Can Duke Energy Manage To Overcome The Effects Of Recent Hurricanes In Its Q1 Results?

Duke Energy Corp (NYSE: DUK) is set to announce its Q1 2019 results on May 9, 2019, followed by a conference call with analysts. The company’s revenue witnessed volatility though out 2018, in line with historical trends, mainly due to the seasonality factor. However, the Q4 2018 the decline in revenue also reflected the impact of two major hurricanes that hit the US in September and October 2018. As Duke has been largely successful in restoring energy supply to the hurricane affected areas, we expect the company’s revenue to increase by about 3% (y-o-y) in Q1 2019. Higher revenue would likely be driven by an increasing customer base due to higher construction activity and improving housing starts, pricing power, higher demand for renewable energy and grid modernization, and improvement initiatives of the company.

We have summarized the key expectations from the announcement in our interactive dashboard – How is Duke Energy expected to fare in Q1 2019 and what is the full year outlook? In addition, here is more Utilities data.

A Quick Look at DUK’s Revenue Sources

DUK reported $24.5 billion in total revenue in FY 2018. This included 3 revenue streams:

• Electric utilities & Infrastructure: $22.2 billion in FY 2018 (90% of total revenue). This includes regulated electric utilities in the Carolinas, Florida, and the Midwest, along with commercial electric transmission infrastructure investments.
• Gas Utilities & Infrastructure: $1.9 billion in FY 2018 (8% of total revenue). This includes Piedmont, DUK’s natural gas local distribution companies in Ohio and Kentucky, and Duke Energy’s natural gas storage and midstream pipeline investments.
• Commercial Renewables: $0.5 billion in FY 2018 (2% of total revenue). This includes non-regulated utility scale wind and solar generation assets located throughout the U.S.

A] Revenue Trends

Electric utilities & Infrastructure

• The segment has seen revenue increase on y-o-y basis throughout 2018, with a sharp rise in Q3 2018, driven by higher customer base and fuel rates, increase in retail pricing due to favorable outcome of Duke Energy Carolinas North Carolina rate cases, and higher rider revenue.
• We expect segment revenue to increase in 2019, benefiting from increasing demand on the back of improving housing starts and construction growth, coupled with increasing sales of electric vehicles.

Gas Utilities & Infrastructure

• Gas revenue increased on a y-o-y basis but witnessed a lot of volatility throughout 2018, mainly due to seasonality factors, with peak natural gas sales occurring during the winter months as a result of space heating requirements.
• We expect the gas utilities segment to improve its performance in 2019 following the grid modernization and improvement initiatives of the company.

Commercial Renewables

• Segment revenue saw a steady increase throughout 2018 due to a rising share of renewable energy in the US.
• We expect the trend to continue in the medium term, with additional consumers switching to renewable energy, continuous decline in the cost of solar and wind energy generation, coupled with Duke’s 1000 MW of wind and solar projects in late stages of development.

B] Expense Trend

On a year-on-year basis, total expenses continuously decreased during most of the recent quarters, before rising in Q4 2018 due to higher depreciation charge and storm-related remediation, operation, and maintenance costs.

• Cost of Natural Gas: Cost of natural gas was higher in Q1 and Q4 of 2018 due to higher volume sold and higher natural gas prices at Piedmont. We expect the cost of natural gas to remain elevated in Q1 2019, driven by expectations of higher volume and higher price levels.
• Operation & Maintenance Cost: Operation and maintenance cost increased sharply in Q4 2018, driven by higher storm-related costs following 2 major hurricanes in the second half of 2018. With most of the repair, restoration, and maintenance cost already incurred, cost in Q1 2019 is expected to be lower.
• Depreciation and Amortization Cost: Depreciation and amortization expense has continuously increased over recent quarters. We expect the trend to continue in Q1 2019 on the back of the growing asset base of the company.

After witnessing volatility, the net income margin decreased in Q4 2018 due to low revenue and high storm related costs. With most of the maintenance costs already incurred, we expect margins to increase on the back of higher revenue and a decrease in operation and maintenance cost.

Full Year Outlook

For the full year, we expect revenue to increase by about 3.6% to $25.4 billion in 2019. Higher revenue is likely to be driven by an increase in customer base, higher retail pricing, increasing share of renewable energy in the US, and higher gas utility revenue with the recent grid integration program. Net income margin is expected to increase from 10.9% in 2018 to 12% in 2019 on the back of strong revenue growth and lower operation and maintenance cost, partially offset by higher depreciation expense and the absence of tax credits (unlike 2018).

Trefis has a price estimate of $88 per share for DUK’s stock.

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