Duke Energy Beats on Rising Power Demand - Analyst Blog

Duke Energy Corp. DUK reported adjusted first quarter 2014 earnings of $1.17 per share that came in ahead of the Zacks Consensus Estimate of $1.10 by 6.4%. Quarterly earnings also increased 14.7% from the year-ago figure of $1.02.

The strong numbers mainly came from its prime business unit, Regulated Utilities. The year-over-year upside resulted from the cold wave that hit the U.S. this winter thereby boosting demand for electricity. Again, revised customer rates as well as robust international energy results were an added catalyst.

Considering a pre-tax impairment charge of $1.4 billion, or $1.23 per share related to its Midwest Generation business, the company registered a quarterly loss of 14 cents as against earnings of 89 cents per share in the year-ago period.

Operational Update

During the quarter under review, Duke Energy's top line increased 12.3% year over year to $6,624.0 million. The reported figure surpassed the Zacks Consensus Estimate of $6,284.0 million by 5.4%.

On the cost front, total operating expenses were $6,567.0 million in the quarter, up 40.2% from $4,685.0 million in the year-ago period. The spiraling costs were due to higher regulated input costs (up 17.4%), natural gas cost (up 17.3%), operation & maintenance cost (up 6.0%) and depreciation and amortization expense (up 19.7%). Notably, an impairment charge of $1,382 million during the quarter made a big hole in Duke's pocket.

Consequently, operating income plunged 95.2% year over year to $58.0 million.

Quarterly Segmental Highlights

Regulated Utilities (formerly known as U.S. Franchised Electric and Gas): Segment adjusted income was $737.0 million, up from $656.0 million a year ago. This was driven by higher pricing and riders, favorable weather and increased wholesale net margins.

International Energy: Segment income advanced to $130.0 million from $97.0 million buoyed by robust results in Latin America from higher volumes and pricing in Brazil. The positives were partly offset by unfavorable foreign currency exchange rates.

Commercial Power: The segment witnessed an operating income of $10.0 million in the quarter as against $6.0 million in the year-ago period. The improved results reflect higher earnings from the renewable business, partly tempered by lower margins at Duke Energy Retail.

Other: The segment includes corporate interest expense not allocated to the business units, results from Duke Energy's captive insurance company, other investments, and income tax levelization adjustments.

Net expenses were $48.0 million, up from $43.0 million in the year-ago quarter.

Financial Update

As of Mar 31, 2014, the company held cash & cash equivalents of $1,531.0 million versus $1,501.0 million as of Dec 31, 2013. Long-term debt decreased to $39,885.0 million (including current maturities) from $40,256.0 million as of Dec 31, 2013. The debt-to-capitalization ratio stood at 49.4% in the quarter.

Guidance

Duke Energy reiterated its full year 2014 adjusted earnings guidance in the range of $4.45 to $4.60 per share. Earlier it had expected its longer-term average annual growth at 4% to 6% through 2016. The Zacks Consensus Estimate for 2014 is pegged at $4.55, on the higher end of the guided range.

At the Peers

American Electric Power Company Inc. AEP reported first quarter 2014 operating earnings of $1.15 per share, beating the Zacks Consensus Estimate of 91 cents by 26.4%. The quarterly figure also improved a whopping 43.8% from the year-ago adjusted profit of 80 cents per share. The upbeat performance was supported by favorable weather and high power prices.

CMS Energy Corp. (CMS) posted first-quarter 2014 earnings per share of 75 cents, surpassing the Zacks Consensus Estimate of 64 cents by 17.2%.

Entergy Corp. ETR reported first-quarter 2014 earnings of $2.29 per share, beating the Zacks Consensus Estimate by 8.5%.

Our Take

The largest power provider in the U.S. – Duke Energy – reported higher quarterly earnings, aided by extremely cold weather. We believe the company's regulated electricity and gas operations will enable it to generate a relatively steady and growing earnings stream in the future.

Recently, Duke Energy announced its plan to divest its stake in 13 power plants in the nation's Midwest after Ohio regulators denied its request to raise rates. The plants together have a generation capacity of 6,600 megawatts. The company's willingness to get out of the wholesale power-generation business in the Midwest reflects the volatility associated with its financial results.

Going forward, key growth drivers for the company include its strong balance sheet, ongoing capital expansion projects and an above industry average dividend yield.  However, the unfavorable macro backdrop, predominantly fossil-fuel based generation assets and tepid demand for electricity remain matters of concern. Duke Energy presently holds a short-term Zacks Rank #3 (Hold).