Duke Energy Corporation (DUK) reported third-quarter 2010 earnings of 51 cents per share, beating the Zacks Consensus Estimate of 42 cents. Results were also ahead of 40 cents from a year ago.
Net income attributable to Duke Energy in the quarter was $670 million, substantially higher than $190 million in the year-ago quarter.
The better-than-expected results were largely due to warm weather and base-rate increases approved in 2009 in the Carolinas, as well as higher weather-normalized sales volumes to industrial customers. However, partial offsets included an impairment charge related to the Edwardsport project in Indiana and customers switching in Ohio.
Revenue was $3.9 billion, up from $3.4 billion in the third quarter of 2009. Solid revenues at U.S. Franchised Electric and Gas and Commercial Power segments aided the climb. Results were also ahead of the Zacks Consensus Estimate of $3.8 billion.
Operating expenses inched lower by 1.7% year over year to $2.92 billion in the quarter.
Operating income was $1.0 billion in the quarter, much higher than $0.4 billion in the third quarter of 2009.
The company recorded an increase in interest expense attributable to higher debt balances due to construction program financing. Interest expense in the quarter totaled $202 million, up 6.3% year over year.
Segment Update
U.S.Franchised Electric and Gas: Operating revenue was $2.9 billion, up 17.8% from $2.5 billion in third-quarter 2009.
Operating earnings at the segment increased 32% year over year to $946 million. The considerable improvement was driven by warm weather, rate increase in the Carolinas, and higher Allowance for Funds Used During Construction from the ongoing construction program. However, settlement charges related to the Edwardsport project in Indiana somewhat muted the increase.
Commercial Power: Segment operating revenue improved 21% year over year to $7.7 million in the reported quarter.
The segment posted an operating profit of $188 million, compared with an operating loss of $234 million in the year-ago quarter. Increased energy margins and revenues from the Midwest gas-fired generation coupled with favorable weather and higher mark-to-market gains on economic hedges helped reverse the prior-year loss, though lower retail sales and lower gains on coal sales were partial offsets.
Duke Energy International: Operating revenue was $273 million, a decline of 6.8% over the prior-year quarter.
Segment operating income was $110 million, higher than $100 million in the quarter. The increase was largely driven by higher sales prices and favorable average foreign exchange rates in Brazil, partially offset by unfavorable hydrology in Central America resulting in lower dispatch of thermal generation.
Other: Operating income at $17 million incurred a double-digit, year-over-year decline of 10.5% in the quarter.
Other items’ charge of $100 million of net expense from continuing operations compared unfavorably with $65 million in the year-ago quarter. The increase in net expense was due primarily to severance costs associated with the voluntary employee separation program and office consolidation.
Financial Update
Total debt at the end of the third quarter was $18.3 billion, higher than $16.4 billion at the end of third-quarter 2009.
Book value per share increased 24% year over year to $16.73 as of September 30, 2010.
Capital and investment expenditures in the quarter were $1.05 billion, down from $1.17 billion in the prior-year quarter. A substantially lower capital and investment expenditure at U.S. Franchised Electric and Gas and Commercial Power compared with the year-ago quarter resulted in the year-over year decline.
Cash from operations for the first nine months of 2010 totaled $3.7 billion, a substantial increase of 44% year over year.
Guidance
Based on the solid performance through the first nine months of the fiscal year, Duke Energy raised its earnings guidance to a range of $1.40–$1.45, up from the previous guidance of $1.30–$1.35.
Based on base rate increase, capital expansion projects, and a recovering economy, we expect the company to post bullish results in the upcoming quarters.
We maintain a Neutral recommendation on Duke Energy in the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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