Duke Energy’s Q3 Results Will Be Influenced By Rate Increases, Wholesale Business And Cooler Weather

by Trefis Team
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Duke Energy (NYSE:DUK), one of America’s largest utility companies, will report its Q3 2013 earnings on November 6. We expect the company’s quarterly results to be aided by the recent rate increases for the U.S. franchised electric and gas (USFE&G) division as well as improvements in operational efficiency and contributions from the wholesale electricity business.  Slightly cooler weather could weigh on the company’s load. During the second quarter, Duke’s operating revenues stood at around $5.88 billion, while operating income came in at around $821 million. Here is a quick rundown on some of the factors that will influence the firm’s results.

Trefis has a $73 price estimate for Duke Energy, which is in line with the current market price.

Recent Rate Increases: Over 85% of Duke Energy’s revenues come from its regulated utility business in the United States and the company is dependent on state regulators for rate increases to offset costs related to upgrading its fleet and adding new generation capacity. Over the past few months Duke’s Ohio subsidiary received approval to increase its rates by around 2.9%, while Duke’s Progress subsidiary in North Carolina saw a 5.5% rate increase.  In September, the firm was awarded a 5.1% rate increase for its Duke Energy subsidiary in North Carolina and a 8.2% rate increase for its South Carolina operations. These increases should have a moderate effect on the company’s revenues and profitability for the quarter.

Wholesale Business Could Be Accretive To Earnings: The wholesale electricity business involves short-term and long-term contracts to provide electricity to municipalities and co-operatives within the areas that Duke Energy operates in. [1] Duke expects this business to grow at a compounded rate of around 8% per year over the next two years, which is considerably higher than the estimated 4% revenue growth for the USFE&G division. Duke has signed several new wholesale contracts this year, most of which are located in the Carolinas. The wholesale business is expected to be earnings accretive for the company, contributing about $1 billion in net margins for 2013, and we believe that it could influence the company’s third quarter results as well.

Operational Efficiency And Synergies From Progress Energy Merger: Duke Energy closed its merger with Progress Energy in July 2012. Following the merger, Duke has been able to derive synergies by eliminating some duplicate functions, reducing manpower, increasing scale in power generation, and combining dispatch centers. As of Q2 2013, the company had seen combined savings of over $120 million and this should improve going forward. [2] The company estimates that non-fuel operating expenses can be reduced by 5% to 7%, while savings related to fuel and transmission are expected to be at least $650 million over the next five years.

Slightly Cooler Weather Could Impact Load: We believe that Duke’s load during the third quarter could have been impacted by milder weather. The number of cooling degree days, which measures 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 7% on average year-over-year in the South Atlantic region, where a large part of Duke’s U.S. Franchised Electric and Gas operations are located. [3] The number of cooling degree days were down by around 8% on average across the United States during the quarter.

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Notes:
  1. Duke Energy Q1 Conference Call, Seeking Alpha []
  2. Duke Energy Q2 Conference Call, Seeking Alpha []
  3. American Gas Association []
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