Merger costs, overruns reduce Duke profit, but results top expectations on higher power prices

NEW YORK, N.Y. – Duke Energy Corp.’s fourth-quarter earnings topped Wall Street expectations as electric rates rose and more extreme weather increased demand for power. But results were reduced by merger costs and cost overruns at an Indiana power plant.

Duke acquired Progress Energy in June, making it the nation’s largest utility.

Duke reported net income of $435 million, or 62 cents per share, for the fourth quarter. Adjusted to remove the effect of the merger costs and other one-time charges, Duke earned 70 cents per share. Analysts had expected the company to earn 65 cents per share on an adjusted basis.

The company’s results for the quarter are not directly comparable to last year because the company had not combined with Progress. As a stand-alone company, Duke posted net income of $288 million last year, or 65 cents per share.

In pre-market trading, Duke shares fell 4 cents to $68.70.

Performance at Duke’s regulated utilities improved as a result of the addition of Progress Energy’s territories in the Carolinas and Florida. Higher power prices and an income tax benefit also helped, and electricity demand was boosted by more extreme weather.

Adjusted for the effect of weather, electricity demand grew 1 per cent over last year, according to Duke Chief Financial Officer Lynn Good. She said Wednesday that she expects demand growth to continue to be weak because the economy is not growing quickly and efficiency programs are making homes and businesses less energy hungry.

Duke, based in Charlotte, serves 7 million customers in six states. It is the largest utility in the U.S. by market value and number of customers.

Duke CEO Jim Rogers said in an interview Wednesday that lower power demand is likely to affect the entire industry. In response Duke — and the industry — will likely focus intensely on lowering costs in the months ahead.

“The growth in demand is not going to be the same as we’ve experienced in the past,” he said. “Our industry is going to have to change its cost structure.”

Good said that in Duke’s service territory, auto manufacturers and metals companies have been increasing activity but textile manufacturers and chemical companies have been cutting back.

Andy Smith, an analyst at Edward Jones, said Duke posted a solid quarter and, more importantly, has resolved three major issues investors were concerned about: An investigation into boardroom manoeuvring by North Carolina regulators, how much the company would have to pay for a new coal plant in Indiana that has gone far over budget, and whether the company would try to fix a broken nuclear plant in Florida.

In December the company reached a settlement with North Carolina regulators over surprise executive changes in the hours after Duke’s merger with Progress was completed. Rogers will retire by the end of this year as part of the settlement. Duke took a charge of $164 million in the quarter, accounting for 13 cents per share, to pay merger-related expenses. Seven hundred employees have accepted buyouts to leave the company, and Duke expects another 400 to leave in 2013.

Also in December, Indiana regulators approved a settlement over payment terms for the over-budget coal plant. Customers will pay $2.6 billion and Duke will absorb $900 million. The plant was originally supposed to have cost $1.9 billion. The overruns cost Duke $28 million in the quarter, or 2 cents per share. For the year, cost overruns have cost the company $628 million.

Earlier this month Duke announced it would close the crippled Crystal River nuclear station in Florida rather than spend as much as $3.4 billion to try to repair it. The plant has been shut since 2009 when part of its structure cracked during maintenance.

“We’ve had a lot of issues to deal with,” Roger said. “But now we’re positioned to harvest savings, to change our cost structure, and get prepared for the future.”

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