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Duke Energy Lags Q2 Earnings, Beats Sales

Zacks Equity Research

Duke Energy Corp. (DUK) reported adjusted second quarter 2013 earnings of 87 cents per share that came below the Zacks Consensus Estimate of 93 cents. The quarterly earnings also fell below the year-ago figure of $1.02 by 14.7%.

The lower numbers mainly reflect the impact of share dilution from the Progress Energy merger and lower quarterly results at both the Commercial Power and International Energy business units. However, this was partially offset by favorable results at U.S. Franchised Electric & Gas driven by the addition of Progress Energy's utility operations.

Including Crystal River Unit 3 impairment of 26 cents per share, nuclear development costs of 8 cents, Progress Energy merger costs of 7 cents, litigation charges of 4 cents and mark-to-market gain of 6 cents, the company reported earnings of 48 cents per share compared with 99 cents in the year-ago quarter.

Operational Update

Duke Energy’s top line climbed a significant 64.4% year over year to $5,879.0 million in the reported quarter. The reported figure also beat the Zacks Consensus Estimate of $5,535.0 million.

On the cost front, total operating expenses were $5,059.0 million, significantly up 81% from $2,795 million in the year-ago quarter.

The company registered a considerable improvement in its quarterly operating income to $821 million, up 4.5% year over year.

Quarterly Segmental Highlights

U.S. Franchised Electric and Gas: Segment income was $590 million, up from $337 million a year ago. The results were driven by the addition of Progress Energy’s regulated utility operations in the Carolinas and Florida, increased pricing due to revised customer rates at Duke Energy Ohio, and lower operations and maintenance expenses. However, these positives were partially offset by milder weather and a decrease in the Allowance for Funds Used During Construction equity primarily due to the completion of certain major capital projects.

International Energy: Segment income declined to $87 million from $105.0 million due to lower volumes resulting from an extended planned maintenance outage at National Methanol Company.

Commercial Power: Segment loss was $3.0 million compared to segment income of $32 million in the year-ago quarter. The results reflect lesser contribution from the Midwest coal and gas generation fleet principally due to lower PJM capacity revenues, lower generation volumes and the prior-year recovery of a previously written-off receivable from Lehman Brothers.

Other: The segment includes corporate governance expenses, costs associated with the company's 2010 voluntary employee separation plan, costs-to-achieve the merger with Progress Energy and results from Duke Energy's captive insurance company.

Net expenses were $57 million, up from $18 million in the year-ago quarter. The significant increase reflects addition of interest expense on Progress Energy’s corporate debt and increased Duke Energy holding company interest expense.

Financial Update

As of Jun 30, 2013, the company held cash & cash equivalents worth $1,571 million versus $1,424.0 million as of Dec 31, 2012. Long-term debt decreased to $38,323 million (including current maturities) from $38,609.0 million as of Dec 31, 2012.


Duke Energy maintained this year’s adjusted earnings guidance range of $4.20 to $4.45 per share. For the second half of 2013, the company expects strong adjusted earnings as it implements revised customer rates and continues to achieve efficiencies from the merger transaction.

At the Peers

Integrys Energy Group, Inc. (TEG) reported second quarter 2013 pro forma earnings of 45 cents per share, up 66.7% from the year-ago quarter. Earnings also breezed past the Zacks Consensus Estimate of 32 cents by 40.6%.

Diversified utility, NiSource Inc. (NI) posted net operating earnings of 23 cents per share in the second quarter of 2013, a penny or 4.2% lower than the Zacks Consensus Estimate. Earnings were however 4.5% higher than the year-ago quarter.

Our Take

Duke Energy’s bottom line failed to meet the Zacks Consensus Estimate; however the top line easily surpassed our expectation. Most of the growth in the top and bottom line was related to Duke’s merger with Progress Energy. The company has now begun to accrue benefits.

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).

In the near term, we would advise investors to accumulate its short-term Zacks Rank #1 (Strong Buy) peer Huaneng Power International, Inc. (HNP).

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