Duke Energy Refocuses Around Its 'Core'

Feb 19, 2016

Beginning a few decades ago, Duke Energy began buying up plants outside the U.S. It also acquired companies beyond the Carolinas that sell energy on the open market. Now, Duke wants to tighten its focus on what it calls its core businesses.

State regulators set prices for most of the energy Duke sells to households and businesses. It’s fairly predictable revenue, and where Duke gets most of its profits.

As CEO Lynn Good delivered Duke’s latest earnings report Thursday, she said those businesses continued to perform well over the past year.

"I’m pleased with the solid performance and operational execution of our core regulated businesses, despite record mild December weather. These results largely offset challenges throughout the year in our international operations," Good said.

Those hydroelectric and other power plants in Central and South America have been a drag on profits over the past two years. That’s why Duke announced two weeks ago, it’s putting those businesses up for sale

Meanwhile, competition on open market businesses is intensifying.

Good says Duke now will concentrate on selling electricity and gas through its state-regulated utilities. Duke also will continue building its renewable energy business, which sells solar and wind power through stable, long-term contracts.

"Our industry is undergoing transformation, with new technologies, evolving customer expectations, increasingly impactful public policies, and abundant, low cost natural gas," Good told analysts. "These factors will have a profound impact on our businesses in the years ahead, and are informing our strategic investments."

Chief Financial Officer Steve Young said Duke’s refocusing actually started with the deal for Progress Energy in 2012. That brought together the two largest consumer utilities in the Carolinas under one roof.

Before that, Duke got about 25 percent of its income from investments in non-traditional businesses, Young said. Now that’s falling.

"We’ve been making several moves over the last several years to further deepen our interest in regulated infrastructure businesses, whether it’s electric and gas, highly contracted renewables business or gas pipelines.

Duke a year ago sold its unregulated Midwest commercial energy business, a company acquired as part of the 2006 merger with Cincinnati's Cinergy Corp. And it's hoping to sell it's Latin American businesses, either whole or in pieces.

Meanwhile, Duke also is in the midst of a $6.7 billion deal to buy Piedmont Natural Gas, announced last October. Like Duke, it’s a stable, state-regulated utility. And it comes as both companies have partnered with Dominion Energy to build the Atlantic Coast Pipeline.

Duke’s goal to reposition itself as a safer, more reliable investment is working, says Bloomberg Intelligence analyst Kit Konolige. 

“It's an important stock to a lot of investors," he said. "In this environment, where people are buying utility stocks a lot to avoid the pitfalls of the market out there, anything that says we’re becoming more solid and more stable and more predictable - as I think is clearly the direction Duke is going in - that’s going to encourage investors to buy the stock.”

EARNINGS REPORT

On Thursday, Duke reported a $477 million profit for the last three months of 2015, up from $97 million a year ago when a Brazilian drought and unfavorable foreign exchange rates brought losses in Latin America. Adjusted for non-recurring costs, Duke's earnings per share for the fourth quarter were 87 cents - up a penny from a year ago. But that fell short of analysts’ expectations, which averaged 91 cents per share, according to Marketwatch.com.

Mild temperatures in the Carolinas in December led to lower than expected revenues in the consumer utilities business. But the unit’s profit grew anyway, helped by higher prices and better profit margins.  

For all of 2015, Duke earned $4.54 per share, down from $4.55 a year earlier.  In its announcement, the company said it current expects 2016 profits in a range between $4.50 and $4.70 per share. 

Duke shares are up nearly 7 percent since January.