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Duke Energy – FY 2014 Results And Future Guidance Takeaways

Summary Expected EPS growth in 2015 ($4.55-$4.75) from $4.55 in 2014. Expected EPS growth of 4-6% through 2017. Commitment to dividend and maintaining a strong balance sheet. Potential risks include exposure to Brazil, decreased residential energy usage, and volatile oil prices. Duke Energy’s Q4 Earnings Call On February 18, 2015, Duke Energy Corporation (NYSE: DUK ) reported their fourth quarter and full year 2014 earnings. Within the earnings call, the company identified four financial objectives for 2015 and beyond within their presentation: (1) Current Year earnings guidance, (2) Long-term earnings growth, (3) Dividend growth, (4) Balance sheet strength. In this article, I will review these four financial objectives and provide an outline and analysis on the company’s projections. Refer to the company’s earnings call transcript and power point for additional details. Expected EPS Growth in 2015 In 2014, the company achieved an adjusted diluted EPS of $4.55, which fell in the range of the original guidance ($4.45-$4.60) and the revised guidance ($4.50-$4.65). The guidance range for 2015 earnings guidance is $4.55-$4.75. Key assumptions for 2015 in obtaining this estimate are: Capital expenditures falling within the range of $7.4-$7.8 billion in 2015. This represents a moderate increase of 35% to 42% from the $5.5 billion in 2014. This increase is a positive sign for the company in the future as they make commitments to pursue alternative energy generation sources to decrease their financial dependency on crude oil prices. Retail load growth of 0.5-1.0% in 2015. This range has been reached each year since 2012 (0.6% in 2012, 2013, and 2014). This will be a key metric to monitor throughout the year as the company experienced a difficult year for residential sales in 2014. The company experienced a 0.1% decline in weather-normalized residential sales, but the decline was much worse in Q4 2014 specifically where they experienced a 2.2% decline. 700M average shares outstanding as of 12/31/2015. This shouldn’t be a difficult metric for the company to achieve as they had 707M outstanding as of 12/31/2014 with no planned equity issuances through 2017. $65 per barrel average Brent crude price for 2015. This is a hard assumption to question as oil has become a major battleground and everyone has a different opinion on the future price of oil. I expect that oil inventories will continue to rise and prices will continue to decrease in 2015. Based on the February 2015, EIA report, Brent crude oil prices are expected to be $57.56 in 2015. Exchange rate of approximately 2.85 BRL/US$ (2.35 in 2014). Again, like oil, this is a hard assumption to question, but the BRL/US$ exchange rate has seen a relatively steady increase since September 2014 and I expect this to continue as the Brazilian economy struggles and the US economy strengthens in 2015. Expected EPS Growth Past 2015 In addition to achieving 2015 adjusted diluted EPS guidance, the company is striving for per share growth of 4-6% through 2017. The key growth drivers in this per share growth are: Retail load growth of 1% going forward. Based on the analysis above, the company has been stagnant with a 0.6% retail load growth from 2012 to 2014. I think it is going to be very difficult for the company to achieve a 1% growth going forward. I think it is going to be difficult to achieve because of the lower energy usages in homes. I don’t see this trend reversing and allowing this 1% growth rate to be achieved. The company expects total wholesale net margin to increase due to the new 20-year contract with NCEMC at Duke Energy Progress (began in 2013) and 18-year contract with Central EMC at Duke Energy Carolinas growing to a load of 900MW in 2019 from 115MW in 2013. FY2015’s total wholesale net margin is expected to be approximately $1.1 billion with an anticipated 5% compound annual growth rate. Regulated earnings base growth is expected to follow the $2 billion growth trend in 2015 that was seen in 2014. Commitment to Dividend and Maintaining a Strong Balance Sheet In 2014, the company paid out a dividend of $3.18 per share with that amount expected to rise to $3.24 per share in 2015 (almost 2% increase year-over-year). With the company achieving a payout ratio close to 70% and management’s commitment to paying out a quarterly dividend to investors, I do not see the company’s current 4% dividend yield to be at risk. Management has paid 89 consecutive years of dividends with increases coming the past 7 years. This is largely possible due to the company’s strong balance sheet and no planned equity issuances through 2017. In addition, the company announced a strategically tax-efficient way to repatriate $2.7 billion back to the U.S., which will help fuel the dividend increases going forward. 3 Potential Risks The exposure to Brazil is a significant risk for the company’s future, which was seen in the 2014 financial results. In 2014, there was a decrease in sales volume as well as higher purchased power costs due to the interruptions in the hydrology production. Per the earnings call, they are assuming normal hydrology despite the rainy season starting slowly. Brazil is a major story to follow for Duke Energy in 2015 and beyond as the company is predicting EPS growth from this business segment despite recent downward trends in profits there as well as the Brazilian economy. I think the company will have difficulty increasing the retail load growth to 1% given the increased technologies and social initiatives to decrease electric use. Oil prices will continue to be a wild card going forward. Forecasting a price on such a volatile asset is a difficult task. If oil prices continue to fluctuate widely, it will significantly impact the company’s bottom line. Conclusion: Duke Energy Corporation faces some difficult obstacles including a slowing Brazilian economy, lower residential energy usage, and volatile oil prices; however, I believe that the company gave conservative and very obtainable estimates in each of the key assumptions used to allow them to meet their financial objectives for FY 2015 and beyond. While I don’t see Duke Energy being a rapid growth story going forward, I do believe they have the ability to present slow stock appreciation with the safety of a consistent dividend. Disclosure: The author is long DUK. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Are you Bullish or Bearish on ? Bullish Bearish Neutral Results for ( ) Thanks for sharing your thoughts. Submit & View Results Skip to results » Share this article with a colleague

