Duke Energy’s Earnings Benefit From Colder Weather, International Business

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Duke Energy (NYSE:DUK), one of North America’s largest utility holding companies, reported a reasonably strong set of Q1 2014 earnings on May 7. The company’s results were driven by weather conditions, recent rate increases and better wholesale net margins. While quarterly revenues grew by around 12% year-over-year to around $6.62 billion, adjusted net income grew by around 16% to about $829 million. [1] On a GAAP basis, the company posted a net loss of around $97 million due to a pre-tax impairment charge of $1.4 billion related to a writedown of its Midwest Generation business. Here is a brief look at some of the trends behind the earnings.

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Colder Weather Helps  Regulated Business

The regulated electric business saw its load growth rise by around 7.1% year-over-year to around 63,868 GWh, due to extremely cold weather across many of the company’s service territories. Notably, on a weather normalized basis, the company’s load grew by around 2.6%, driven by the residential and commercial segments. Weather normalization removes the effects of weather on load growth and is likely to be a better measure of long term consumption trends. Duke’s earnings were also favorably impacted by some rate increases that the company was awarded through the last year.  Wholesale sales from the regulated business also did well through the quarter. The company expects wholesale net margins for this year to amount to about  $1 billion, potentially growing at a rate of about 6% through 2016. Through this wholesale business, Duke provides electricity under short-term and long-term contracts to entities such as municipalities and co-operatives.

International Business Does Well, Brazil Reservoir Levels Prove A Concern

Duke’s international business primarily operates electric generation facilities, and also sells and markets electricity and natural gas, in Latin America. The business did well this quarter, with segment income rising by around 34% year-over-year to around $130 million, on the back higher spot volumes and better pricing in Brazil. Almost all of Duke’s capacity in Brazil is hydroelectric, and this has proven a concern since the country has been witnessing low rainfall of late. Reservoir levels, which are an important metric for future generation from hydropower plants, stood at around 39% at the end of April, versus about 62% a year ago. Duke has indicated that it has currently minimized downside risks by using thermal generation units to preserve reservoir levels and also by reducing the contracted percentage for its hydro generation. [2] However, if the drought were to continue, it could impact the company’s business in the Brazilian market.

Writedown on Midwestern Generation Assets Impacts Commercial Power Business

Earlier this year, Duke had announced that it planned to divest its Midwest electricity generation business, which accounts for a bulk of the commercial power division’s assets.  For this quarter, the company recorded a pre-tax impairment charge of about $1.4 billion on these assets, causing the division to post a segment loss of around $879 million. Prices in the PJM interconnection wholesale market, to which the Midwestern assets supplied electricity, have been very volatile due to low natural gas prices. This resulted in high earnings volatility, making the assets a poor fit with Duke’s largely stable utilities-driven business. Although the company has yet to find a buyer for the Midwest assets, it estimates that the transaction would be accretive to overall earnings beginning in 2015 (see: Why Duke Energy Plans To Sell Its Midwest Generation Business). Following the divestiture, the commercial power division is likely to consist of the company’s solar and wind generation assets.

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Notes:
  1. Duke Energy Q1 2014 Earnings Press Release, Duke Energy, May 2014 []
  2. Duke Energy’s CEO Lynn Good on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 []
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