Favorable Weather, Better Costs Aid Duke’s Results

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Duke Energy (NYSE:DUK), one of North America’s largest electric utility companies, published its Q4 2013 earnings on February 18, reporting a reasonably strong set of numbers that beat market expectations. While quarterly revenues grew by around 7% year-over-year to $6.15 billion, operating income rose 57% to about $1.20 billion. [1] The results were aided by recent rate increases, better control over operating and maintenance costs, as well as more favorable weather conditions. The company has guided FY2014 earnings of between $4.45 and $4.60 per share, which translates to an increase of around 5% year-over-year. Here are some of the key takeaways from the earnings release and what to expect going forward.

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U.S. Franchised Electric And Gas Business

Duke Energy’s U.S. franchised electric and gas business (USFE&G) did well this quarter. Revenues grew by around 5.5% year-over-year to $5.14 billion, aided by favorable weather conditions as well as recent rate increases in the company’s Ohio and Carolinas utility operations. Segment profits rose by around 19% to $572 million, benefiting from better per-unit costs.

Total retail load (unadjusted for weather effects) grew by around 3.2% year-over-year to 49,722 gigawatt hours (GWh). However, on a weather-normalized basis, retail load grew by just about 0.9% year-over-year. [2] Weather normalization removes the effects of weather on load growth and is likely to be a better measure of long term consumption trends.

Commercial and Industrial Sectors Drive Load Growth: Most of the weather-normalized load growth has come from the commercial sector, where improving employment trends as well as better consumer spending have resulted in lower vacancy rates for commercial spaces. Things seem to be improving on the industrial side as well on the back of a resurgent automotive industry and higher housing market related activity. However, the residential sector has been somewhat sluggish for the company, given the increasing focus on energy efficiency. Most of the weather-normalized load growth in the residential space has actually come from new customer additions (about 1% year-over-year) rather than from a growth in per-customer consumption.

Cost Control: It has been more than a year since Duke closed its merger with Progress Energy. Following the merger, Duke has been able to realize synergies by eliminating some duplicate functions, reducing manpower, increasing scale in power generation and combining dispatch centers. As of Q4 2013, the company says that it has achieved cumulative fuel and joint dispatch savings of about $190 million, and says that it is on track to reduce the  non-fuel operation and maintenance costs in 2014 by about 9%. Duke expects operation and maintenance costs to remain flat in 2014.

Outlook For 2014: Duke remains relatively cautious on its outlook for load growth, guiding an increase in retail load of just about 0.5% for 2014. Considering the sluggish load growth, much of the projected growth in the company’s earnings per share will have to come from the company’s cost reductions as well as from the full year impact of the rate increases that the company was awarded through 2013. Additionally, higher margins for the wholesale business and milder weather conditions could also drive earnings growth.

Commercial And International Business

Duke’s Commercial business, which primarily consists of the company’s Midwestern-generation assets that it recently decided to divest, continued to see a volatile performance, posting a segment loss of around $29 million versus a profit of around $16 million a year ago (see Why Duke Energy Plans To Sell Its Midwest Generation Business).

The company’s international business, on the other hand, did reasonably well, as quarterly segment income rose by close to 21% year-over-year to $108 million. The business, which is largely located in Latin America, owns and operates electric generation capacity, and also sells and markets electricity and natural gas. The business is important for the company, since electricity consumption growth in key Latin American markets is at least four times higher than in the United States. During the fourth quarter, the company benefited from higher volume sales as well as a slight improvement in conditions for hydroelectric power generation in Brazil. For 2014, the company expects the Brazilian operations, which account for nearly half of the international segments generation capacity, to drive earnings growth on the back of higher pricing as well as volumes.

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Notes:
  1. Duke Energy Q4 2013 Earnings News Release, Duke Energy, February 2014 []
  2. Earnings Review and Business Update, Duke Energy, February 2014 []
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