Earnings Review: Unfavorable Weather in U.S., Brazil Dampens Duke Energy’s Results

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

Duke Energy (NYSE:DUK) released its third quarter earnings on November 5. The company’s reported numbers that were below market expectations. While the reported EPS of $1.40 came in slightly below last year’s EPS of $1.46, diluted EPS of $1.80 was much higher than last year’s figure of $1.42. [1] The diluted EPS benefited from a $477 million pre-tax reversal because of impairment charges taken by the company on its Midwest generation business taken in the first quarter. The company attributed the disappointing performance to below normal weather- cooling degree days, defined as the amount of energy used to cool a home or business, were 10% below the average level in North and South Carolina, and 30% lower in the Midwest. [1] Despite these numbers, there are several steps that the company has been taking in order to mitigate the impact of these factors on its cash flows. Below, we discuss those decisions in light of these numbers.

Trefis has a $73 price estimate for Duke Energy, which is in line with the current market price.

See Our Complete Analysis For Duke Energy Here

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?

Summary of the numbers: The company reported revenues of $6.4 billion for the quarter, about $0.2 billion than last year’s revenues, but still about 10% below the expected number. [1] The reported EPS of $1.40 fell short of expectations by about 8% and was lower than last year’s reported EPS by about 6%. Duke’s regulated utilities business recognized income of $920 million for the quarter, essentially flat compared with last year’s income of $923 million.  [1] The regulated utilities business benefited from higher pricing and a favorable change in effective tax rate; these gains were offset by lower volumes, higher expenditure on infrastructure maintenance and interest payments. The company’s International Energy business recognized adjusted segment income of $80 million, over 30% below last year’s $116 million. [1] The decrease in this division’s earnings was primarily driven by unfavorable results in lower volumes and higher purchased power costs resulting from unfavorable weather in Brazil and an unplanned power outage in Chile. Duke’s commercial power business increased its income to $51 million compared to last year’s $15 million driven by higher results from the Midwest coal and gas generation fleets and increased results from the renewable business. [1]

International Business: Duke Energy Corporation has been in Brazil since 1999, when it acquired Paranapanema Electricity Generation Company. The subsidiary, which creates just over 2% of Brazil’s total electricity, is highly risky as it generates all its electricity by relying on just 10 power plants spread along two rivers. As a result, when weather conditions are unfavorable, as in the case of this summer with lower rainfall resulting in lower than expected reservoir levels, the company has had to rely on contracts to reduce the volatility in its numbers. However, financial arrangements do not affect the weather; the company still suffers in case of such an event.

In the previous quarter, company management announced plans to undertake a strategic review of its international business which makes electricity across Central and South America. The unit, which contributes just a shade over 10% to the earnings, might even be sold, but that is not the only option on the table for Duke. One of the objectives of this review will be to devise a plan to repatriate $1.7 billion cash being held offshore. ((Duke Energy’s CEO Lynn Good on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, August 2014))

Rate Increases, Higher Office Occupancy Rates Should Drive Q4 Results: The revenue of the company’s regulated electric subsidiary increased by $176 million to $5,861 million over the quarter. [1] Most of the realized gains were a result of increases in the customer rate. This trend bodes well for the company, as this division comprises over 90% of overall sales. Moreover, the commercial office market is seeing a resurgence with improvements in the employment levels in the United States. In the fourth 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. For instance, through Q1, the office sector saw vacancy rates decline by about 0.2 percentage points year-over-year, to about 15.6% on the back of healthy leasing activity. [2] Economic data relating to employment has continued to improve ever since and we expect the same trends to continue this quarter. In fact, according to Cushman & Wakefield,  the U.S. office market remained on pace to achieve the lowest vacancy rates in the last five years, at the end of the third quarter. [3]

Trefis is currently updating its valuation model and price estimate for Duke Energy to account for the earnings release.

Understand how a company’s products impact its stock price on Trefis

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Duke Energy 8-K, SEC [] [] [] [] [] [] []
  2. C&W: Q1 U.S. office market occupancy absorption up 133% from last year, FMLink, April 2014 []
  3. U.S. Office Market on Pace for Highest Absorption in 5 Years, World Property Journal, October 2014 []