Duke Energy’s Results Fueled By Progress Merger

by Trefis Team
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Quick take

  • Duke Energy reported a 51% y-o-y increase in Q4 2012 earnings driven by the Progress Energy merger. Adjusted for the merger earnings were about flat.
  • USFE&G quarterly revenues grow 2x on merger, but cautious outlook for demand growth ~1 % per year.
  • Rate increases in Carolina’s on track, could be approved by the end of the year.
  • Commercial businesses post lackluster results due to lower rates.
  • Caution that poor rainfall could hit profitability in Brazilian hydropower operations.

Duke Energy (NYSE: DUK) published its Q4 earnings on February 13, marking its second quarterly earnings release following the Progress Energy merger. Adjusted for the Progress merger, earnings per share of $0.70 was about flat compared to the fourth quarter of 2011. Here are the key takeaways and trends from the firm’s earnings release.

U.S. Franchised Electric and Gas

Revenues for the division nearly doubled to around $4.9 billion from $2.5 billion while operating income also grew to around $846 million from $434 million, thanks to the Progress Energy merger. ((Duke Energy 8-K)) However, organic growth was minimal. The division is Duke’s largest business segment and accounts for around 90% of its Trefis price.

Sluggish Load Growth Expected: Load growth, adjusted for weather effects was quite sluggish, at around 0.6%. Although industrial and commercial usage grew by around 1% and 0.7% respectively, the weaker economic environment and a growing focus on energy savings meant that residential consumption remained flat despite some customer growth over the last year. Duke’s outlook for electricity demand has also been very cautious, expecting demand to grow at about 1% over the next few years.

Cost Savings: Given the slowing load growth, much of the company’s earnings growth will hinge on operational improvements and synergies from the Progress Energy merger. The merger provides scope to reduce fuel and transmission costs through enhanced economies of scale and provides opportunities for joint dispatch. The firm mentioned that it had recognized around $52 million in cost savings relating to the merger over the last two quarters. The merger has also helped reduce manpower. A total of 1100 headcount reductions are expected by the end of this year.

Status of Rate Increases: Over 90% of Duke’s Energy’s business comes from its regulated utility services, and the firm is dependent on state regulators for rate increases to defray costs of expansions and upgrades to its fleet. Over the last few months, the firm filed for rate increases totaling $359 million for its Progress Energy Carolina’s division and a $446 million hike for its Duke Energy Carolinas division. The firm expects the new rates to be approved by the end of this year. ((Bloomberg)) The firm also has two more pending rate cases in Ohio, for its electric distribution and gas distribution. These increases should help to boost revenues and profitability marginally going forward.

International And Commercial Power Segments

International Operations Clock Modest Revenue Growth, But Profitability Could Be Impacted: The firm’s international division operates power generation facilities and engages in sales and marketing of electric power and natural gas, primarily in Latin America. Revenues for the division grew by around 4% year-over-year to $353 million while operating profits fell by around 25% to around $93 million. Although the division accounts for just around 16% of the firm’s business, we believe that they are important from a growth perspective, given the high demand for energy and relatively high electricity prices in Latin America. The firm has been steadily expanding its presence in the Latin American market and acquired a diesel power plant and two hydroelectric facilities in Chile last year.

Duke’s Brazilian operations rely on hydroelectric power assets and off late the country has been experiencing low rainfall. The firm warned that it these conditions continue to persist, it could drive up generation costs for the firm and subsequently impact profitability of the firm’s international business segment. ((Seeking Alpha))

Commercial Business Weighed Down By Lower Rates: Duke’s commercial power segment includes the non-regulated generation business in the mid-west, the firm’s renewable energy portfolio and retail operations. The segment saw its revenues fall by around 16% while posting an operating loss of around $1 million for the quarter. This was attributable to lower market based rates in Ohio and lower margins for the firm’s retail operations.

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