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Duke Energy: Will the Latin American Arm Be a Drag Again in 1Q16?

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Duke Energy: Net income

Wall Street analysts expect Duke Energy (DUK) to post earnings of $1.14 per share in 1Q16. Duke earned $1.24 per share in 1Q15. Duke Energy’s management has provided the earnings guidance range of $4.50–$4.70 per share for 2016.

Duke Energy (DUK) is expected to report net income of $770 million in 1Q16. In the same quarter last year, it reported $880 million in net income. Duke Energy has engaged advisers for exiting its Latin American Generation business and is focused on increasing its Regulated business.

The proceeds from the sale of this Latin American Generation business is expected to strengthen Duke’s Regulated business. Duke Energy’s management is projecting that its earnings could grow by 4%–6% annually through 2020.

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Growth drivers

The divestment of Duke Energy’s International Generation segment is expected to improve its risk profile significantly. It would reduce or eliminate Duke’s exposure to less stable earnings.

A two-year-long drought in Latin America led to the weak performance of this segment, which directed Duke to consider exiting its Latin American arm. It will be interesting to see its impact on the company’s 1Q16 earnings release.

Improving return on equity

Duke Energy (DUK) estimates that its regulatory return on equity could meet or exceed its 2015 levels of nearly 10% in all its operational states. Its principal operating territory of the Carolinas, its return on equity last year stayed around 10% while it is estimated to grow to 10.5% this year. Also, Duke’s exit from its Latin American (ILF) Generation segment may reduce its return on equity volatility.

Piedmont Natural Gas acquisition

Duke Energy, like many other utilities, is seeking growth in the natural gas utility and pipeline business. Its ongoing acquisition of Piedmont Natural Gas is expected to be completed by the end of this year.

Piedmont Natural Gas has 90% regulated operations, which makes it a strategic fit for Duke Energy. Similarly, Southern Company (SO) is in the process of acquiring AGL Resources (GAS) while Dominion Resources (D) is acquiring Questar Corporation (STR).

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