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Duke Energy Corp. (DUK - Analyst Report) reported adjusted third quarter 2013 earnings of $1.46 per share that came below the Zacks Consensus Estimate of $1.51 by 3.3%. The quarterly earnings also fell short of the year-ago figure by a penny. The weak numbers mainly reflect unfavorable weather and higher depreciation and amortization expense.

However, including special items, quarterly earnings increased 67.1% to $1.42 per share on a year-over-year basis. This was mainly backed by revised customer rates, increased weather normalized retail volumes and wholesale net margins in the company’s regulated businesses.

Operational Update

Duke Energy’s top line decreased marginally to $6,709.0 million in the reported quarter from the year-ago level of $6,722.0 million. The reported figure also fell short of the Zacks Consensus Estimate of $7,331.0 million.

On the cost front, total operating expenses were $4,966.0 million, down 12.2% from $5,658.0 million in the year-ago quarter.

The company registered a considerable improvement in its quarterly operating income to $1,743.0 million, up 61.7% year over year.

Quarterly Segmental Highlights

U.S. Franchised Electric and Gas: Segment adjusted income was $923.0 million, up from $907.0 million a year ago. The results were driven by increased pricing due to revised customer rates as well as favorable retail volumes and wholesale net margins.

International Energy: Segment income advanced to $116.0 million from $103.0 million buoyed by robust results in Latin America owing to higher pricing in Brazil and financial results from the Chilean operations acquired last year.

Commercial Power: Segment operating income stood at $15.0 million, down from $31.0 million in the year-ago quarter. The results reflect lesser contribution from the Midwest gas generation fleet and from its renewables business.

Other: The segment includes corporate interest expense not allocated to the business units, results from Duke Energy’s captive insurance company, other investments, and income tax levelization adjustments.

Net expenses were $22 million, up from $16 million in the year-ago quarter.

Financial Update

As of Sep 30, 2013, the company held cash & cash equivalents worth $2,166 million versus $1,424.0 million as of Dec 31, 2012. Long-term debt decreased to $38,444 million (including current maturities) from $38,609.0 million as of Dec 31, 2012. The debt-to-capitalization ratio stood at 48.2% in the quarter.

Guidance

Duke Energy has narrowed its adjusted diluted earnings guidance range from $4.20 to $4.45 per share to $4.25 to $4.45 per share for the year.

At the Peers

American Electric Power Company Inc. (AEP - Analyst Report) reported third quarter 2013 operating earnings of $1.10 per share, beating the Zacks Consensus Estimate of $1.08 by 1.9%. The quarterly figure also improved 7.8% from the year-ago profit of $1.02. This improved performance reflects positive returns from the investments made in the company’s regulated operations.

Diversified energy company FirstEnergy Corp. (FE - Analyst Report) announced third-quarter 2013 operating earnings of 94 cents per share, beating the Zacks Consensus Estimate of 91 cents. However, the results lagged the year-ago earnings of $1.11 by 15.3%.

Our Take

Although Duke Energy’s top and bottom line failed to meet the Zacks Consensus Estimate, we believe the company’s stable electricity and gas operations will enable it to generate a relatively steady and growing earnings stream in the future.

Going forward, key growth drivers for the company include its strong balance sheet, ongoing capital expansion projects and an above industry average dividend yield.  However, the unfavorable macro backdrop, predominantly fossil-fuel based generation assets and tepid demand for electricity remain matters of concern. Duke Energy presently retains a short-term Zacks Rank #3 (Hold).

In the near term, we would advise investors to accumulate its short-term Zacks Rank #1 (Strong Buy) peer UNS Energy Corporation (UNS - Snapshot Report).

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