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Duke Energy CORP (DUK)·Q2 2016 Earnings Summary

Executive Summary

  • Q2 2016 adjusted EPS rose to $1.07 from $0.95 YoY on higher pricing/riders, lower O&M, and NCEMPA wholesale margins; GAAP EPS was $0.74, reflecting a $194M pre-tax impairment in Central America and merger/cost-savings charges .
  • Total operating revenue was $5.48B vs $5.59B YoY; operating income was $1.15B vs $1.25B YoY; DUK reaffirmed 2016 adjusted EPS guidance of $4.50–$4.70 and noted a recent dividend increase .
  • Regulated Utilities drove the quarter (adjusted segment income $718M vs $632M), offsetting weakness in International (adjusted $43M vs $52M) and modest Commercial gains ($14M vs $11M) .
  • Strategic catalysts: progress on the Piedmont acquisition (NC settlement/hearing, financing plans) and advancing the sale of Latin American assets (second-round diligence, targeting year-end announcement, 2017 close) .

What Went Well and What Went Wrong

  • What Went Well

    • Regulated Utilities growth: pricing/riders (+$0.08/sh), lower O&M (+$0.05/sh), and NCEMPA wholesale margin (+$0.03/sh) lifted adjusted EPS; segment income rose to $718M vs $632M YoY .
    • Execution and strategy: “Our solid second quarter performance reflects the strength of our regulated utilities… The execution of our long-term strategy to modernize the energy grid and generate cleaner energy…” — Lynn Good, CEO .
    • Grid modernization and gas strategy momentum: Indiana $1.4B grid plan approved; Florida plant projects advancing; pipeline projects (ACP, Sabal Trail) on schedule .

  • What Went Wrong

    • International headwinds: GAAP segment loss of $(102)M on a $194M pre-tax impairment in Central America and higher taxes; adjusted International down to $43M from $52M .
    • Weather: less favorable weather reduced Regulated Utilities by ~$(0.04)/sh in Q2; YoY YTD weather impact ~$(0.14)/sh .
    • Other/Interest: higher interest expense weighed on “Other,” partly offset by a favorable tax audit adjustment; adjusted “Other” net expense $(36)M vs $(37)M YoY, flat per share .

Financial Results

MetricQ2 2015Q1 2016Q2 2016
Total Operating Revenues ($USD Millions)$5,589 $5,622 $5,484
Operating Income ($USD Millions)$1,246 $1,333 $1,145
Net Income Attributable to DUK ($USD Millions)$543 $694 $509
Diluted EPS (GAAP, $)$0.78 $1.01 $0.74
Adjusted Diluted EPS ($)$0.95 $1.13 $1.07
Adjusted Effective Tax Rate (%)31.3% 26% 31.4%

Segment breakdown – Adjusted segment income ($USD Millions):

SegmentQ2 2015Q2 2016
Regulated Utilities$632 $718
International Energy$52 $43
Commercial Portfolio$11 $14
Other (adjusted net expense)$(37) $(36)

KPIs and operating statistics:

KPIQ2 2015Q2 2016
Regulated Utilities Operating Revenues ($MM)$5,220 $5,099
Total Regulated Electric Sales (GWh)60,998 62,185
Residential Electric Customers (Avg)6,348,277 6,438,062
Nuclear Capacity Factor (%)93% 96%
Total Capital & Investment Expenditures ($MM, QTD)$1,735 $1,825

Context and drivers:

  • YoY adjusted EPS up $0.12 on pricing/riders, lower O&M, NCEMPA wholesale contract; GAAP EPS down on impairment/merger-related costs .
  • Rolling 12-month weather-normalized retail load growth ~0.3% (residential +0.8% on 1.4% customer growth; commercial -0.2%; industrial +0.4%) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EPSFY 2016$4.50–$4.70 $4.50–$4.70 Maintained

Notes:

  • Management highlighted a “recent increase in our dividend,” reinforcing the income proposition; amount not disclosed in these materials .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q2 2016)Trend
Grid modernizationFY15/Q4: highlighted regulated investments; Q1: continued spend; Indiana plan seeking approval Indiana Commission approved $1.4B, 7-year plan; smart meters filings in KY, SC deferral Improving execution
Pipelines (ACP, Sabal Trail)Q1: positioning for gas infra; pipelines part of strategy ACP schedule order anticipated; FERC order mid-2017; Sabal Trail in construction late summer; in-service mid-2017/late-2018 On schedule
Latin America exitFY15/Q4: no sale detail;Sale process in second round; aiming for announcement by year-end 2016, close in 2017 Advancing
Coal ash/regulatoryFY15: discussed litigation and CCR compliance;NC House Bill 630 clarifies closure path; SC deferral order; IN filing for CCR recovery (~$400M projects) Policy clarity improving
Renewables (regulated & commercial)FY15/Q4: renewables growth supported 2015;Adding utility-scale solar in NC/IN; commercial wind projects Los Vientos IV online, Frontier on track; portfolio ~3,000 MW by YE Continued growth
Retail load & macroFY15/Q4/Q1: mild weather drag, steady load;R12M load +0.3%; resi strength; Midwest industrial mixed, metals improving with tariffs Stable to modestly improving

