Duke Energy: Sale Highlights Difficult Transaction Environment for Renewable Energy Assets

We are maintaining our $105 Duke Energy DUK fair value estimate after the company announced it had reached an agreement to sell the company’s 3.4-gigawatt renewable energy portfolio to Brookfield Renewable Partners for $2.8 billion, including debt. Our narrow moat rating remains unchanged.

The company reaffirmed its 2023 earnings per share guidance range of $5.55-$5.75 and long-term earnings growth rate of 5%-7%, both of which are in line with our expectations.

Duke is one of the cheapest utilities in our coverage, trading at a 13% discount to our fair value estimate as of mid-June. The company’s 4.4% dividend yield is 80 basis points above the sector average, though we expect dividend growth will be less than its peers given Duke’s current elevated payout ratio. Duke trades at an 8% discount to the sector average P/E, a discount we think is unwarranted given Duke’s growth opportunities supported by constructive regulatory environments.

Duke is one of the last U.S. utilities to sell its commercial renewable energy portfolio. In February, American Electric Power sold its 1.4 GW commercial renewable energy portfolio for $1.5 billion, including debt. While there are some differences between the portfolios, Duke’s sale price marks a significant decline in prices in just four months as the macro environment remains challenging.

The company’s net $1.1 billion in proceeds was in line with our expectations, which we had lowered after Duke took nearly $1.5 billion in write-offs the past two quarters. Duke expects to take an additional $800 million pretax impairment charge in the second quarter.

Management plans to use the proceeds to avoid issuing holding company debt, a positive amid rising interest rates. Duke reaffirmed it will not need to issue equity during the next five years to support its $65 billion capital investment plan. We continue to expect Duke to need minimal equity in the back half of our forecast.