Earnings Review: Drought, Currency Impact On International Business Dents Duke's Q4 Results

| About: Duke Energy (DUK)

Summary

Duke Energy reported fourth quarter 2015 adjusted earnings per share of 87 cents, 7% below consensus estimates of 94 cents.

For the full year, revenue stood at $23.46 billion, down 2% from 2014's $23.93 billion.

Duke is considering exiting from its international business, but no timeline has been specified on this front, making the performance of the international business in 2016 less important.

We have a $68 price estimate for Duke Energy, which is about 9% below the current market price.

The largest electric utility company in North America, Duke Energy (NYSE:DUK) reported its fourth quarter and full-year earnings for the fiscal-year 2015 on Thursday, February 18th. The company reported adjusted earnings per share of 87 cents, 7% below consensus estimates of 94 cents. Management attributed the earnings miss on the impact of mild weather conditions and the negative impact of currency translation, as revenue earned from international operations in South America was worth less when translated back into the U.S. dollar. For the full year, revenue stood at $23.46 billion, down 2% from 2014's $23.93 billion. Operating income rose by 2.1% year over year as operating expenses fell by close to 3% on lower fuel expenses. The decline in operating costs was offset by higher operation and maintenance expenses, as well as higher depreciation and amortization expenses.

Segment wise, increased pricing as well higher wholesale net margins led to a 9% increase to $601 million in the reported adjusted income of the Regulated Utilities division. Lower margins for National Methanol and the unfavorable impact of currency translations meant that the adjusted income of the International Business dropped by 5.6% to $68 million for the full year. The company's commercial power business reported an adjusted income of $41 million for the full year, up 28% from last year's $32 million, on the back of higher margins in wind and solar generated power. The commercial power business which now includes unregulated renewable assets and commercial electric and gas transmission investments but not the Midwest Commercial Generation business, which the company sold to Dynergy last year.

We have a $68 price estimate for Duke Energy, which is about 9% below the current market price.

Key Drivers For 2016

Due to a tougher regulatory environment, Duke has had to forego short-term profitability and focus on optimizing its asset base. The company has focused on increasing investments in natural gas and renewables, while getting lowering its exposure to unregulated markets. In 2016, the company expects most of its growth in the regulated utilities business to come from opportunities that will be unlocked by the $5 billion investments in growth that it has made. Management expects retail load to grow by around 0.5% year over year, and that should result in some bottom-line growth for the company. Most of its growth in 2016 is expected to result from the integration of the North Carolina Eastern Municipal Agency's (NCEMPA) assets that it purchased for $1.25 billion and closed in July of last year. Additionally, the company has been focusing on reducing operational and maintenance costs.

On the commercial power front, Duke expects to benefit from a $1.5 billion investment in Renewables and from its stake in the joint venture in the Atlantic Coast pipeline with Piedmont and Dominion. However, there has been a lag in getting regulatory approval for operations in certain jurisdictions. This, coupled with the loss of earnings from the Midwest power generation business, will offset some of the gains from new investments. On the international front, management said that reservoir levels in Brazil increased throughout 2015, which will enable the company to purchase power at a lower cost in 2016, resulting in higher margins. However, lower exchange rates between currencies in South America and the U.S. dollar, and low Brent crude oil prices, will mean lower revenue for the company's National Methanol business. Additionally, Duke is considering exiting from its international business, but no timeline has been specified on this front, making the performance of the international business in 2016 less important. Most of Duke's growth will come from its core business, which the company expects to grow between 4% and 6% in 2016.

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