Duke Energy Q4 Preview: Colder Weather, Rate Increases Should Power Results

by Trefis Team
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Duke Energy (NYSE:DUK), one of North America’s largest utility companies, is scheduled to report its Q4 2013 earnings on Tuesday, February 18. In the third quarter, the company’s revenues and adjusted net income remained relatively flat year-over-year at around $6.7 billion and $1.03 billion, respectively. [1] For this quarter, we expect to see an improvement on a year-over-year basis, driven by colder weather and rate increases for the company’s regulated utility business in the United States. Below we discuss what to expect when Duke reports Tuesday.

Trefis has a $74 price estimate for Duke Energy, which is about 5% ahead of the current market price. 

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Colder Weather Could Help Load Growth: The U.S. has been experiencing a particularly cold winter, and we believe that Duke’s U.S. Franchised Electric and Gas (USFE&G) division’s revenues could be aided by higher demand for heating. For the fourth quarter, the average number of heating degree days in the United States rose by about 10% year-over-year. ((American Gas Association))  Heating degree days are a measure of the need for heating based on the extent to which the average temperature on a day falls below a certain reference temperature (typically 65° Fahrenheit).

Recent Rate Increases: Over 85% of Duke Energy’s revenues come from its regulated utility business in the United States. 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 has seen some significant rate increases. During Q2 2013, 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 company was awarded a 5.1% rate increase for its Duke Energy subsidiary in North Carolina and 8.2% rate increase for its Duke South Carolina operations.  While these rate increases have partially helped the firm’s Q3 2013 revenues and margins, their effect will be more pronounced in Q4 when the company should realize the full benefit.

International Business Could Be Aided By Brazil: Duke’s international energy business, which is primarily located in Latin America, owns and operates electric generation capacity and also sells and markets electricity and natural gas. We believe that the business could have a reasonably good quarter on stronger operating performance in Brazil, which is its single largest market. Duke’s Brazilian operations are composed predominantly of hydroelectric assets and were impacted earlier this year as droughts reduced reservoir levels, resulting in lower generation volumes and higher costs due to power purchases. However, during the third quarter, the company had indicated that hydro power conditions in Brazil were stabilizing, with reservoir levels improving over the last year. [2] This should help the company reduce generation costs and help to stabilize margins.

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Notes:
  1. Duke Energy Press Release []
  2. Duke Energy Earnings Call Transcript, Seeking Alpha, November 2013 []
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