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Duke Energy Earnings Beat on Lower Costs

Zacks Equity Research

Duke Energy Corp. (DUK) reported adjusted fourth quarter 2013 earnings of $1.00 per share that came in ahead of the Zacks Consensus Estimate of 94 cents by 6.4%. Quarterly earnings were also above the year-ago figure by 30 cents.

The strong numbers mainly reflect lower costs through synergies from the 2012 merger with Progress Energy, along with recovered infrastructure modernization costs through revised customer rates. The company also benefited from the adoption of nuclear outage cost levelization in the Carolinas.

Including special items, quarterly earnings increased 56.5% to 97 cents per share on a year-over-year basis.

Full-year 2013 adjusted earnings increased 0.7% year over year to $4.35 per share, beating the Zacks Consensus Estimate by 4 cents.

Full Year 2013 Operational Update

In 2013, Duke Energy’s top line increased 25.3% year over year to $24,598.0 million. The reported figure fell short of the Zacks Consensus Estimate of $24,973 million.

On the cost front, total operating expenses were $19,600.0 million in 2013, up 18.7% from $16,514.0 million in 2012.

The company registered a considerable improvement in its operating income, which escalated 59.4% year over year to $4,982.0 million.

Quarterly Segmental Highlights

Regulated Utilities (formerly known as U.S. Franchised Electric and Gas): Segment adjusted income was $607.0 million, up from $498.0 million a year ago. This was driven by lower operating and maintenance expenses, higher pricing and riders, favorable weather and increased wholesale net margins.

International Energy: Segment income advanced to $108.0 million from $89.0 million buoyed by robust results in Latin America from higher volumes and pricing in Brazil.

Commercial Power: The segment incurred an operating loss of $3 million in the quarter as against break-even results in the year-ago period. The weak results reflect lower margins at Duke Energy Retail.

Other: The segment includes corporate interest expense not allocated to the business units, results from Duke Energy’s captive insurance company, other investments, and income tax levelization adjustments.

Net expenses were $6.0 million, down from $91.0 million in the year-ago quarter. The improvement was mainly due to a lower effective tax rate, favorable captive insurance loss experience, and higher investment returns.

Financial Update

As of Dec 31, 2013, the company held cash & cash equivalents of $1,501.0 million versus $1,424.0 million as of Dec 31, 2012. Long-term debt increased to $40,256.0 million (including current maturities) from $39,461.0 million as of Dec 31, 2012. The debt-to-capitalization ratio stood at 49.3% in the quarter.


Duke Energy provided full year 2014 adjusted earnings guidance in the range of $4.45 to $4.60 per share. It also updated its longer-term average annual growth to 4% to 6% through 2016. The Zacks Consensus Estimate for 2014 is pegged at $4.57, on the higher end of the guided range.

At the Peers

American Electric Power Company Inc. (AEP) reported fourth quarter 2013 operating earnings of 60 cents per share, beating the Zacks Consensus Estimate of 56 cents by 7.1%. The quarterly figure also improved 20% from the year-ago profit of 50 cents.

Michigan-based CMS Energy Corp. (CMS) posted fourth-quarter 2013 earnings per share of 37 cents on both adjusted and GAAP basis. The quarterly figure was on par with the Zacks Consensus Estimate, but increased 48% on a year-over-year basis.

PG&E Corporation’s (PCG) adjusted operating earnings per share of 42 cents in the fourth quarter of 2013 were ahead of the Zacks Consensus Estimate of 40 cents, backed by higher rate base earnings. However, the reported figure came in below the year-ago number of 59 cents by 28.8% due to lower regulated return on equity and debt compared to last year and a higher number of shares outstanding.

Our Take

The largest power provider in the U.S. – Duke Energy – reported higher quarterly earnings, aided by lower costs and regulatory approvals of rate base requests. We believe the company’s stable electricity and gas operations will enable it to generate a relatively steady and growing earnings stream in the future.

Its acquisition of fellow North Carolina based utility, Progress Energy Inc. spread the new entity’s stable U.S. electricity and gas operations over 7.1 million electric customers in Carolinas, Florida, Indiana, Kentucky and Ohio.

Recently, Duke Energy announced its plan to divest its stake in 13 power plants in the nation’s Midwest after Ohio regulators denied its request to raise rates. The plants together have a capacity of 6,600 megawatts.

The company will record a pretax charge of $1 billion to $2 billion in the first quarter of 2014 from the sale, which it expects will take 12 to 18 months to complete. The company’s willingness to get out of the wholesale power-generation business in the Midwest reflects the volatility associated with its financial results.

Going forward, key growth drivers for the company include its strong balance sheet, ongoing capital expansion projects and an above industry average dividend yield.  However, the unfavorable macro backdrop, predominantly fossil-fuel based generation assets and tepid demand for electricity remain matters of concern. Duke Energy presently retains a short-term Zacks Rank #3 (Hold).

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