Fund Investors Look For Comfort In Bond Funds

By Tom Roseen Despite U.S. stocks pushing to record highs for the first time in 2015 during the flows week ended February 18, investors continued to pad the coffers of fixed income funds. At the end of the week the minutes of the Federal Reserve’s latest policy meeting indicated officials were not in any hurry to raise interest rates, with many Fed members opining that a premature hike in rates could harm the economy. And, while the stock market showed a muted reaction to the minutes, the benchmark ten-year Treasury yield declined 6 basis points to close the flows week down to 2.07%-but still considerably higher than the lows seen at the beginning of February. During the flows week fund investors injected net new money into three of Lipper’s four broad-based fund macro-groups (including conventional funds and exchange-traded funds [ETFs]). Bond funds (+$5.9 billion) took in the largest haul, followed by equity funds (+$3.7 billion) and municipal bond funds (+$0.1 billion), while money market funds handed back some $14.1 billion-for their largest weekly net redemption since the week ended October 17, 2014. (click to enlarge) Source: Lipper, a Thomson Reuters company For the seventh consecutive week corporate investment-grade debt funds attracted the largest sum of net new money of the fixed income macro-group, taking in a net $3.0 billion for the week, while corporate high-yield funds took in some $1.6 billion-for their fourth week of net inflows in a row. Despite investors’ embracing the thought that the Fed will not be raising interest rates anytime soon, a subset of the corporate investment-grade debt funds group – bank loan funds – witnessed net inflows (+$130 million) for the first week in thirty-two. Share this article with a colleague

Inside Guggenheim’s New High Income Infrastructure ETF

The income ETF space remains a favorite among investors as evidenced by the incredible level of interest seen in many of the products in the space. In fact, many issuers have lined up with several new funds focused on income strategies to tap into this sentiment (read: 3 ETFs Yielding Over 6% to Watch as Market Speculates Rising Rates ). This trend continues with Guggenheim which has just launched a fund with global coverage, focusing on the high income space, but with a slight tilt as the fund has a specific sector exposure i.e. infrastructure. In fact, the global footprint made the fund more attractive given the ultra-low interest rate backdrop prevailing in most developed economies. Below, we have highlighted the newly launched fund – Guggenheim S&P High Income Infrastructure ETF ( GHII ) – in greater detail. GHII in Focus This product tracks the S&P High Income Infrastructure Index, focusing on 50 high-yielding global infrastructure companies. These companies are engaged in several infrastructure-related sub-industries, such as energy, transportation and utilities. The individual stocks are moderately diversified as no single security forms more than 5.09% of the total fund assets. Sydney Airport (5.09%), Williams Companies, Inc. (4.99%) and Jiangsu Express Co. Ltd-H (4.79%) are the top three holdings of the fund. As far as geographic allocation is concerned, the U.S. takes the top spot with about one fifth of the basket followed by Australia (14.45%) and China (9.37%). Overall, the fund is spread across 15 countries. Utilities hold the lion’s share followed by Industrials (33.15%) and Energy (16.70%). The fund charges 45 bps in fee. How Could it Fit in a Portfolio? The ETF could be well suited for income-oriented investors seeking higher longer-term returns with low risk. Utilities and infrastructure related stocks are interest rate sensitive and recession resistant in nature. With interest rates being low in most developed nations, the appeal of utilities stocks has increased as these offer steady and strong yields (read: 3 Utility ETFs Surging to Start 2015 ). However, investors looking for a high-growth vehicle may not be satisfied with this product as infrastructure is generally a slow-growth business. Competition The main competitor of GHII is the established iShares S&P Global Infrastructure Index Fund ( IGF ) . This product also focuses in on global utilities ranging from transportation to electricity services, and it has already seen a great deal of interest from investors, as evidenced by its $1.18 billion in assets under management. This iShares fund charges 47 bps in fee. The U.S. takes about 32.8% of the basket followed by Canada (8.33%) and Australia (8.17%). The fund holds 75 stocks in total. The fund yields yielded about 2.98% as of February 19, 2015. The newly launched ETF will also face stiff competition from iShares S&P Global Utilities Index Fund ( JXI ) , which has amassed about $338.3 million in assets. The fund charges 48 bps in fees and yields about 3.67% annually (as of February 19, 2015) (read: FlexShares Launches Global Infrastructure ETF ). Another potentially sound player in the space is SPDR FTSE/Macquarie Global Infrastructure 100 ETF ( GII ) though the fund was behind the newly launched GHII in terms of assets within such a short span. Notably, within just seven days of launch, GHII has amassed about $189 million in assets while GII has garnered $112 million in AUM. So, though competition may be intensifying in the global infrastructure ETF world, GHII is definitely worth a closer look. The product charges reasonably in the space and has an attractive yield, which is drawing investors’ attention. We expect its winning trend to continue in the days to come. Also, most other global infrastructure ETFs have put a large weight on the U.S. unlike GHII. A lower focus on the U.S. market might earn GHII an extra advantage over its peers as the U.S. economy will likely see a rise in rates.