Earnings Preview: Spotlight On The Future As Duke’s Revenue Growth Stalls

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Duke Energy

Duke Energy (NYSE:DUK), one of North America’s largest utility holding companies, is expected to publish its results for the second quarter of the fiscal year 2016 on Thursday, August 4th. [1] In the previous quarter,the company’s profit fell on the back of mild winter conditions and higher operational and maintenance expenses necessitated by winter storms. It reported an earnings per share (EPS) of $1.13 for the quarter, compared to $1.24 for the first quarter of the previous year. The company’s biggest division Regulated Utilities saw its earnings fall to $695 million compared to $774 million in the previous year.

Over the past five years, revenue for the regulated utilities division has grown at a CAGR of 2.6%. This growth has been the result of a mild increase in the amount of electricity sold per user (CAGR of 0.5%), an increase in the number of customers (0.8% per year) and a 1.3% annual increase in the price of electricity per unit. Duke is the largest utility in the U.S. with close to 7.3 million customers but its customer satisfaction levels have been dropping. According to a survey by the American Customer Satisfaction Index, satisfaction rate with Duke declined from 72% in 2015 to 70% this year. This was a second consecutive decline on the Index for the company. This is part of the reason why the company has seen its revenue grow so slowly.

Additionally, the company has decided to sell off its international power division, which was largely based in South America.  This business declined sharply as the dollar rose against currencies like the Brazilian real and the Chilean peso following the collapse of the Global commodity super cycle. In the previous quarter, the company stated that it had begun marketing its assets in the business and signed non disclosure agreements with interested parties. We look forward to more detail on this front.

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Going forward, the company’s focus is on diversifying its asset portfolio through several investments in wind, solar and biomass capacity. The company is targeting 33% of its electricity generation to come from these sources by 2020. On this front, the company recently opened a solar plant at a Walt Disney resort in Florida and its North Carolina Subsidiary Duke Energy Renewables bought six solar farms in North Carolina, taking its overall total of owned solar farms to 30. The per unit cost of Solar and Wind is considerably higher than that for natural gas and coal, so we look forward to the company management’s thoughts on how they plan to negotiate this barrier to solar adoption and drive customer growth. Finally, Duke’s proposed purchase of Piedmont Natural Gas for $ 4.9 billion was approved by the North Carolina Public Staff, an independent agency that advises North Carolina utilities regulatory bodies. We look forward to the company’s thoughts on how they plan to integrate this business into their operations.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Duke Energy
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Notes:
  1. Duke Energy Investor Relations []