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Duke Energy: A Utility Stock For Your Income Portfolio For 2015

Summary Company’s long-term performance will be positively affected by planned growth investments. Growth investments will drive its rate base and earnings growth in the long run. DUK remains committed to achieving its targeted dividend payout ratio of 65%-70%. I reiterate my bullish stance on Duke Energy (NYSE: DUK ). In this article, I will discuss in more detail the ongoing capital expenditures that the company is making, which will portend well for its financial performance. Also, I will briefly discuss the 4Q’14 earnings outlook. DUK has been progressing well with its healthy capital expenditures in regulated operations. The company’s planned capital expenditures for the next five years remain healthy, and I believe DUK will deliver decent earnings growth in the long run. Moreover, the effect of the healthy earnings growth will improve its cash flow base, due to which the company will make hefty dividend payments in the long run. The stock offers an attractive dividend yield of 3.6%, which makes it a good investment option for dividend-seeking investors. Smart Growth Investments set to Improve DUK’s Financial Performance U.S. utility stocks delivered healthy performances in 2014. Moving forward, I believe 2015 will be another good year for the utility sector. As far as DUK is concerned, the company has carved out its plans to deliver a healthy performance in the long term through acceleration in capital expenditure for long-term growth generating projects. As per its growth plans, focused on regulated operations, the company is planning to spend approximately $16-$20 billion on several growth projects from 2014 to 2018, focused on its new power generation projects. The company revealed that it will be constructing three major generation projects in Florida, with an investment of approximately $1.9 billion . Also, DUK is planning to build a 1,640MW joint cycle plant worth $1.5 billion. In addition, the company has been making progress with its two new combustion turbine plants in Suwannee, which are expected to be in service by the end of 2018. Moreover, regulators have approved DUK’s project to build a 750MW Lee natural gas plant in South Carolina, which will start providing services by the end of 2017. The value of these growth investments lies in the betterment of the company’s power generation capacity due to a significant improvement in regulated operations, which will portend well for its rate base and earnings growth in the long run. Along with power generation projects, DUK has been gradually increasing its renewable energy portfolio. So far, the company is progressing well with the constructions of its 400MW wind energy project and 100MW solar project. DUK has recently acquired a 20MW solar project from Geenex and ET solar Energy Corporation; the project’s site, being located in Dominion North Carolina Power’s service area, will allow the company to generate revenue by selling electricity generated from the project for a period of 15 years. In future, DUK will be making more investments in its renewable generation projects. All these renewable energy generation investments will not only diversify the company’s generation mix, but will help it meet environmental standards. I believe DUK’s increased focus on renewable energy sources will deliver a significant upside to the company’s financial performance in the long run. In addition, DUK is actively evaluating all growth opportunities in international markets to generate growth in the long run. Also, DUK is conducting a strategic examination of international operations to get tax benefits of approximately $1.7 billion . The company’s strategic overview of international operations is still in progress, but by the time DUK will start pursuing tax saving initiatives for its international operations, its stock price will be positively affected. Owing to DUK’s healthy capital expenditures for the next five years, active investments in renewable energy resources and international growth opportunities, I believe the company’s earnings will be positively affected in the long term. Analysts are expecting that DUK’s long-term earnings will grow at approximately 4.76% , better than Southern Company’s (NYSE: SO ) earnings growth of 3.63% . The company is scheduled to report its 4Q’14 earnings next month. The company will provide an update on its future capital expenditure outlook; any increases in planned capital expenditures will positively affect the company’s growth potential and stock price. Also, the company will provide the 1Q’15 and full year 2015 earnings guidance. Analysts are expecting DUK to report an EPS of $0.88 for 4Q’14. In the last four quarters, the company reported three earnings beats. The one earnings miss was due to an impairment charge related to Midwest assets. I believe that as the company has finalized the sale of Midwest assets, it will report strong earnings for 4Q’15. The following table shows the actual EPS and consensus EPS estimates for the last four quarters. (click to enlarge) Source: Yahoofinance.com Healthy Returns DUK has been sharing its success with shareholders through dividends. The company recently announced a quarterly dividend payment of $0.795 , which marked its 85th consecutive year of dividend payments. The company currently offers a healthy dividend yield of 3.60% . The company’s impressive cash flows have been backing these impressive dividend payments, as shown below. DUK’s healthy growth prospects indicate that its cash flow productivity will improve in the years ahead, helping it affirm its commitment to rewarding shareholders through dividend payments. Owing to its ability to pay dividends consistently in upcoming years, I believe DUK remains a good investment option for shareholders. Moreover, the company can use $2.8 billion in cash proceeds from the Midwest assets sale to repurchase shares or boost dividends. Owing to DUK’s shareholder-friendly cash return policy, I believe the company will utilize all growth prospects that could support its healthy cash return policy in order to ensure consistent dividend increases in the years ahead. The following table shows the ongoing increases in dividend per share, ROE, dividend payout ratio and dividend coverage for the company, for 2012 and 2013. The table also includes my estimated figures for 2014 and 2015. (Note *Dividend Coverage Ratio = Operating Cash Flow/Annual Dividends) Dividend Per Share Dividend Payout Dividend Coverage ROE 2012 $3.03 70% 3x 9.5% 2013 $3.12 71.7% 2.9x 6.3% 2014(E) $3.15 69.6% 3.2x 7.6% 2015(E) $3.25 68.7% 3.8x 7.7% Source: Company’s Reports and Equity watch’s Calculations Using Estimates Conclusion DUK’s long-term performance will be positively affected by planned growth investments. The growth investments, directed at improving the company’s operational performance, will drive its rate base and earnings growth in the long run. Also, DUK’s healthy growth prospects will portend well for the betterment of its cash flow base, which will allow the company to consistently increase dividends. Moreover, DUK remains committed to achieving its targeted dividend payout ratio of 65%-70% . Due to the aforementioned factors, I remain bullish on DUK.

