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Assessing Duke Energy’s Debt Profile after 4Q15 Earnings

Vincent Kruger

Duke Energy Posted Sturdy Growth in 2015, Released 2016 Guidance

(Continued from Prior Part)

Debt

Duke Energy’s (DUK) debt has increased significantly in the last five years. After 2011, Duke’s debt nearly doubled due to its fervor for new business acquisitions. As of December 31, 2015, Duke Energy had total debt of $43.2 billion. Its debt-to-equity ratio stands at 1x while its debt-to-market capitalization ratio is 0.8x.

Assessing leverage

Although Duke Energy’s (DUK) debt has increased in the last couple of years, its net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio has actually shown a downward trend. As of December 31, 2015, its net debt-to-EBITDA ratio stood at 4.4x. This is an important tool to assess the leverage of utilities, indicating how many years it would take a company to repay its current debt with its EBITDA if its debt and EBITDA were held constant.

By comparison, the net debt-to-EBITDA ratio of Dominion Resources (D) stood at 5.6x while the ratio for NextEra Energy (NEE) was 3.7x.

Credit rating

Duke Energy has a negative outlook and a Standard & Poor’s credit rating of “A-.” Moody’s deemed Duke’s decision to sell its International Energy business to be a credit positive. Moody’s also gave Duke a negative outlook and a credit rating of “Baa1.”

The demand growth for power rose only marginally for utilities, a capital-intensive industry that has borrowed heavily in the last few years. Hence, the liabilities of these utilities (JXI) rose more than earnings from operations. As a result, their leverage, including utilities like Duke Energy, PG&E (PCG), and American Electric Power (AEP), has risen steadily in the last few years, adding to these companies’ risk profile.

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