Duke Energy Corp. (DUK - Analyst Report) reported adjusted third-quarter 2014 earnings of $1.40 per share that came in below the Zacks Consensus Estimate of $1.52 by 7.9%. Quarterly earnings also decreased 4.1% from the year-ago figure of $1.46.

Duke Energy Corporation - Earnings Surprise | FindTheBest

Stronger results in Commercial Power were more than offset by a weak International Energy business. The company also experienced below normal weather for the second summer in a row. Higher operating expenses also aggravated the shortfall.

The company’s quarterly results were affected by a $477 million charge associated with the sale of its Midwest business to Dynegy Inc. (DYN - Snapshot Report) in Aug 2014. Following its sale, the business was reclassified as discontinued operations. However, financial results from this business will be considered in Duke Energy's adjusted earnings, adjusted diluted earnings per share and adjusted segment income during 2014.

Operational Update

During the quarter under review, Duke Energy’s revenues increased 2.9% year over year to $6,395 million. The reported figure, however, failed to meet the Zacks Consensus Estimate of $7,315.0 million by 12.6%. The regulated electric unit’s revenue was $5,861 million (up 3.1% year over year) representing approximately 92% of the company’s total revenue. Its non-regulated electric, natural gas, and other segment generated $449 million in revenue, flat year over year. Its regulated natural gas business’ revenue was $85 million, up by $2 million from the year-ago level.

On the cost front, total operating expenses were $4,780 million in the quarter, down 4.9% from $4,556 million in the year-ago period. The costs comprised regulated input costs (up 5.9% year over year), non-regulated input costs (up 13.8%), natural gas cost (up 50%), operation & maintenance cost (up 0.5%) and depreciation and amortization expense (up 17.3%).

Operating income declined 2.5% year over year to $1,619 million.

Quarterly Segmental Highlights

Regulated Utilities: Adjusted income was $920 million, down marginally from $923 million a year ago. Higher pricing and riders, and a lower effective tax rate were offset by below normal weather, higher depreciation and amortization expenses and increased interest expense.

International Energy: Segment income stood at $80.0 million, down 31% from the year-ago level. The decline was due to unfavorable results in Latin America, particularly lower volumes and higher purchased power costs in Brazil and Chile. The latter faced an unplanned outage during the quarter.

Commercial Power: The segment recorded an operating income of $51.0 million in the quarter compared with $15 million in the year-ago period. The improved results reflect higher earnings from the Midwest coal and gas generation fleets.

Other: The segment includes corporate interest expense not allocated to the other business units, results from Duke Energy’s captive insurance company, other investments, and income tax levelization adjustments.

Net expenses were $58 million, up from $21 million in the year-ago quarter.

Financial Update

As of Sep 30, 2014, the company held cash & cash equivalents of $1,931 million, up from $1,501.0 million as of Dec 31, 2013. Long-term debt declined to $39.9 billion million (including current maturities) from $40.3 billion as of Dec 31, 2013.

Guidance

The company is confident of achieving its 2014 adjusted earnings guidance of $4.50 to $4.65 per share.

At the Peers

Edison International (ETR - Analyst Report) reported solid third-quarter 2014 results wherein its adjusted earnings of $1.52 per share came in ahead of the Zacks Consensus Estimate of $1.35 by 12.6%. The quarterly number rose an impressive 7% from the year-ago figure of $1.42 per share.

Entergy Corp. (ETR - Analyst Report) posted third-quarter 2014 operational earnings of $1.68 per share, in line with the Zacks Consensus Estimate. However, the reported number was down from earnings of $2.41 per share in the year-ago period.

Our Take

The largest power provider in the U.S. – Duke Energy – reported lower quarterly earnings due to a much milder summer season. We believe the company’s regulated electricity and gas operations will enable it to generate a relatively steady and growing earnings stream in the future.

Going forward, key growth drivers for the company include its strong balance sheet, ongoing capital expansion projects and an above industry average dividend yield. However, the unfavorable macro backdrop, predominantly fossil-fuel based generation assets and tepid demand for electricity remain matters of concern.

Duke Energy presently holds a short-term Zacks Rank #3 (Hold).