Southern Company Will Be Teaming Up With The U.S. Navy And Air Force

Summary Southern Co. and HelioSage are teaming up with the U.S. Military to develop three solar facilities on military sites across the gulf coast. Southern Co. has taken added interest since the end of QE3 in October 2014, hitting new all-time highs in a fighting market. Southern Co. is a stable long-term stock with a respectable 4.02% dividend. Southern Co. is reporting earnings on February 4, 2015. Here we are, three weeks into the year, and we are working our way through earnings. If this is the first time you have read my articles, I am building a portfolio for 2015 that contains all original research. I am digging through SEC filings and considering the state of the economy. So far, I have written articles about seven stocks and my eighth pick is Southern Co. (NYSE: SO ). I am focusing on long-term growth, diversification, and I love dividend stocks. With the uncertainty of the market right now, I have begun each search with a few primary characteristics of each stock. Aside from the economic state, which is driving me towards oil and retail, I am also looking for stocks that popped around mid-October of last year, and that have weathered the January storm. The reason for this is because October was the end of QE and people reallocated their money, and stocks that gained interest in these time frames are a good indicator of where a lot of it went. I believe that some of the stocks that have done well since that time are likely to continue to rise for the time being. This article will take an objective approach to the company, and raise any potential issues. However, upon evaluation, I believe that the market risks are not of immediate concern, but should be considered when deciding whether to invest or not. A Brief Overview Southern Co. is seen as a secure investment because of its customer base. According to its website : Southern Co. is a leading U.S. producer of clean, safe, reliable and affordable electricity, Southern Company owns electric utilities in four states – Alabama Power , Georgia Power , Gulf Power , and Mississippi Power – and a growing competitive generation company – Southern Power – as well as a licensed operator of three nuclear generating plants – Southern Nuclear – and fiber optics and wireless communications – Southern Telecom and SouthernLINC Wireless , respectively. Their clientele is around 4.4 million and they have nearly 46,000 megawatts of generating capacity. Below is some info about the power subsidiaries. Gulf Power Company (Gulf Power) Gulf power has a variety of power generation sources, and has a focus on Carbon Conscious Energy. Specifically, gas-to-energy, wind and geothermal, and solar are highlighted focuses of the company. Any time a company pairs with the government, many opportunities of expansion are created because the military is seen as a reliable customer once commitments are made. Gulf Power just announced that it is partnering with the U.S. Navy and U.S. Air Force to build solar energy farms within its region. The planned implementation date is December 2016; however, in my experience with the military, it is highly likely that this date may be pushed back. If approved, it will still be a large revenue boost, and there will likely be a reduction in operating costs since solar requires less regulation than other options such as nuclear. It will not replace other forms of energy at the moment, but will supplement them. Georgia Power Company (Georgia Power) Georgia power services 2.3 million customers as of December 31, 2013. The majority of the customers are serviced in metro regions, with the fewest customers in Southern Georgia. Total Georgia Power kW Capacity Hydro 1,087,536 Fossil 8,791,427 Nuclear 1,959,852 Solar 705 Other (Diesel, Combined Cycle and Combustion Turbine) 5,746,409 Total 17,585,929 Although solar is the smallest of the generating capacity, Southern Co. has made it clear that solar is one of the focuses of the company as the country moves towards cleaner, safer forms of energy. Georgia power has an initiative called the “Georgia Power Advanced Solar Initiative (GPASI).” 2015 will begin the first year that four Power Purchase Agreements (PPA) will take effect totaling 50 MWs of utility scale solar generation to be purchased by the company. Southern Power Company (Southern Power) Southern Power recently announced plans to develop a 131MW PV solar project in Georgia. The electricity will power 21,000 homes and will be sold to three Georgia electric membership corporations. First Solar will be the engineer and contractor. Plans to begin this project are set for September, 2015. There will be approximately 1.6 million thin-film PV solar modules mounted on single-axis tracking tables. Alabama Power Company (Alabama Power) Alabama Power is the second largest subsidiary of Southern Company and its customer base is approximately 1.4 million homes, businesses and industries in the southern two-thirds of Alabama. There are 24 generating plants that range from Hydro, Coal/Gas, Gas, and Nuclear. The single nuclear plant has a total nameplate generating capacity of 1,720,000 KW. One concern is that with the major earthquake and tsunami that struck Japan, operating expenses may rise once reviews are complete of nuclear facilities in the US. This may result in higher capital requirements and increased costs associated with ensuring