Duke Energy Earnings Preview: Cost Management, Higher Brazil Prices To Drive Results

-0.88%
Downside
94.94
Market
94.10
Trefis
DUK: Duke Energy logo
DUK
Duke Energy

Duke Energy (NYSE:DUK), one of North America’s largest utility holding companies, is expected to publish its Q2 2014 earnings on August 6. 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 Q1 2014, the company’s revenues grew by 12% year-over-year to $6.6 billion, while adjusted income rose 16% to about $829 million. In this note, we take a look at some of the trends that we believe will influence Duke’s earnings for the quarter. [1]

We have a $72 price estimate for Duke Energy, which is almost in line with the current market price. We will be updating our price estimate for the company after the earnings release.

See Our Complete Analysis For Duke Energy Here

Commercial, Industrial Sectors 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. [2]

Relevant Articles
  1. Duke Energy Jumps 10% On Takeover Rebuff News – What’s Going To Happen Now?
  2. Duke Energy Could Have 20% Upside. What Are The Catalysts?
  3. Duke, Southern, Dominion: Utility Stocks Continue To Underperform. Time To Buy?
  4. Is Ameren’s 2x Price Rise Compared To Duke Energy Justified?
  5. Why NextEra’s 5x Price Rise Versus Duke Energy Is Not Justified
  6. Duke, NextEra, Southern: Are Big Utilities Riskier Through This Downturn?

In the second quarter, the commercial and industrial sectors could be key growth drivers. During Q1 2014, 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. [3]

Cost Cutting Should Improve Margins: 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.

Higher Prices To Drive International Revenues: 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. [4]

See More at TrefisView Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

Notes:
  1. Duke Energy Q1 2014 Earnings Press Release, Duke Energy, May 2014 []
  2. Electricity Monthly Update, US EIA []
  3. C&W: Q1 U.S. office market occupancy absorption up 133% from last year, FMLink, April 2014 []
  4. Duke Energy Q4 2013 Earnings Slides, Duke Energy, February 2014 []