What Can We Learn From Duke's Missed Earnings?
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Duke Energy (NYSE: DUK) missed its earnings this quarter due to several factors. What can investors learn from this earnings call and apply to the utility sector? There were several macro-economic trends that Duke called out, and we’ll look into them below.
Duke announced that its net income fell 24% in the second quarter and earnings fell to $0.48 per share. The company is citing warmer weather and one-time charges related to a nuclear plant as the main reasons for the miss. However, Duke stated that lower demand has meant that the wholesale market for electricity has pushed the price of electricity down. This seems to be a macro-economic change that is staying around longer than most utilities would like.
Warmer weather, tepid demand
June was a particularly wet and cold month for Duke’s service area. Consumers didn’t turn on their AC as much, with the number of “cooling days” falling 32% in Indiana, 21% in Ohio, and 17% in the Carolinas.
Similarly, Exelon (NYSE: EXC) saw warmer weather in its Midwest service areas last quarter. Exelon expects that it will reduce revenue at Exelon Generation by nearly $100 million for full-year 2013. On the distribution side, ComEd also saw EPS lowered by $0.02 due to nice weather.
Exelon had a gross margin of 23.1% and a net profit margin of 3.9%. This company has moved financial conservatism to the forefront. It paid down $400 million in debt this last quarter. Exelon is looking to become a less-leveraged company, while funding a larger percentage of its capital expenditure with operating cash flows.
Going Forward, Exelon’s merger with Constellation Energy is still on track to achieve $550 million of annual run-rate merger synergies by 2014. The company has laid out a current five-year plan that includes $16 billion of growth capital expenditure. This spending will include numerous renewable projects that will have lower variable costs once they are installed.
Electricity is cheap
Low power prices in the Midwest hurt Duke’s commercial power division, which sells wholesale power to other utilities. Duke saw demand from steel and other metal manufacturers drop, which is reflective of a weaker global economy, putting pressure on demand for electricity.
Duke finally decided this quarter that the Crystal River reactor in Florida, that it acquired in the Progress Energy merger, would be closed down. This caused a one-time charge against Duke’s earnings. The company cited the low generation costs of natural gas compared to nuclear in the decision to do so.
NextEra Energy (NYSE: NEE) is looking to change its generation mix before lower energy costs compromise its earnings. NextEra provides electricity to most of Florida with a mostly natural-gas-powered fleet. However, NextEra has been hedging its bets with solar and wind power installations. Since its Q1 earnings release, NextEra has been planning on increasing its wind-powered generation by approximately 650 MW in 2014. This will increase NextEra’s renewable capacity by 1.8 GW. This is enough electricity to power nearly 1.5 million homes.
NextEra saw its net income rise by nearly $40 million in Q2 and its EPS grow by 8% year-over-year. All of NextEra’s capital investments seem to be paying off. The company just signed a partnership agreement with Spectra Energy to build a pipeline from Mississippi that will run through Alabama, Georgia, and Florida. This pipeline is expected to be completed in 2017, and will help the U.S. efficiently use the country's supply glut of natural gas.
NextEra has a 10.7% profit margin, one of the highest in the industry. NextEra is going to continue to be a growth story. This is one of the reasons the company has is not focused more on raising its 3.1% dividend, which on the low side for a utility. NextEra has been a benefactor of the oversupply of natural gas in the U.S., while other utilities were hurt by it. While NextEra continues to focus on natural gas and renewable energy projects, fixed costs and capital expenditure will continue to expand. This push to increase its renewables portfolio will benefit the company in the long-run with a source of energy that has virtually zero variable costs.
Foolish bottom line
When it comes to having a large renewable portfolio, both Duke and Exelon are behind companies like NextEra. Duke and Exelon both have strength in their regulated utilities segments that provides steady income, but they are being slowly out-competed when it comes to installing low cost electric generation capacity. NextEra will continue to be the growth story in the utility sector, while the other companies play catch-up.
Duke is testing programs that involve the installation of solar panels on customers' rooftops, and has seen some success. The company sees less wear and tear on its distribution network, and lower fuel costs in its generation segment. Utilities in Southern states are cautious when it comes to residential solar power because, if everyone is generating their own electricity, the supply will increase and wholesale prices will decrease, leading to lower profits.
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Wes Patoka owns shares of Duke Energy and Exelon. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!