safety. Many of the capital expenditures include investments to comply with environmental regulations. Mississippi Power Company (Mississippi Power) Mississippi Power is another subsidiary of Southern Co. that operates utilizing multiple fuel sources. You will notice that the diversification of fuel sources is intentional, so that the distribution of each source can be modified to adjust to current price trends. Lignite, natural gas, and traditional coal are the primary sources of energy with 70% of the customers being fueled by natural gas. Mississippi Power is currently working on a $6.1 billion, 582-megawatt power plant in Kemper, Miss. This has contributed to increases in debt load and the costs have surpassed expectations. It has a coal gasification design called Transport Integrated Gasification. It will tap into lignite reserves, which will reduce shipping costs and stabilize prices in the long term. The progress of this project is important because of the sheer scope and cost. Another important factor will be the recapturing of CO2. The company will need to ensure that this new plant is able to capture the targeted amount (65%) because if there is any excess or does not comply with regulations, it could become a target, upping the cost even more. The projected completion date is mid-2016. The Commonality One common theme throughout all of these companies is the level of debt currently held by the company. The debt level has grown steadily over the past several years. The 2013 annual report reflects a total debt of $23.395 billion. In a low interest climate, this is OK, but this is something they will need to keep under control in a rising interest climate. An important point on their debt though is some of the forms of debt they hold. For example, Alabama Power established a wholly-owned trust to issue preferred securities. The investment in the trust is reflected as other investments, and the related loan from the trust is reflected as long-term debt. This total was $206 million as of December 31, 2013. A tactic used to maintain the control of debt in Alabama Power is through the conversion of long-term debt to short-term debt. While this is not generally a good practice, there are strategic reasons why this could be a good decision. From 2014-2016, the debt maturities are expected to exceed operating cash flows. The solution to this is for the company to take out short-term debts to cover longer-term debts. With the seasonality of the business, this is necessary and while interest rates are low, this tactic will benefit the business. Short-term cash needs are met through the paper program and through a SO subsidiary organized to issue and sell commercial paper at the request of the company. There are very specific actions being taken to ensure debts are taken care of and after their current projects are completed and implemented, the expectation is that some of the debts should decline. In the meantime, it is important to keep an eye on the allocation of their cash flows and how they control their debts. More items to consider are investments that are made to comply with imposed regulations. As mentioned previously, as CO2 emissions gain the attention of politicians, it will affect the operations of companies like SO. Swings in weather are generally good for power companies since colder days or hotter days require the use of either a heater or air conditioning. However, major disasters can have a drastic effect on SO (note the location of the nuclear power plant on the coast). Finally, I mentioned interest rates assisting or hurting their ability to pay off debts, this trickles down to the bottom line and expect EPS to be effected by the rise in interest rates that may come within the next year. Should I Buy It? (click to enlarge) The stock currently has an attractive dividend yield of 4.03% and a PE ratio of 21.4. Currently there are 2 analysts that rate Southern Co. as a buy, 4 analysts rate it a sell, and 8 rate it a hold. A look at the charts from 2014 makes it seem a bit rich for the typical growth of a utility company; however, expanding back to 2010 and before yields more information. A long, drawn out correction from 2012-2014 has given the stock room to grow in the near-term. Southern Co. has been reaching new all-time highs on a regular basis and is trading above both 50 and 200-day SMAs. The future growth will most likely not happen as quickly as the last year. In fact, the stock is due for a correction. While it is currently a bit pricey, the revenue growth has shown superior growth to the industry average of 5.8%. SO is sitting at 6.4%, and as a long-term growth strategy, this could be a promising company to hold for years. The future earnings potential are dependent upon a number of factors mentioned previously and since prices are regulated by the FERC, retail rates may be adjusted as necessary to accommodate the current economic climate. Earnings are due to be reported on February 4, 2015 and this should give a good indicator of where the company will go from here. Regardless of the earnings results, this stock is a wait and see in the short term, but I will buy it for the long term. In the event of negative earnings press, I will wait until after the stock has declined and shown support multiple times before purchasing it. In the event of an earnings beat, I may wait a bit longer until a reasonable correction has occurred.

