After Strong Gas Utility Sales In Q1 2019, How Will Duke Energy Perform In FY 2019?

Duke Energy (NYSE: DUK) released its Q1 2019 results on May 9, 2019. The company reported revenue of $6.16 billion in Q1 2019, marking a y-o-y growth of 0.5% over Q1 2018. Revenue growth was driven by an increasing customer base due to higher construction activity and improving housing starts, higher pricing power, higher demand for renewable energy, increase in gas utility revenue due to grid modernization, and improvement initiatives of the company, and higher rider revenues. Adjusted diluted earnings came in at $1.24 per share in Q1 2019, lower than $1.28/share in the year-ago period, while reaffirming its 2019 earnings guidance range of $4.80 to $5.20 per share. Lower earnings were driven by unfavorable weather and share dilution, partially offset by growth from investments at the electric and gas utilities.

We have summarized the key announcements in our interactive dashboard – How did Duke Energy 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

• Segment revenue remained flat in Q1 2019 compared to previous year levels, as higher customer base, prices, and rising sales of electric vehicles were offset by adverse impact of hurricane Michael in Q4 2018.
• Pricing increased due to the favorable outcome of Duke Energy Carolinas North Carolina rate cases, and higher rider revenue, which was offset by unfavorable weather conditions.

Gas Utilities & Infrastructure

• Gas revenue increased by about 3.5% (y-o-y) in Q1 2019, driven by rising customer base and higher natural gas prices.
• Additionally, favorable result of the North Carolina and Tennessee IMR cases led to increase in rider revenues.
• 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 remained relatively flat on y-o-y basis, as increase in revenue due to higher number of EPC (Engineering, Procurement and Construction) agreements at REC Solar, was offset by lower production in the wind portfolio.
• We expect the segment to witness strong growth 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 and Profitability

Total expenses decreased in Q1 2019, primarily due to lower effective tax rate, most of the remediation expenses being incurred in the prior year and no impairment charge during the quarter.

• Operation & Maintenance Cost: Decrease in operation and maintenance cost on y-o-y basis in Q1 2019 was driven by prior year impacts associated with the Duke Energy Progress North Carolina rate case, lower outage costs at Duke Energy Progress, and lower employee benefit costs at Duke Energy Progress and Duke Energy Florida. The drop was sharp sequentially, as a significant expense related to remediation following two hurricanes was incurred in Q4 2018.
• Impairment Charge: Impairment charge was nil in Q1 2019 compared to $43 million in Q1 2018 and $63 million in Q4 2018. Decrease in impairment cost was due to prior year impacts associated with the Duke Energy Progress North Carolina rate case and coal ash costs in South Carolina.
• Effective Tax Rate: Effective tax rate decreased from 22.5% in Q1 2018 to 9.6% in Q1 2019 primarily due to a one-time valuation allowance charge in the prior year, an adjustment related to the income tax recognition for equity method investments recorded in the first quarter of 2019, and lower amortization of excess deferred taxes.

Net income margin increased from 10.1% in Q1 2018 to 14.6% in Q1 2019, mainly driven by a decrease in impairment charge, operation and maintenance cost, and lower effective tax rate, partially offset by higher depreciation due to increasing asset base.

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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