DUK 3Q2017: Absent weather effects, DUK is performing to expectations

Reported $1.59 AEPS vs. our $1.76 and consensus’ $1.63. But, adjusting for bad weather including hurricane Irma, DUK would’ve come in at $1.73.
Due to subpar 3Q17 results, we lowered our 4Q17 expectations to fit narrowed AEPS guidance of $4.50-$4.60 from $4.50-$4.70
Macro-economic indicators are turning up and demographics picking-up momentum and now usage/customer is climbing too; we look for these trends to continue
We believe DUK is on track to meet its 4%-6% AEPS CAGR through 2021 thru development of both organic natural gas projects and acquired natural gas businesses, as well as electric infrastructure projects
DUK continues to use regulatory filings to drive growth
We believe another transformative gas-based acquisition is in the making within 12-18 months or by yearend 2018

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DUK 2Q2017 Earnings: DUK isn’t resting on its laurels but working hard to get next gold medal

We overhauled the model to more intricately incorporate Piedmont, which had the benefit of increasing our NIV/Share to $159/share from $148/share. We are increasing our ST-Target to $110/share from $105/share. We still believe DUK will meet or beat the high end of its 2017 AEPS guidance. Target 8%-10% total shareholder return with 4%-6% coming from AEPS growth through 2021 seems conservative. Demographics picking-up momentum and now usage/customer is climbing too; we look for this to continue moving up. Investments in renewables and gas-fired generation helps DUK move away from coal and is right move. We expect DUK to surpass high-end of its 4%-6% AEPS CAGR through 2021 thru development of both organic natural gas projects and acquired natural gas businesses. DUK continues to use regulatory filings to drive growth. We believe another transformative gas-based acquisition is in the making within 12-18 months or by yearend 2018 that would have multiple benefits. Organic growth target for gas business is to increase its contribution in AEPS to 15% from 8% estimated for 2017. We believe this is meaningless. We believe DUK will achieve $850MM cost savings over next 10 years.

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DUK 1Q2017 Earnings Note

But for warm winter 1Q17 would’ve been epic; Executing at high level ||

Disappointing 1Q17 results were due to moderate winter weather; otherwise it was a stellar quarter and would have clocked at least $1.17/share. So, we were not surprised that DUK didn’t raise its 2017 AEPS guidance, but we still believe DUK will meet or beat the high end. Target 8%-10% total shareholder return with 4%-6% coming from AEPS growth through 2021 seems conservative. Demographics picking-up momentum and now usage/customer is climbing too; we look for this to continue moving forward. Investments in renewables and gas-fired generation helps DUK move away from coal and is right move. We expect DUK to surpass high-end of its 4%-6% AEPS CAGR through 2021 thru development of both organic natural gas projects and acquired natural gas businesses. We believe another transformative gas-based acquisition is in the making within 12-18 months or by yearend 2018 that would have multiple benefits. Organic growth target for gas business is to increase its contribution in AEPS to 15% from 8% estimated for 2017. We believe this is a meaningless objective. DUK’s NOL position complicates analysis of tax rate cuts, but should be net positive.

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EIX Initiation Report

EIX: Growth capital should drive valuations higher ||

Continued high levels of capital spending relative to maintenance capex should accelerate valuation and drive dividend payout back to normalized range of 45%-55% from current levels of about 33%. We look for continued capex spending on transmission, distributed generation, electric vehicle (EV) infrastructure, select renewable generation, energy storage, grid modernization, energy efficiency, recovery of remaining investment balance of San Onofre Nuclear Generating Station (SONGS), and recovery of underbalance in power purchase costs. In addition, we look for a positive impact from the 2015 General Rate Case. We believe that GHG regulations will have little to no impact on EIX. We are also heartened by the fact that EIX is investing in another power subsidiary, but based on renewables not fossil-fueled plants. Acquisitions of utilities may be dilutive to valuations due to higher expected growth at SCE versus many utilities outside of California. Decommissioning of SONGS appears to be on schedule and the nuclear decommissioning trust fund (NDTF) appears to be adequate for now. Therefore, we look for valuations to move to the upside over the ST.

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DUK 4Q2016 Earnings Note

Poised for growth in both earnings and dividend; strong strategy ||

We were disappointed that DUK didn’t raise its 2017 AEPS guidance, but doesn’t surprise us that DUK’s being conservative. Target 8%-10% total shareholder return with 4%-6% coming from AEPS growth through 2021 seems conservative. We believe DUK will make more transformative acquisitions on gas-side of business. Demographics picking-up momentum and now usage/customer is climbing too; we look for this to continue moving forward. Investments in renewables and gas-fired generation helps DUK move away from coal and is the right move. We expect DUK to surpass high-end of its 4%-6% AEPS CAGR through 2021 thru development of both organic natural gas projects and acquired natural gas businesses. We’re not excited about potential for industry moving towards cost-of-service gas programs. We believe another transformative gas-based acquisition is in the making within 12-18 months or by yearend 2018 that would have multiple benefits. Organic growth target for gas business is to increase its contribution in AEPS to 15% from 8% estimated for 2017. We believe this is a meaningless objective. DUK’s NOL position complicates analysis of tax rate cuts, but should be net positive.