Management Commentary

  • “Our solid second quarter performance reflects the strength of our regulated utilities driven by strategic investments, dedicated cost management and a relentless focus on operational excellence.” — Lynn Good, CEO .
  • “Given the results through the first half of the year, we remain on track to achieve… 2016 guidance of $4.50 to $4.70 per share.” — Steve Young, CFO .
  • “We… reached constructive settlement agreements [for Piedmont]… confident of closing… by the end of this year and possibly earlier.” — Lynn Good .
  • “We’re proceeding as planned with our process to exit the Latin American generation business… invited a select group of bidders to participate in detailed due diligence.” — Lynn Good .

Q&A Highlights

  • Latin America sale timing/proceeds: targeting announcement by year-end 2016; 2017 close; CFO/CEO reiterated commitment to sell and indicated improved macro/hydrology/FX backdrop vs three months prior .
  • Coal ash: ~$1.3B spend over several years focused on first four sites; recovery via SC deferral and future NC rate cases; legislation adds closure-method certainty .
  • Renewables economics/mix: commercial outcomes heavily tax-incentive driven; near-term bias to wind PTC; regulated focus primarily on solar; disciplined returns emphasized .
  • Pensions: 25 bps sensitivity ≈ ~$0.02 EPS; plan fully funded and de-risked; largely recovered in cost of service .
  • Load/regional trends: resi +0.8% R12M; Midwest industrial mixed (metals improving on tariffs); Southeast resi growth offsetting softer industrial .
  • Growth mix and 4–6% EPS CAGR: main drivers are Regulated Utilities investments, Piedmont/gas platform, and pipelines; O&M savings of ~$0.10 YTD offset by ~$0.06 storm costs .

Estimates Context

  • S&P Global consensus estimates were unavailable due to request limits at the time of retrieval; therefore, a quantitative beat/miss vs Street for Q2 2016 could not be assessed at this time. Values retrieved from S&P Global were unavailable.
  • Qualitatively, DUK reaffirmed full-year adjusted EPS guidance of $4.50–$4.70, and Q2 adjusted EPS ($1.07) improved YoY on core regulated strength, suggesting estimates may remain anchored near the prior range midpoint absent macro/regulatory surprises .

Key Takeaways for Investors

  • Core regulated engine healthy: pricing/riders, O&M discipline, and NCEMPA wholesale margins lifted adjusted EPS despite softer weather; expect Regulated Utilities to continue driving earnings while Latin America is exited .
  • Portfolio repositioning catalysts: Piedmont closing (potentially 2016) and Latin American sale announcement (target YE16) can de-risk the profile and re-rate cash flows toward domestic regulated/gas infrastructure .
  • Execution on capex plan: grid modernization approvals (IN), Florida generation additions, and pipeline milestones support multi-year rate base growth, underpinning the 4–6% long-term EPS CAGR target .
  • Dividend support: management emphasized a recent increase and strong utility cash flows; income investors remain well served alongside earnings growth .
  • Watch items: International divestiture valuation/timing, coal ash cost recovery cadence, weather normalization into H2, and O&M savings sustainability (flat through 2020 target) .
  • Near-term trading: reaffirmed guidance and visible pipeline/grid/renewables execution provide support; resolution of Latin America sale could be a stock catalyst as proceeds and earnings dilution are clarified .

Supporting detail on drivers and special items:

  • Q2 special items (after-tax/EPS impact): mergers ($69M/$0.10), international impairment ($145M/$0.21), cost savings ($15M/~$0.02); reconciled GAAP to adjusted EPS $0.74 → $1.07 .
  • Consolidated Q2 adjusted tax rate 31.4% vs 31.3% YoY; YTD 28.6% vs 32.1% prior year (reflecting international tax dynamics and audit items) .

Press releases/transcripts coverage:

  • Q2 2016 8-K 2.02 press release (full) –; Q2 2016 earnings call (full transcript) –.
  • Prior quarters for trend: Q1 2016 8-K 2.02 (press release) –; Q4 2015 8-K 2.02 (press release) –.