Duke Energy (NYSE:DUK), one of North America’s largest utility holding companies, is expected to publish its Q1 2014 earnings on Wednesday, May 7. We expect earnings to increase on a year-over-year basis, driven by higher load from the regulated electric business in the United States and some operating cost-related improvements. During Q4 2013, the company’s revenues grew by 7% year-over-year to $6.15 billion, while operating income rose 57% to about $1.20 billion. In this note, we take a look at some of the trends that we believe will influence Duke’s earnings for the quarter.
Colder Weather, Higher Commercial Occupancies Should Drive Regulated Business: The United States witnessed a cold wave during the first quarter, and this is likely to have driven up demand for electricity. The number of heating degree-days, 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, was up by around 9.7% year-over-year during the month of February, according to the most recent data available. 
The commercial and industrial sectors could also be key growth drivers. During Q4 2013, much of Duke’s weather-normalized load growth came from the commercial sector, where improving employment trends as well as better consumer spending resulted in lower vacancy rates for commercial spaces. We think that this trend could continue. For instance, through Q1, the office sector saw vacancy rates reduce by about 0.2 percentage points year-over-year, to about 15.6% on the back of healthy leasing activity. 
Operation And Maintenance Cost Management: Given the relatively sluggish long term outlook for retail load growth, Duke has been streamlining its cost base in order to improve earnings. Operation and maintenance expenses are one of Duke’s most significant costs, standing at around 25% of revenues as of 2013. However, since Duke closed its merger with Progress Energy in mid-2012, it has indicated that it was able to keep these expenses flat, owing partly to better management of its corporate costs. The company now aims to maintain these costs at current levels through 2016 owing to through work eliminations and efficiency improvements, headcount management and reduced use of contract workers. This could possibly allow Duke to expand margins for the quarter.
Brazil Volumes And Pricing Could Be Positive; Watching Reservoir Levels: Duke’s international 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 that of the United States. For this quarter, we will be watching the company’s Brazilian operations, which account for about half of the international segment’s generation capacity. Duke expects earnings from the segment to grow on the back of favorable pricing and volumes in Brazil. The company projects that contract pricing in Brazil will rise at a rate of around 6% (in local currency) between 2013 and 2016.  However, we think that the company could face a significant risk on the cost front in Brazil, since nearly all its generation capacity in the country is hydroelectric, and reservoir levels have been below projected levels through much of Q1 due to lower rainfall. Notes:
- Electricity Monthly Update, US EIA [↩]
- C&W: Q1 U.S. office market occupancy absorption up 133% from last year, FMLink, April 2014 [↩]
- Duke Energy Q4 2013 Earnings Slides, Duke Energy, February 2014 [↩]
- Duke Energy Q4 2013 Earnings Conference Call Transcript, Seeking Alpha, February 2014 [↩]