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DUK 3Q2016 Earnings Note

Setting the stage for stronger growth profile ||

Sale of International completed for $2.4B ($1.2B for Brazil and $1.2B for rest of Lat Am); $1.7B-$1.9B net cash repatriation expected to pay for more growth projects, particularly on the gas-side. Sale price was as expected. Closing expected to occur 1Q2017 for Brazil assets and 2Q2017 for Rest of Lat Am. PNG acquisition closed October 2016 for $5B. So, we expect DUK to slightly pump-up its CAGR with next guidance in Feb. 2017. Ash basin issues are largely in rearview mirror, but still in consciousness of management. We believe DUK will make more transformative acquisitions on gas-side of business. Demographics picking-up momentum and now usage/customer is climbing too; we look for this to continue moving forward. Investments in renewables and gas-fired generation helps DUK move away from coal and is the right move. We expect DUK to surpass high-end of its 4%-6% AEPS CAGR through 2020 thru development of both organic natural gas projects and acquired natural gas businesses. We’re not excited about potential for industry moving towards cost-of-service gas programs. We believe another transformative gas-based acquisition is in the making within a year or two that would have multiple benefits.

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DUK sells its international assets for $2.4B

We estimated that the sales of the international assets would generate some $2.9B in cash proceeds, but DUK sold it for $2.4B
DUK sold its Brazilian (~2.1GW) assets for $1.2B (~$571/KW) to the Chinese company China Three Gorges Corporation, which is the owner/operator of the world’s largest dam
The balance of the assets in Peru, Chile, Ecuador, Guatemala, El Salvador, and Argentina were sold to I Squared Capital for $1.2B
We believe that these are reasonable prices
DUK is pledged to repatriate the cash after paying-down debt and appropriate taxes to all of the appropriate jurisdictions

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DUK: Control of SE Starts with Closing of PNG acquisition; Expect Far More on the Gas Side Including Another Acquisition within 2-3 Years

DUK announced that it closed its acquisition of Piedmont Natural Gas (PNG) as of October 3, 2016
PNG is inconsequential as a stand-alone business to DUK, so we believe that there is a beginning game, middle game and end game to come that starts with the close of the PNG acquisition; i.e., acquisition of PNG was just a pre-season game, in our opinion.
Obviously, the next step for DUK regarding its gas business is to integrate PNG into the rest of DUK, but more importantly …
… DUK needs to not only integrate PNG, but it needs to demonstrate to investors that DUK can add to shareholder value through its strategic move into the gas business; we believe that DUK will accomplish this by engaging in new gas projects, drawing out synergies – albeit small – from the acquisition, managing its regulatory framework, and by delivering additional value to its customers; we believe that this is just the beginning.
The middle game for DUK, in our opinion, is the acquisition of a major regulated business, one that has a very large component of regulated gas businesses, within 2-3 year
In our opinion, the endgame for DUK is the fight for control of the regulated businesses of the southeast

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DUK 2Q2016 Earnings Note

DUK: One of the best low-risk investments in the industry ||

Sale of International is in final stages. Though dilutive in ST, we believe this decision may be necessary for DUK to invest in renewable energy and should prove to be value-add in the MT-to-LT. Ash basin issues are largely in rearview mirror, but still in consciousness of management. We believe DUK will make more transformative acquisitions on gas-side of business. Awaiting NC regulatory approval to close Piedmont; TN approval granted in 1Q16. Transaction likely to close by YE2016. Demographics picking-up momentum and now usage/customer is climbing too; we look for this to continue moving forward. Investments in renewables and gas-fired generation helps DUK move away from coal and is the right move. We expect DUK to achieve high end of its 4%-6% AEPS CAGR through 2020, if not exceeding it thru development of both organic natural gas projects and acquired natural gas businesses. We’re not excited about potential for industry moving towards cost-of-service gas programs. 2Q16 results were ahead of expectations, and we are tweaking our estimates accordingly. Raising ST-Target to $100.

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DUK 1Q2016 Earnings Note

DUK: Strategic Shift On-track to Transform DUK ||

Sale of International is progressing. Though dilutive in ST, we believe this decision not only proves to be value-add in the MT-to-LT, but also likely to accelerate cash repatriation. Ash basin issues are largely in rearview mirror, but still in consciousness of management. We continue to believe DUK will make more transformative acquisitions, especially on gas-side of business. Awaiting NC regulatory approval to close Piedmont; TN approval granted in 1Q16. Transaction likely to close by YE2016. Demographics picking-up momentum but usage/customer is still fairly flat; we look for this to change moving forward. Investments in renewables and gas-fired generation helps DUK move away from coal and is the right move. We expect DUK to achieve high end of its 4%-6% AEPS CAGR through 2020, if not exceeding it thru development of both organic natural gas projects and acquired natural gas businesses. We’re not excited about potential for industry moving towards cost-of-service gas programs. 1Q16 results were below expectations by the amount incurred due to storm costs and lower than expected usage.

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