RWE – Recovery Postponed, Indefinitely?

RWE has warned earnings will not as expected bottom out in 2015. It will also struggle with its debt target. The announced strategic moves are not enough short term relief. Political risk is high with major pieces of legislation in a controversial debate, namely capacity markets and climate legislation. RWE is the most exposed within the peer group. As power markets in Europe get taken over by new structures, volatility and earnings risk, energy system infrastructure is a better investment proposition. RWE’s ( OTCPK:RWEOY ) earnings warning weighs stronger short term than its strategic moves. The company will continue to struggle with weak commodities and high leverage in 2015, despite the DEA sale. It may embark onto some rescuing of value through power plant sales, but it does not have the potential to deliver a similar strategic boost to E.ON. RWE is at the heat of the political storm that still has high potential to deliver more unpleasant surprises. Infrastructure and the private sector, conversely, might be beneficiaries. There are signs that private investors with longer strategic horizon are circling around distressed assets. They will gain a more important part in a decentralized energy market. Asset rotation will be a feature. My view of increasing M&A activity remains underpinned. RWE is not out of the woods yet; investors who were hoping for earnings stabilization as indicated by the company in April 2014 may be disappointed. Management has warned on earnings , saying that the earnings trough may not occur in 2015 yet. Consensus has not bottomed out for 2015 yet and it may still come down. Power prices are the unsurprising cause of the problem. Futures are pointing nowhere to a meaningful enough recovery, and the broader commodities environment is not any more supportive. RWE more than any of its peers, needs significant commodity recovery. In tandem with the above comes relentless balance sheet stress. I find little chance of material decrease of leverage. The Urenco sale will not come through short term. The CEO has further confirmed that leverage falling to 3x net debt/Ebitda by 2016 will be “extremely difficult to achieve”. I estimate just short of 4x for 2016. Attention will swiftly return to risk to the dividend. RWE may rescue some value through selling its power stations that are unprofitable abroad as announced this week. That is clearly a strategy to mitigate cash losses. It would bring minor debt reduction. Some of the company’s plant is new and competitive technology. The bulk of the RWE’s mothballing and closure programme is less than 20 years old, some plants are not even three years from commissioning. That concerns particularly gas. It is sensible that management looks to maximise value of otherwise potentially stranded assets. But, a power plant cannot be displaced and sold into another location like other capital assets. High quality and well performing equipment may still find a market value in locations with tighter reserve margins and new build demand. The CEE region comes to mind. There is also an active secondary plant market also in Asia. There will clearly be a loss of value for RWE. Investors should not hold up high hopes of significant earnings contributions from the process. Signaling power to the political powers may be stronger than actual earnings impact. Infrastructure investors have begun to look at power generation with a view of power price recovery over the long term. The prospect for capacity payments may underpin that kind of activity. Germany is uncertain on that note, but plenty of European countries putting into place capacity markets could keep M&A activity up. All of RWE’s strategic moves could in the end amount to a similar outcome to E.ON’s corporate split. The company has been vocal about reducing the share of generation to 5% of earnings. Most recently, the CFO has now said it no longer rules out a similar move even though management decided against it in 2012. RWE is in a different situation to E.ON ( OTCQX:EONGY ), in that it cannot bring as diversified a generation park into any potential new co. Merging renewables into a “genco” may remedy to a point. But in that case management would have to have a clear strategy about how it would pursue downstream brand equity and service/product packing for which renewables exposure is important. A split co will also not have the same upstream and oil and gas diversification as E.ON. That would make a genco or “upstreamco” resemble much more of a bad bank than in the case of E.ON. Importantly, it would in my view have to raise capital in order to fund the nuclear liabilities that the genco would inherit. RWE might embark onto greater strategic change beyond its already announced transformational steps. That would be a positive. But with the chances increasing that more steps are taken, so does the probability of a capital increase. I see significant potential for large parts of RWE’s business going private. Meanwhile, the debate over capacity payments rages on. The Economy Minister’s has again repeated he is opposed to capacity payments , which is out of line with market expectations. The political debate bears high potential for disappointment. My preferred exposure in all of this is infrastructure, engineering and market backbone. Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.