Duke Energy Posts Weaker Q4 But Outlook is Solid

Duke Energy (NYSE:DUK) recently announced its Q4 results which saw a decline of 33% over Q4 2010, but it exceeded 2011 earnings guidance range posting a 29% yearly growth in net profit. The improvement in earnings resulted from its modernization program and encouraging results from its international businesses division. These results were able to mitigate the negative effects of unfavorable weather which led to increase in operating and maintenance costs.

Duke Energy provides electric and gas services in North America and Latin America. It has approximately 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest, and natural gas distribution services in Ohio and Kentucky. Below we take a look at the major trends during Q4, and what can we expect going forward.

See our complete analysis for Duke Energy here

Factors affecting segmental earnings in Q4

Although Duke Energy registered solid growth overall, we believe analyzing the results by segment presents a much clearer picture.

The U.S. Franchised Electric and Gas (USFE&G) division registered a drop in earnings primarily due to unfavorable weather, increases in operation and maintenance costs and storm restoration costs. However, the company recognized higher earnings from investments in its ongoing modernization program and a revenue true-up from a North Carolina regulatory ruling related to the company’s energy efficiency programs, but these were insufficient to offset the costs.

Earnings from the Commercial power division also declined on account of $35 million fees related to exiting the Midwest Independent System Operator (MISO) and the annualized effect of 2010 customer switching in Ohio. The International Energy division showed a huge increase in earnings resulting from favorable volumes and pricing in Brazil, higher pricing at National Methanol, and higher capacity revenues in Peru.

Other businesses include Duke Energy’s insurance business and corporate governance expenses that saw net expenses decline compared to Q4 2010 because of fewer donations this quarter.

Outlook in 2012

Under the company’s modernization plan, which addresses environmental regulations and replace aging power plants with more efficient ones, it will add two functional power plants in 2012. This will lead to improvement in margins for USFE&G and commercial power divisions.

The International Energy division has operations in high growth Latin American countries like Brazil and Peru that will support high growth in future.

Our current price estimate for Duke Energy”s stock stands at $21.05 which is slightly above the current market price. We are in the process of revising our price estimate.

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