Duke Energy – FY 2014 Results And Future Guidance Takeaways

By | February 22, 2015

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Summary Expected EPS growth in 2015 ($4.55-$4.75) from $4.55 in 2014. Expected EPS growth of 4-6% through 2017. Commitment to dividend and maintaining a strong balance sheet. Potential risks include exposure to Brazil, decreased residential energy usage, and volatile oil prices. Duke Energy’s Q4 Earnings Call On February 18, 2015, Duke Energy Corporation (NYSE: DUK ) reported their fourth quarter and full year 2014 earnings. Within the earnings call, the company identified four financial objectives for 2015 and beyond within their presentation: (1) Current Year earnings guidance, (2) Long-term earnings growth, (3) Dividend growth, (4) Balance sheet strength. In this article, I will review these four financial objectives and provide an outline and analysis on the company’s projections. Refer to the company’s earnings call transcript and power point for additional details. Expected EPS Growth in 2015 In 2014, the company achieved an adjusted diluted EPS of $4.55, which fell in the range of the original guidance ($4.45-$4.60) and the revised guidance ($4.50-$4.65). The guidance range for 2015 earnings guidance is $4.55-$4.75. Key assumptions for 2015 in obtaining this estimate are: Capital expenditures falling within the range of $7.4-$7.8 billion in 2015. This represents a moderate increase of 35% to 42% from the $5.5 billion in 2014. This increase is a positive sign for the company in the future as they make commitments to pursue alternative energy generation sources to decrease their financial dependency on crude oil prices. Retail load growth of 0.5-1.0% in 2015. This range has been reached each year since 2012 (0.6% in 2012, 2013, and 2014). This will be a key metric to monitor throughout the year as the company experienced a difficult year for residential sales in 2014. The company experienced a 0.1% decline in weather-normalized residential sales, but the decline was much worse in Q4 2014 specifically where they experienced a 2.2% decline. 700M average shares outstanding as of 12/31/2015. This shouldn’t be a difficult metric for the company to achieve as they had 707M outstanding as of 12/31/2014 with no planned equity issuances through 2017. $65 per barrel average Brent crude price for 2015. This is a hard assumption to question as oil has become a major battleground and everyone has a different opinion on the future price of oil. I expect that oil inventories will continue to rise and prices will continue to decrease in 2015. Based on the February 2015, EIA report, Brent crude oil prices are expected to be $57.56 in 2015. Exchange rate of approximately 2.85 BRL/US$ (2.35 in 2014). Again, like oil, this is a hard assumption to question, but the BRL/US$ exchange rate has seen a relatively steady increase since September 2014 and I expect this to continue as the Brazilian economy struggles and the US economy strengthens in 2015. Expected EPS Growth Past 2015 In addition to achieving 2015 adjusted diluted EPS guidance, the company is striving for per share growth of 4-6% through 2017. The key growth drivers in this per share growth are: Retail load growth of 1% going forward. Based on the analysis above, the company has been stagnant with a 0.6% retail load growth from 2012 to 2014. I think it is going to be very difficult for the company to achieve a 1% growth going forward. I think it is going to be difficult to achieve because of the lower energy usages in homes. I don’t see this trend reversing and allowing this 1% growth rate to be achieved. The company expects total wholesale net margin to increase due to the new 20-year contract with NCEMC at Duke Energy Progress (began in 2013) and 18-year contract with Central EMC at Duke Energy Carolinas growing to a load of 900MW in 2019 from 115MW in 2013. FY2015’s total wholesale net margin is expected to be approximately $1.1 billion with an anticipated 5% compound annual growth rate. Regulated earnings base growth is expected to follow the $2 billion growth trend in 2015 that was seen in 2014. Commitment to Dividend and Maintaining a Strong Balance Sheet In 2014, the company paid out a dividend of $3.18 per share with that amount expected to rise to $3.24 per share in 2015 (almost 2% increase year-over-year). With the company achieving a payout ratio close to 70% and management’s commitment to paying out a quarterly dividend to investors, I do not see the company’s current 4% dividend yield to be at risk. Management has paid 89 consecutive years of dividends with increases coming the past 7 years. This is largely possible due to the company’s strong balance sheet and no planned equity issuances through 2017. In addition, the company announced a strategically tax-efficient way to repatriate $2.7 billion back to the U.S., which will help fuel the dividend increases going forward. 3 Potential Risks The exposure to Brazil is a significant risk for the company’s future, which was seen in the 2014 financial results. In 2014, there was a decrease in sales volume as well as higher purchased power costs due to the interruptions in the hydrology production. Per the earnings call, they are assuming normal hydrology despite the rainy season starting slowly. Brazil is a major story to follow for Duke Energy in 2015 and beyond as the company is predicting EPS growth from this business segment despite recent downward trends in profits there as well as the Brazilian economy. I think the company will have difficulty increasing the retail load growth to 1% given the increased technologies and social initiatives to decrease electric use. Oil prices will continue to be a wild card going forward. Forecasting a price on such a volatile asset is a difficult task. If oil prices continue to fluctuate widely, it will significantly impact the company’s bottom line. Conclusion: Duke Energy Corporation faces some difficult obstacles including a slowing Brazilian economy, lower residential energy usage, and volatile oil prices; however, I believe that the company gave conservative and very obtainable estimates in each of the key assumptions used to allow them to meet their financial objectives for FY 2015 and beyond. While I don’t see Duke Energy being a rapid growth story going forward, I do believe they have the ability to present slow stock appreciation with the safety of a consistent dividend. Disclosure: The author is long DUK. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Are you Bullish or Bearish on ? Bullish Bearish Neutral Results for ( ) Thanks for sharing your thoughts. Submit & View Results Skip to results » Share this article with a colleague Scalper1 News

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