Indiana, Brazil Woes Dampen Duke Energy’s Earnings

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

The largest electric utility company in North America Duke Energy (NYSE:DUK) on July 6th reported  adjusted earnings per share of 95 cents,  a 15% decrease from the prior year $1.11. Reported earnings per share, which include one-time items a the results of discontinued operations, were 78 cents.  ((DUK 8-K, SEC)) [1] Company management attributed the decrease in adjusted earnings to tax items and a drop in results from the international business segment. We take a closer look at segment results in our note below.

We have a $68 price estimate for Duke Energy, which is about 8% below the current market price.

Regulated Utilities Suffers Indiana Setback

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?

Duke’s regulated utilities business contributes around 92% of the company’s revenue and 92% of its valuation, according to our estimates. The company sells electricity and gas in the states of North and South Carolina, Florida, Ohio and Indiana, and also owns the Progress Energy business which sells electricity and natural gas to industries and businesses in North and South Carolina and Florida. Over the first six months of the year, Duke sold higher amounts of electricity through its regulated utilities business in all areas except Indiana and the Carolinas. Indiana is especially worrying for the company as the amount sold in the region has decreased by 5% on a year-over-year basis. [1]

Late last year, Duke had issued a proposal to the Indiana Utility regulatory commission for a $1.9 billion upgrade of its grid in Indiana. [2] Under the proposal, the company would have been able to modernize its grid by installing “self-healing” technologies and expanding its customer services. Under the new system, Duke would be able to monitor energy usage rates for each user and charge them accordingly. This would also allow the company to allocated resources more efficiently, as electricity can be redirected on the grid from places it isn’t being used to where there is a higher or more urgent demand. However, the state regulators turned down the proposal in May of this year on  that grounds that the energy tracking meters would be invading the privacy of homeowners and businesses and that the data transmission mechanism that these smart meters use potentially harmful radiation. [3] In the earnings call, the company management put much a milder spin on the ruling and stated that they would be sending in another proposal with greater detail in the near future. [4]

Duke’s regulated utilities business is capital intensive and offers low scope for growth. In recent quarters, lower per capita electricity consumption rates and sluggish user base growth had put the brakes on top line growth. Demographic trends, such as Millennials choosing to live with their families in higher rates and the rise of multi-family housing, have led to lower energy consumption by consumers. As a result of these factors, the company has had to focus on cost cutting measures and downsizing capacity to levels more commensurate with the demand. The results this quarter are more or less in line with these trends.

Weak Brazil Economy Hurts International Business

The international power business is likely to be Duke’s biggest source of growth in the future. There are two reasons for this. First, electricity consumption in Latin America is still very low. In Brazil, per capita annual electricity consumption stands at around 2,300 kilowatt-hour (kWh) while it is around 3,300 kWh in Chile.  In comparison, the per capita consumption in the United States stands at around 11,900 kWh. This gives the former group much more room to grow, and until recently electricity consumption was expected to grow at a rate of 4.5% per year in Brazil compared to 1% in the U.S.  Regarding the second reason, electricity rates  in many parts of Latin America are higher than the rates in the U.S. Retail rates in Brazil stand at over $0.16 per kWh while retail rates in Chile can some times approach $0.23 per kWh. The high prices are partly a result of higher power generation costs and transmission costs but high demand and relatively short supply also play a significant role. While Duke does not have retail operations in these countries, it can benefit at the wholesale level in the region.

Against this backdrop, the collapse of the Brazilian economy comes as extremely bad news for the company. Fully 40% of Duke’s international business comes from Brazil and the company posted an adjusted segment income of only $52 million this quarter compared to $146 million last year. [1]  Brazil is heavily dependent on export of commodities and thus dependent on demand from China, the biggest commodity importer in the world,  The decline in the value of the Brazilian Real and the strength of the U.S. dollar against currencies of Chile, Peru, Ecuador and El Salvador was the main reason behind this decline, but low demand for electricity from Brazil also contributed.

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. Ref: 1 [] [] []
  2. Duke Energy plans $1.9 billion upgrade to Indiana grid, BizJournal, August 2014 []
  3. State regulators reject Duke Energy’s request for rate hike, Indianapolis Sun Times, May 2015 []
  4. Duke Energy (DUK) Lynn J. Good on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, August 2015 []