Duke Energy
(
DUK
) reported its second quarter earnings recently and the net profit
increased marginally. The primary factors affecting the results for
its largest division - U.S. Franchised Electricity & Gas -
include revised electricity tariffs in the Carolinas, which was
partially undone by lower electricity consumption due to
unfavorable weather conditions.
Its overall revenues increased marginally this quarter while
revenues in International energy and Commercial energy divisions
declined. The results in International energy were affected by
lower earnings in Central America and unfavorable foreign exchange
rates, which overtook improved tariff in Brazil and Peru. While the
growth in residential customers continue to be sluggish, the
company ought to look for periodical tariff raises to harness
value. The recent merger with Progress Energy will benefit
significantly going forward as strengthening pricing power and
reducing costs from achievement of economies of scale are likely to
increase profits.
We have recently revised our model for Duke Energy to
accommodate the merger with Progress Energy and the Q2 results. We
now have a
price estimate of $70 for Duke Energy
. The Progress Energy operations will now be part of U.S.
Franchised division of Duke. We have revised our forecasts for
International Energy and Commercial Energy divisions lower, and we
increased out revenue per MWh estimate for its franchised business
as it has several pending rate cases, which are likely to turn out
positive.
In January 2012, both the North Carolina Utilities Commission
and the Public Service Commission of South Carolina approved rate
hikes for residential customers by approximately 7.2% and 6.0%,
respectively. Other noteworthy changes include reduction in
discount rate from 8.5% to 8% due to increased stability after the
merger, updated share count and total capitalization.
See our complete analysis for Duke
Energy here
Q2 Results
If we were to break down the happenings of Q2 for Duke Energy
,
it would highlight these trends: an increase in tariffs, a decline
in GWh sales and a negligible increase in customers. Average number
of industrial customers dropped, which is more prominent in the
Carolinas where it fell by 3.3%. In its entire operating territory,
the loss in GWh sales was driven primarily by residential customers
who tend to use much less electricity when climatic conditions are
more favorable. During Q2, GWh used by residential customers fell
by 5.6% and 8.2% in Midwest and Carolinas, respectively.
Duke Energy merged with Progress Energy on July 1, 2012 and
reported Progress's Q2 results separately. The earnings reported by
Progress Energy were primarily impacted by outages caused due to
nuclear refueling in the Carolinas. This increased the operations
and maintenance charge by a whopping 15% for the first 6 months of
2012, which stood at $1.15 billion. While revenues saw a marginal
incline of less than 1%, EBITDA increased by 11% on reduced
purchased power expenses. The other trends are more or less
congruent to the ones observed for Duke.
Outlook
The outlook of the company has become more stable after the
merger with Progress Energy, but one will need to keep an eye on
the consolidation process over the next year to ascertain positive
outcomes from the merger. The company plans to reduce its non-fuel
operations and maintenance expenses by 5-7% per year. It will also
execute fuel savings by coal blending and coal purchasing
efficiencies. Duke has pending rate cases in Ohio likely to be in
effect by 2013 Q2. However, its fuel and joint dispatch savings
plan could partially reduce recent tariff gains in Carolinas,
according to which it will offer $89 million reduction in sales to
Carolina customers over next 12 months.
Progress energy generates 43% of total power through nuclear
fuels, which will change the fuel production profile drastically
for the consolidated entity as Duke's maximum share of electricity
generation came from coal. Progress's operations and maintenance
expenses went up abrubptly in Q2 on refueling outages. Hence, much
of the company's fate now lies on how it rolls over across plants
for maintenance. Several of Duke and Progress's plants are phasing
out, which will be replaced by new plants. In its earnings call, it
reaffirmed that Edwardsport IGCC project startup will happen in
early 2013 instead of Sep 2012. The capital structure of the
company is likely to change as it plans to take $2 billion of
additional funding over $1.3 billion it already planned for its
Carolina and Florida utilities.
Overall, we believe the company's ability to charge higher
tariff and contain costs will help unlock value for it going
forward. However, changing fuel consumption profile could affect
the company as it now has an increased reliance on nuclear fuels.
We are looking forward to see how the company manages its power
generation fleet to keep outages to as low as possible. The company
is likely to perform better in the future largely because of its
enlarged scale.
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