Duke Energy (NYSE:DUK), one of North America’s largest utility holding companies, is expected to publish its Q4 and full year earnings for the fiscal year 2015 on February 18th. [] In the previous quarter, the company reported a 4.3% increase in operating income on the back of a 3% increase in operating revenues of its Regulated Electric business. However, the company had benefited from a favorable tax settlement in the previous year, so its reported income attributable to shareholders declined by 27% on a year-over-year basis. []
Stricter regulation of utility companies has meant that Duke has had to sacrifice short term profits for the sake of acquisitions and investments in facilities and power plants. So far the corporation has been limited in its ability to pass on those costs to customers, leading to declining revenues. Below, we take a look at what can be expected of the company when it announces results for the fourth quarter.
Regulated Utilities Should Benefit From Customer Acquisition
Duke has been growing its customer base at a rate of just over 1% on an annualized basis but per capita electricity consumption has been lower due to mild weather conditions. The company’s regulated electric division, which contributes roughly 90% of overall revenues, grew in each of the first three quarters of the year. Moreover, the company gets roughly 85% of its earnings from this division, a figure that should improve further when the company completes its acquisition of the Piedmont Natural Gas Plant. We expect the user base to continue to grow in the fourth quarter, which may positively impact earnings.
On the energy generation front, the company’s nuclear fleet achieved a 97% capacity factor and its natural gas plants benefited from low natural gas prices, which should also be accretive to the company earnings. Duke’s fuel mix is also expected to change in the future as the company improves its access to natural gas and continues to add renewable assets to its portfolio. However, roughly half a million Duke customers in North and South Carolina suffered from power outages following heavy rain and flooding in the two states in the month of October. This may offset some of the gains from cost savings and customer growth.
International Business Segment Up For Sale
Duke’s international business is likely to be its biggest growth driver as it is more productive on a revenue generated as a percentage of asset basis. It contributes around 5% of revenues despite accounting for only 4% of the total assets in comparison to the commercial power business, which contributes just 1% revenue but accounts for 5% of the asset base. However, Duke’s operations are based in countries that are suffering from the downturn in demand worldwide. For example, 40% of Duke’s international revenue comes from Brazil, whose currency has declined by a third against the U.S. dollar over the past year. [] For this reason, the company is considering selling its international segment. It also fits with the company’s overall strategy of trying to reduce its exposure to unregulated markets. Duke is expected to retain its 25% equity investment in Saudi Arabian National Methanol even after selling some of its international business assets.
