Duke Ups Profit, Misses Revenue

Zacks

Duke Energy Corporation (DUK) announced second-quarter 2012 adjusted earnings of $1.02 per share, beating both the Zacks Consensus Estimate of 95 cents and the year-ago number of 99 cents. The upsurge came from revised customer rates in the Carolinas and lower storm restoration costs year-over-year. These were partially offset by less favorable weather, higher financing costs, and increased depreciation expense.

In the reported quarter, Duke Energy reported GAAP earnings per share of 99 cents versus 98 cents per share in the year-ago period.

In the second-quarter 2012, the variance of 3 cents between reported and adjusted earnings was due to merger-related costs and mark-to-market impacts of economic hedges in the Commercial Power segment.

The EPS numbers are derived after adjusting the reported and prior-year periods to reflect the one-for-three reverse stock split which was completed immediately prior to closing the merger with Progress Energy on July 2, 2012. In connection with the merger, Progress Energy has become a wholly owned direct subsidiary of Duke Energy. As a result, the Duke Energy’s financial results for the second quarter 2012 are on a stand-alone basis and do not include Progress Energy’s results. The financial results of Progress Energy will be included in Duke Energy’s consolidated results only from the third quarter of 2012.

Operational Update

Duke Energy generated total revenue of $3,577 million in the reported quarter, falling short of the Zacks Consensus Estimate of $4,355 million. However, it was above the year-ago figure of $3,534 million.

Segment Update

U.S. Franchised Electric and Gas: Earnings before Interest and Taxes (“EBIT”) increased to $337 million year over year from $297 million. The results were primarily driven by the implementation of new customer rates in the Carolinas; lower operation and maintenance costs primarily due to significant prior-year storm restoration costs; and increased pricing and riders. These results were partially offset by higher planned depreciation expense; less favorable weather; and higher financing costs.

International Energy: EBIT during the quarter decreased to $105 million year over year from $127 million due primarily to lower pricing in Central America and unfavorable average foreign exchange rates. These results were partially offset by favorable pricing in Brazil as well as higher volumes and pricing in Peru.

Commercial Power:  EBIT was $32 million compared with the year-ago figure of $30 million. The positive variance was primarily due to a non-bypassable stability charge under the new Electric Security Plan (ESP) in Ohio; recovery of a Lehman Brothers receivable previously written-off; lower operation and maintenance costs and the prior-year impairment of the Vermillion gas-fired plant. These were partially offset by lower margins from the Midwest coal generation fleet resulting from the new ESP in Ohio and lower margins and volumes realized by Duke Energy Retail.

Other:  This segment primarily includes corporate interest expense not allocated to the business units, results from Duke Energy's captive insurance company and income tax levelization adjustments. Other recognized a second-quarter 2012 adjusted net expense of $18 million, compared with an expense of $15 million in the second quarter 2011.

Financial Update

At the end of the reported period, the company held cash & cash equivalents worth $1,526 million versus $2,110 million at year-end 2011. Long-term debt decreased to $17,539 million from $17,730 million at year-end 2011. During the first half of 2012, the company generated $2,002 million from operating activities versus $1,717 million generated in the year-ago period.

Guidance

Duke Energy remains on track to achieve its 2012 adjusted earnings guidance range of $4.20 to $4.35 per share.

Our Take

The acquisition of Progress Energy at the inception of July 2012 made Duke Energy the largest U.S. utility in terms of market capitalization. Earlier, Chicago-based Exelon Corporation (EXC) was the largest U.S. utility.

Based in Charlotte, North Carolina, Duke Energy is a diversified energy company with more than $100 billion in total assets. Its regulated utility operations serve approximately 7.1 million electric customers located in six states in the Southeast and Midwest. Its commercial power and international business segments own and operate diverse power generation assets in North America and Latin America, including a growing portfolio of renewable energy assets in the U.S.

Duke Energy Corporation’s U.S. electricity and gas operations generate a relatively stable and growing earnings stream. Looking ahead, the company’s outlook is supported by its strong balance sheet and ongoing capital expansion projects which add visibility to the story.

However, valuation continues to be restrained by a number of factors, including the present unfavorable macro backdrop, predominantly fossil-fuel based generation assets, tepid demand for electricity, foreign currency exchange volatility and pending regulatory cases. The company presently retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.

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