Duke Energy (NYSE: DUK) released its Q3 earnings on Thursday, reporting its first financial results following the completion of its merger with Progress Energy. The company had a solid quarter with profits growing by 26% y-o-y to $594 million while revenues came in at $6.72 billion. Although the company witnessed encouraging customer growth during the quarter, demand was depressed due to the weak economy and lower temperatures that reduced the cooling load. Given the challenging demand environment, the company is concentrating on trimming costs and pushing for rate increases to boost earnings going forward.
Franchised Electricity Customer Additions Strong , But Demand Outlook Is Tepid
Duke’s largest business, the U.S. franchised electric and gas division, accounts for over 85% of its Trefis value. The division saw healthy residential customer growth this quarter, adding about 50,000 residential customers, up 0.7% over last year’s quarter.  However, the company reported that weather-normalized demand declined by about 0.3% y-o-y.
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The fragile US economy and the increasing consciousness about energy conservation are causing the US power consumption to fall. Over the last 12 months, consumption declined by around 2% compared to a drop of just 0.1% between 2007 and 2010. Keeping with industry trends, Duke’s outlook for electricity demand growth has been decidedly cautious. The company expects the demand to grow at about 1% in the future, negating the effects of climate change. Despite the restrained demand outlook, the company said that it expects profits to grow between 4% and 6%.
To compensate for slower demand growth, the firm is seeking to increase its rates. For instance, in October, the company filed a rate case with energy regulators in North Carolina, seeking a rate increase totaling $359 million for its Progress Energy Carolinas division.
On the international front, revenues grew by about 6% since last year, although profits fell by about 10% due to foreign currency related losses. In Brazil, a market where the firm has significant hydro power interest and currently derives about half its international profits, the government is seeking to enforce rate cuts of up to 20% from next year. However, the company expects the short-term impact of these cuts to be negligible since most of its power sales have been contracted through 2014, and partially committed until 2016. However, in the long term, the firm’s international operations could be impacted.
Duke’s commercial division power division, which caters to the wholesale electricity market, saw profits drop by about 50% y-o-y due to lower rates in Ohio. To overcome the low rates, Duke has filed a request with the Utilities Commission of Ohio to move to cost-based capacity rates. Sales to industries also experienced a decline of about 1.1% due to weaker load from the chemicals, metals and textiles sectors.
Fleet Modernization And Merger Synergies
Management mentioned that it was in the process of completing its $9 billion fleet modernization drive. The initiative covers the upgrade of existing equipment and will see 6.8 GW of older coal fired capacity being replaced with more efficient and economical methods of generation like natural gas, which would reduce costs. These upgrades will also help the company improve the diversity of its energy mix, which is still largely dominated by coal. The firm is deploying technologies like smart grids to reduce transmission and distribution costs and to improve customer experience. Its first smart grid project is underway in Ohio and could be extended to other states.
The merger with Progress Energy makes Duke the largest utility company in the US, with a customer base of about 7.1 million, which allows the firm to leverage cost synergies. The merger gives scope to cut manpower, reduce fuel and transmission costs through enhanced economies of scale, and provides opportunities for joint dispatch.
We are presently updating our price estimate for Duke Energy, following the earnings release.Notes: