Duke Energy’s Q2: Earnings Were Cooled By Milder Weather And Weaker Commercial Business

Duke Energy‘s (NYSE:DUK) second quarter earnings turned out to be relatively disappointing weighed down by mild weather, lower rates for its commercial power business and impairment charges relating to its Crystal River nuclear power plant in Florida. Quarterly operating revenues came in at around $5.88 billion while operating income stood at around $821 million. The company reported an adjusted earnings per share of around $0.87 versus around $0.65 last year. However, excluding the contribution of the Progress Energy merger, which took place in Q3 2013, earnings per share was around $0.52, which is lower than last year’s number. ^[1] Here is a brief look at some of the factors that drove the company’s performance for the quarter.

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Mild Weather Hits U.S. Franchised Electricity and Gas Division

Duke’s U.S. franchised electric and gas (USFE&G) division was weighed down by mild weather in its primary operating regions. The number of cooling degree days, which measure the need for air conditioning based on the extent to which the average temperature on a day exceeds a certain reference temperature, declined by around 6% on average in the South Atlantic region where a large portion of Duke’s operations are located. ^[2] In addition, the Carolinas saw a significant amount of rainfall during the quarter which reduced the cooling load.

Even on a weather normalized basis, the load growth for the USFE&G division continues to be slow as usage per customer has been trending lower due to low income growth and increasing energy efficiency in homes. The average number of customers, however, grew by around 0.8% since last year. However, industrial load growth has been strong rising by around 1.2% since Q2 2012 supported by growth in the automobile sector. Given the middling load growth performance, Duke will have to count on efficiencies for profit growth. Duke has been realizing synergies from its merger with Progress Energy and mentioned that it was continuing to achieve savings through fuel savings as well as joint-dispatch. The combined savings over the last year stood at around $120 million. ^[3]

The firm saw increased revenue contributions from recently approved rate increases, and this  helped the company partially offset some of the effects of the decline in load. In the last three months, Duke Energy Ohio received approval to increase its rates by around 2.9% while Duke’s Progress subsidiary in North Carolina saw a 5.5% rate increase. The firm also has settlement agreements that are pending commission approval for Duke Energy Carolinas, and these are likely to go into effect next month and could contribute over $350 million in additional annualized revenues. ^[4]

Commercial Power Hit By Lower Pricing On PJM Interconnection

Duke’s commercial power division primarily operates out of the Mid-West through the PJM Interconnection regional transmission organization and accounts for about 10% of Duke’s total sales. This quarter turned out to be rather rough on the division as it posted adjusted segment loss of around $3 million compared to adjusted income of $32 million in the second quarter last year. This was primarily due to lower prices on the PJM auctions that were caused partly due to overcapacity on the interconnection. Unlike the retail electricity market in which rates are regulated and relatively stable, the wholesale electricity market is much more competitive given the number of participants and Duke must compete with other suppliers primarily based on pricing.

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1. Duke Energy Press Release [↩]
2. Weekly Statistics, American Gas Association [↩]
3. Seeking Alpha [↩]
4. Duke Energy Quarterly Presentation [↩]