Duke Energy (NYSE:DUK) is expected to publish its second quarter earnings on August 7. We expect the company to continue its stable performance aided by growing wholesale sales and cost savings, although cooler weather during the quarter could potentially impact load. During Q1, the company reported an EPS of around $0.89, up from around $0.66 a year ago. On an adjusted basis, excluding the results of Progress Energy which the firm acquired last year, the EPS was almost flat at around $0.71. Here is a quick look at some of the key factors that we believe will influence the firm’s U.S. franchised electric and gas (USFE&G) division, which accounts for nearly 85% of the company’s revenues.
Weather Effects: We believe that the firm’s load during this quarter could have been impacted by cooler weather. The number of cooling degree days, which measure the need for air conditioning based on the extent to which the average temperature on a day exceeds a certain reference temperature, actually declined by around 6% on average in the South Atlantic region, where a large portion of Duke’s operations are centered. ((Weekly Statistics, American Gas Association)) This could, however, be partially offset by cooler weather in early April which could have potentially raised heating demand.
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Wholesale Business Could Perform Well: The wholesale electricity business entails short-term and long-term contracts to provide electricity to municipalities and co-operatives within the areas that Duke operates.  The company expects margins from this business to grow at a rate of around 8% per year over the next two years, which is higher than the estimated 4% growth for the USFE&G division. The wholesale business is expected to contribute around $1 billion in net margins for this year alone. Duke said that it had signed several new wholesale contracts this year, most of which are located in North Carolina and South Carolina. Since most of these sales are contracted over the long term, it could provide some additional revenue stability for the company.
Cost Savings And Efficiency Improvements Are Important: An increasing focus on energy conservation and a weak economy have weighed on Duke’s load growth in recent times, and the company expects a weather normalized load growth to remain quite sluggish at around 1% going forward.  Considering this, the firm’s future earnings growth will partly hinge on operational improvements. Duke’s recent merger with Progress Energy provides opportunities to reduce fuel and transmission costs through enhanced economies of scale and enables the possibilities for joint dispatch.
Nuclear power accounts for around one-third of Duke’s electricity production, and over the first quarter, its nuclear fleet put up a strong performance with capacity factors coming in at around 97%. Capacity factors are a ratio of the electricity that a power plant produces during a certain period versus the maximum power that it could produce in the period. We believe that improvements such as these should help to increase asset utilization and improve margins.Notes: