competitive Advantage

When we think about multiples, we think about other energy companies in this space. How competitive is Duke Energy? It has no competitors in North Carolina, but does it have competitors across the industry and other geographic areas?

To an extent, but they do have a monopoly on their main business. When you look at valuations, you can’t really look at competitor valuations, which we typically do if we do a relative valuation analysis rather than an absolute valuation analysis.

P/E and Yield Rate

So in this case, it’s hard to do because there’s no competition, but you can look at similar companies across the country. Examples include other diversified energy businesses, other electric utilities, etc. These companies are currently trading at a median forward PE ratio of around 18, with Duke Energy currently trading at around 17, 17.5 times earnings. Duke Energy does have a 4% dividend yield. Many power companies also offer decent dividend yields, but not necessarily as high as 4%. But that’s not the real competitive advantage you see, it’s similar companies.

The role of regulation

How to value?

Because this is the only power provider in North Carolina. Duke Energy operates in a truly highly regulated market. But does the North Carolina statute change how we evaluate it?

Determine the company’s profit level

Yes, because it affects the company’s ability to grow profits. They often can’t grow profits the way growth companies or technology companies can. This has the advantage that since they are regulated, they are more predictable. Price increases are regulated, growth is regulated. When you look ahead, you get a better idea of how much a company like Duke Energy might make in the next three to five years.

Performance is easy to predict

As with any company, there are supply and demand characteristics. The demand for energy ultimately affects the profits they generate. There is indeed some variability, but far more than the variability of an average company producing products and services dictates the prices the market will bear, hoping that supply and demand will work in their favour. Duke Energy is more regulated and therefore more predictable.

Duke Energy
credit: Duke Energy

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