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Duke Energy (NYSE:DUK) published its Q4 earnings on May 3, marking its third quarterly earnings release following the Progress Energy merger. Operating revenues were around $5.9 billion, while net income was around $634 million. The firm reported an earnings per share (EPS) of $0.89, up from $0.66 a year ago. On an adjusted basis, excluding the results of Progress Energy, EPS was almost flat at around $0.71. The U.S. Franchised Electric and Gas (USFE&G) division continued to perform well aided by favorable weather conditions. However, the international energy division was weighed down by higher costs in Brazil, while the commercial power division was hit by lower pricing. Here are some of the key takeaways from the firm's earnings release.

Cooler Weather Helps USFE&G Division

The U.S. franchised electric and gas division is Duke's largest business segment and accounts for nearly 90% of our price estimate. The division's quarterly revenues stood at around $5.06 billion compared to around $2.67 billion a year ago, primarily due to the Progress Energy merger, while operating income was around $1.22 billion. Excluding the effects of the Progress merger, adjusted earnings from the division came in at around $0.58 per share (up from around $0.49 per share a year ago), driven primarily by higher demand for energy due to cooler weather that increased the number of heating degree days during the quarter.

Residential Customer Growth: An increasing focus on energy conservation and a weak economy have weighed on Duke's load growth. The company's weather normalized load increased by around 0.5% year over year. In the residential sector, the usage per customer declined marginally, although the number of customers grew by around 0.7%. Going forward, Duke expects load growth in the U.S. to continue to be sluggish at around 1%.

Cost Saving and Efficiency: Considering the relatively weak outlook for load growth, the firm's future earnings growth will partly hinge on operational improvements. Duke's recent merger with Progress Energy provides opportunities to reduce fuel and transmission costs through enhanced economies of scale and enables the possibilities for joint dispatch. During Q1, the firm mentioned that it had achieved $37 million in fuel and joint dispatch savings from its Carolinas fleet. Nuclear power accounts for around one-third of Duke's electricity production, and over the quarter its nuclear fleet put up a strong performance, with capacity factors coming in at around 97%. Improvements like this should help to increase asset utilization and improve margins.

Rate Cases: Almost 85% of Duke Energy's revenues come from its regulated utility services, and the firm is dependent on state regulators for rate increases to offset costs of adding new capacity or upgrading its fleet. The Carolinas fleet has filed rate cases in North Carolina and South Carolina for increasing the annual rates paid by customers by a total of around $446 million and $220 million, respectively, and the firm expects these rates to come into effect end of this year.

Wholesale business provides a pocket for growth: The wholesale electricity business entails short-term and long-term contracts to provide electricity to municipalities and co-operatives within the areas where Duke operates. The firm expects this business to grow at a rate of around 8% per year over the next two years, which is higher than the estimated 4% growth for the USFE&G division. Duke said that it had signed several new wholesale contracts this year, most of which are located in the Carolinas. Since most of these sales are contracted over the long term, it should provide some additional stability for the company. The wholesale business is expected to contribute around $1 billion in net margins for this year alone.

International Operations Weighed Down by Higher Costs in Brazil

Duke's international businesses, which primarily operates generation capacity in Latin America, accounts for less than 10% of the firm's total business, but we believe that it is quite important from a growth perspective. In the first quarter, the division's performance was weighed down by lower volumes and higher power purchase costs in Brazil due to a delay in the rainy season, which impacted Duke's hydropower assets in the region. (See also "Duke Energy's International Business: A Closer Look At The Brazilian Market.") Since Brazil accounts for a bulk of Duke's international capacity, it weighed down its international margins. The segment's operating income fell from around $157 million in Q1 2012 to around $129 million.

The commercial power division also performed relatively poorly, posting an operating loss of around $81 million for the quarter due to lower results from coal and gas generation assets in the Midwest. The weak results were due to a sharp decrease in pricing for electricity on the PJM interconnection.

Disclosure: No positions.

Source: Duke Energy's Q1 Results Benefit From Cooler Weather