Duke Energy Corporation (DUK) announced its fourth-quarter 2011 adjusted earnings of 24 cents per share, beating both the Zacks Consensus Estimate and the year-ago earnings of 21 cents each.
In the quarter under review, the company reported GAAP earnings per share of 22 cents versus 32 cents per share in the year-ago period.
In the fourth-quarter 2011, the variance of 2 cents between reported and adjusted earnings was due to the impact of costs-to-achieve the merger with Progress Energy Inc. (PGN). Earlier, in January 2011, Duke Energy announced that it would buy Progress Energy. The $16.1 billion transaction is expected to be completed by July 2012. Once the transaction gets through, it would create the largest U.S. utility and increase its ability to build new power plants to meet future greenhouse-gas emissions limits. Currently, Chicago-based Exelon Corporation (EXC) is the largest U.S. Utility.
Duke Energy’s fiscal 2011 adjusted earnings were $1.46 per share, topping the Zacks Consensus Estimate of $1.41 and fiscal 2010 adjusted earnings of $1.43 per share.
On a reported basis, fiscal 2011 earnings came in at $1.28 per share versus $1.00 in fiscal 2010. Performance was boosted in fiscal 2011 from the ongoing modernization program and favorable results from its International business unit. This helped mitigate the impact of significantly less favorable weather, higher operating and maintenance costs, including significant storm restoration costs, and the annualized effect of customer switching in Ohio.
Operational Update
Duke Energy generated total revenue of $3,368 million in the fourth quarter, beating the Zacks Consensus Estimate of $3,220 million. However, it was below the year-ago figure of $3,445 million.
In fiscal 2011, Duke Energy generated total revenue of $14,529 million beating the Zacks Consensus Estimate of $14,393 million and fiscal 2010 revenue of $14,272 million.
Fourth Quarterly Segment Update
U.S.Franchised Electric and Gas: Earnings before Interest and Taxes (“EBIT”) at the segment decreased to $552 million year over year from $605 million. The results decreased primarily due to unfavorable weather. This was partially offset by higher earnings from investments in its ongoing modernization program and a favorable revenue true-up, following a North Carolina regulatory ruling related to the company’s energy efficiency programs.
Commercial Power: EBIT, during the quarter under review, was $8 million; far below the year-ago figure of $58 million. The decrease was primarily due to lower fee, on account of exiting the Midwest Independent System Operator (“MISO”) effective at the end of 2011 and the annualized effect of 2010 customer switching in Ohio, which stabilized in the latter half of 2010. Additionally, earnings from the Midwest gas-fired generating fleet decreased primarily driven by lower PJM capacity revenues and higher operation and maintenance costs from planned outages. These were partially offset by higher margins on wholesale transactions.
Duke Energy International: EBIT during the quarter increased to $152 million year over year from $110 million driven primarily by favorable volumes and pricing in Brazil, higher pricing at National Methanol, and higher capacity revenues in Peru. These were partially offset by slightly unfavorable average foreign exchange rates.
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 during the quarter were $46 million, compared with $121 million in the year-ago quarter. The decrease in net expense was primarily attributable to a $40 million donation to the Duke Energy Foundation in the prior-year quarter, and lower corporate governance costs in the fourth-quarter 2011.
Financial Update
At the end of fiscal 2011, the company held cash & cash equivalents worth $2,110 million versus $1,670 million at fiscal-end 2010. Long-term debt increased to $17,730 million from $16,959 million at fiscal-end 2010. During fiscal 2011, the company generated $3,672 million from operating activities versus $4,511 generated at fiscal-end 2010.
Guidance
Duke Energy affirmed its 2012 adjusted diluted EPS guidance range of $1.40 – $1.45. This range does not contemplate the effects of the proposed Progress Energy merger. Duke Energy remains well-positioned to achieve its long-term adjusted diluted EPS compound annual growth rate of 4% – 6% from its 2009 base.
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. In addition, its strong balance sheet and ongoing capital expansion projects add visibility to the story.
However, valuation continues to be restrained by a number of factors, including the present unfavorable macro backdrop, predominantly fossil-fuel based generation assets, tepid demand for electricity, foreign currency exchange volatility and pending regulatory cases. The company presently retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.
Based in Charlotte, North Carolina, Duke Energy is a diversified energy company with a portfolio of domestic and international, natural gas and electric, regulated and unregulated businesses. These businesses supply, deliver, and process energy for customers in North America and selected international markets.
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PROGRESS ENERGY (PGN): Free Stock Analysis Report
