Duke Energy Corporation (DUK) announced its second-quarter 2011 operating earnings of 33 cents per share, beating the Zacks Consensus Estimate by 3 cents. However, the results were marginally lower than the year-ago earnings of 34 cents per share. GAAP and adjusted EPS were the same for the quarter compared with a GAAP loss per share of 17 cents in the prior-year period.
The year-over-year growth in earnings was driven by the strong performance at all the three segments of the company partially offset by less favorable weather and higher operations and maintenance costs primarily related to storm restorations compared with the prior-year period.
Operational Update
Duke Energy generated total revenue of $3,534 million in the second quarter, comfortably ahead of the Zacks Consensus Estimate by $201 million and up from $3,287 million in the second quarter 2010.
During the reported quarter, U.S. Franchised Electric and Gas segment sold 34,127 Gigawatt hour (‘’GWh’’) of electricity, down 2% from 34,751 GWh in the prior-year quarter. Commercial Power meanwhile sold 9,965 GWh versus 8,681 GWh in the prior-year quarter. Duke Energy International Energy sales during the quarter were down by 525 GWh to 4,516 GWh from 5,041 GWh a year ago.
In second quarter 2011, total operating expenses declined 13% to $2,859 million from $3,306 million in the prior-year quarter. Operating income in the second quarter swung back to $679 million from an operating loss of $14 million in the prior-year period.
Segment Update
U.S. Franchised Electric and Gas: Earnings before Interest and Taxes (EBIT) at the segment decreased by $52 million year over year to $619 million. The results reflect higher operations and maintenance expense mainly as a result of storm restoration costs, as well as less favorable weather compared with the prior-year period. These headwinds were, however, partially offset by increases ensuing from the new generation investments in the Carolinas and in Indiana.
Commercial Power: EBIT during the quarter under review was $59 million, another turnaround from a loss of $604 million in second quarter 2010. The results were driven by lower mark-to-market losses from economic hedges and favorable outcome from the Midwest gas assets due to higher volumes and margins partially offset by the annualized effects of customer switching in Ohio in 2010 that stabilized in the third quarter of 2010.
Duke Energy International: EBIT during the quarter increased by $53 million year over year to $179 million driven primarily by higher average contract prices in Brazil, greater prices and volumes in Central America, favorable average foreign exchange rates, and increased earnings from National Methanol.
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 Inc. (PGN) and results from Duke Energy’s captive insurance company. Net expenses during the quarter were $57 million, compared with expenses of $122 million in second quarter of 2010. The narrower loss was primarily due to higher severance costs in the prior-year period associated with the voluntary employee separation plan and office consolidation.
Financial Update
At the end of second quarter 2011, the company held current assets worth $5,634 million compared with $6,223 million at fiscal 2010 end. Long-term debt decreased to $17,687 million from $17,935 million in fiscal 2010.
In June 2011, Duke Energy raised the quarterly cash dividend on its common stock by 5 cents to 25 cents per share increasing the annualized dividend from 98 cents to $1.00. The dividend is payable on September 16, 2011 to shareholders of record at the close of business on August 12, 2010.
Guidance
Duke Energy reiterated its adjusted earnings per share guidance for 2011 in the range of $1.35 to $1.40.
At the Peer
A Duke Energy competitor, American Electric Power Co. (AEP) reported second quarter 2011 adjusted EPS of 73 cents, down from the year-ago figure of 74 cents and the Zacks Consensus Estimate of 76 cents.
Our Take
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 ongoing merger proceedings with Progress Energy. Moreover, the company will continue to work on the pending rate cases in the Carolinas, ongoing fleet modernization, and in pursuing a new Electric Security Plan for Duke Energy Ohio customers for the rest of 2011.
However, the valuation continues to be restrained by an unfavorable macro backdrop, predominantly fossil-fuel based generation assets, tepid demand for electricity, and foreign currency exchange volatility. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.
In January this year, Duke Energy decided to buy Progress Energy Inc. for $13.7 billion in stock. The transaction once it gets through would create the largest U.S. utility and increase its ability to build new power plants to meet future greenhouse-gas emissions limits. On August 4, 2011, Progress Energyis expected to release its second quarter results. The Zacks Consensus Estimates for second quarter 2011 and fiscal year 2011 are currently at 63 cents per share and $3.12 per share, respectively.
Charlotte, North Carolina-based Duke Energy is a diversified energy company with a portfolio of domestic and international, natural gas and electric, regulated and unregulated businesses which supply, deliver, and process energy for customers in North America and selected international markets.
