Three Factors Which Resulted In Lower Reported Q4 Earnings For Duke Energy

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Duke Energy (NYSE:DUK) disappointed investors with its fourth quarter earnings. In our note below, we take a closer look at the factors that affected the company’s earnings.

1) Rough Residential Sales: In the fourth quarter of 2014, Duke Energy saw its weather-normalized residential sales decline by 2.2%. [1] Regulated utilities usually make money by getting more customers at a standardized rate. Over the full year, the utility company saw its number of customers rise by 1%, the average energy usage per customer has declined, and as a result its revenue collection has fallen. For the full year, the company’s revenue collection fell by 0.1%. [2] The reasons behind this declining use of electricity are energy saving initiatives and a number of people choosing to live in multi-family housings, which result in lower electricity usage per capita and hence lower electricity bills. On the industrial and commercial front, the company saw 1% growth for the full year. [2] Going forward, this means that in order to hedge revenue collections against the volatility in demand, Duke must lower the expenditure on power plants and downsize to new demand levels.

2) International Businesses: Duke is a multinational business with operations in Guatemala, El Salvador, Ecuador, Peru, Brazil, Argentina, and Chile. As a result, its revenue collections are spread out across South America. In order to invest in future opportunities, multi-national companies need to repatriate cash. This is a step many companies approach with trepidation, but Duke has gone ahead and decided to repatriate its cash. The company will repatriate $2.7 billion worth of cash over the next eight years. [3] While the company plans to repatriate all this cash strategically over the eight year period, it took a $373 million one time hit in taxes over the quarter. [4] The move coincides with the company’s efforts at holding on to its international business assets. The international business unit contributes about 10% to Duke’s overall business mix. While lower earnings might alarm shareholders, the repatriation is a good move because it will help the company strengthen its balance sheet and credit quality, as well as support investments and dividends for the whole period.

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3) Higher Costs: Duke makes its revenues from the sale of electricity to customers. However, it has to produce or buy the electricity first. In the full year, the company’s U.S. earnings from the commercial sector came in $21 million below the company’s guided figure. [2] This was primarily because of higher power purchase costs. In the first quarter, the polar vortex pushed prices higher and there was a power outage at Duke’s mid-west power generation fleet. Similarly the company’s international business suffered from higher power purchase costs. The company’s hydroelectric dams in Brazil were affected by irregular water levels at its reservoirs due to lower than expected rainfall. Going forward, the U.S. based company needs to make sure that its power generation costs are not affected so significantly by fluctuations in the price of power. It will have to pursue more stable electricity generation sources for this purpose in the future. A good sign on this front was the unexpectedly large $60 million in earnings that the company’s renewables division generated in the fourth quarter. It might be a good idea for the company to increase the mix of energy from such sources in its overall sales mix going forward.

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Notes:
  1. DUK 8-K, SEC []
  2. Ref: 1 [] [] []
  3. Duke Energy bringing $2.7B in overseas profits to U.S. to support growth projects, Biz Journal, February 2015 []
  4. Ref: 2 []