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Duke Energy Beats on Bottom Line

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Duke Energy Corporation (DUK - Free Report) announced fourth-quarter 2012 adjusted earnings of 70 cents per share, beating the Zacks Consensus Estimate by 5 cents. However, earnings fell below the year-ago figure by a penny.

Including the impact of costs-to-achieve the merger with Progress Energy Inc. of 13 cents, Edwardsport charges of 2 cents, gain on discontinued operations of 5 cents and mark-to-market gains of 2 cents, the company reported GAAP earnings per share of 62 cents versus 65 cents per share in the year-ago period.

Duke Energy's full year 2012 adjusted earnings were $4.32 per share, topping the Zacks Consensus Estimate of $4.13. However, earnings were lower than the year-ago figure of $4.38. The results were on the higher end of the 2012 guidance range of $4.20 to $4.35. Including one-time charges of $1.25, the company reported GAAP earnings per share of $3.07, down 19.8% year over year.

The results were driven by synergies from Progress Energy, net of the impact of shares issued in connection with the merger, the impact of the new market-based Electric Security Plan in Ohio, and revised customer rates at Duke Energy Carolinas. However, these were partially offset by unfavorable weather.

Operational Update

In full year 2012, Duke Energy generated total revenue of $19,624 million, missing the Zacks Consensus Estimate of $19,656 million. However, the top line was above the year-ago number of $14,529 million.

In 2012, total operating expenses were $16,514 million, up from $11,760 million in 2011. Operating income in 2012 was $3,126, up 12.6% year over year.

Segment Update

U.S. Franchised Electric and Gas: In the fourth quarter of 2012, segment income was $498 million, up from $206 million. The results were driven by the addition of Progress Energy’s regulated utility operations in the Carolinas and Florida, increased pricing due to revised customer rates at Duke Energy Carolinas, and adjustments to income taxes However, this was partially offset by higher operating and maintenance expenses.

Commercial Power: Segment income, during the quarter under review, was $30 million, flat year over year. The results reflect adjustments to income taxes, lower results from the Midwest gas generation fleet offset by lower operating and maintenance costs.

International Energy: Segment income during the quarter declined to $89 million from $96 million due to higher purchased power costs in Brazil and unfavorable foreign exchange rates primarily in Brazil. However, these were partially offset by increased volumes for thermal generation in Central America due to a drier weather.

Other: The segment includes corporate governance expenses, costs associated with the company's 2010 voluntary employee separation plan, costs-to-achieve the merger with Progress Energy and results from Duke Energy's captive insurance company.

Net expenses during the quarter were $91 million, up from $17 million in the year-ago quarter. The significant increase reflects addition of interest expense on Progress Energy’s corporate debt.

Financial Update

At the end of Dec 31, 2012, the company held cash & cash equivalents worth $1,424 million versus $2,110 million at the end of full year 2011. Long-term debt increased significantly to $35,499 million from $17,730 million at the end of 2011. In 2012, the company generated $5,221 million from operating activities versus $3,672 generated at the end of 2011.

Upcoming Event and Guidance

The company is expected to release its financial and business outlook for 2013 and beyond, provide updates on its businesses and report on regulatory initiatives on its investor day meeting on Feb 28, 2013.

Our Take

Duke Energy’s bottom line results succeeded in beating the Zacks Consensus Estimate. The whole of 2012 dictates the story of achievements made by the company. In 2012, Duke Energy was loaded with a number of project developments, especially in Arizona and California.

Also, the acquisition of Progress Energy Inc. proved to be a smart move made by the company. Meanwhile, the company also made significant progress with its fleet modernization program by bringing online three major new power plants in North Carolina and retiring older, less efficient coal fired units.

Given the current pulse in the U.S. market that favors sustainable green generation, we believe these projects would bode well for Duke Energy going forward. However, we prefer to remain on the sidelines due to the present unfavorable macro backdrop, predominantly fossil-fuel based generation assets and a tepid demand for electricity. The company presently retains a short-term Zacks Rank #3 (Hold).

Other Stocks to Consider

Other stocks to consider are Ameren Corporation (AEE - Free Report) with a Zacks Rank #1 (Strong Buy), and The AES Corporation (AES - Free Report) and DTE Energy Company (DTE - Free Report) that carry a Zacks Rank #2 (Buy).

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