Duke Endures Low Demand

Duke Energy Corporation (DUK - Snapshot Report) reported its third quarter 2009 earnings of 40 cents per share, compared to the Zacks Consensus Estimate of 38 cents and the year-earlier earnings of 33 cents. Before adjusting for one-time items, the earnings were 8 cents versus year-earlier earnings of 17 cents.

While the company’s results came in above expectations driven by better cost control and operational excellence, a weak economy sapped the demand for electricity and caused lower electricity sales.

The U.S. Franchised Electric and Gas (USFE&G) segment posted third-quarter earnings before interest and tax (EBIT) of $716 million, down more than 1% year over year. This fall in earnings was due to unfavorable weather throughout the service territory, partially offset by reduced operating and maintenance costs.

EBIT for the Commercial Power segment was a loss of $234 million, compared to a loss of $108 million in the third quarter of 2008. This significant negative comparison was mainly due to non-cash impairment charges primarily related to goodwill associated with non-regulated generation operations in the Midwest. Excluding this one-time item, results would have compared favorably year over year.

Duke Energy International (DEI) reported quarterly EBIT of $100 million, up approximately 30% year over year. This favorable comparison was driven by lower commodity costs in Peru and favorable hydrology in Central America, partially offset by lower commodity prices at National Methanol Company and unfavorable average foreign currency exchange rates. At the end of the quarter, long-term debt stood at $15.4 billion with a debt-to-capitalization ratio of 41.5%.

We expect lower load usage to continue to be a challenge in the next year. However, a meaningful earnings growth is expected in the medium to long run based on a North Carolina’s rate increase benefit as well as load growth and price improvements. We are concerned about the company’s returns on capital employed given its capex plans and difficulty it faces to increase volume sales or unit prices.