Duke Energy Sees Impairment Costs Knock Out Steady Gains in Third-Quarter 2011

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Researched by Industrial Info Resources (Sugar Land, Texas)--Duke Energy Company (NYSE:DUK) (Charlotte, North Carolina), one of the largest electric power holding companies in the U.S., benefited from higher-than-normal temperatures in the U.S. and strong results in its Latin American operations in the third quarter of 2011, although a handful of special expenses took a bite out of overall gains. Net income for the quarter was reported to be $472 million, a 29.55% decrease from third-quarter 2010.

However, the company's executives stressed that these results included a pre-tax impairment charge of about $220 million from Duke's integrated gasification combined-cycle project in Edwardsport, Indiana; a $79 million pre-tax impairment charge concerning emission allowances, stemming from the Environmental Protection Agency's recently finalized Cross-State Air Pollution Rule; $13 million in costs related to the progress on the proposed merger with Progress Energy (NYSE:PGN) (Raleigh, North Carolina); and $1 million in gains from mark-to-market hedges. Adjusting for these factors, as well as interest expense, interest income, and income taxes from continuing operations, net income for the quarter stood at $666 million, a 2.06% decrease from the same period last year.

Total revenues were reported to be $3.96 billion, a 0.46% increase from third-quarter 2010. In addition to the higher temperatures in Duke's Franchised Electric and Gas service territory, which includes Indiana, Kentucky, Ohio, North Carolina and South Carolina, the company benefited from a strong performance by the Midwest gas fleet; favorable pricing in Central America and Brazil; and higher average volumes and prices from Duke's 25% stake in National Methanol Company (Al Jubail, Saudi Arabia), a large producer of methanol and methyl tertiary butyl ether.

Industrial Info is tracking about $36 billion in active Duke projects in the U.S. and South America, including the $2.4 billion addition of an 800-megawatt Toshiba steam turbine/generator at a power station in Cliffside, North Carolina. The unit, which is powered by an Alstom pulverized coal supercritical boiler, will provide base-load power to the grid.

"For the quarter, our nuclear fleet had a capacity factor of 99.27%," said James Rogers, the chairman, president and chief executive officer of Duke, in a conference call. "The fleet dispatched more than 15 million megawatt-hours, setting an all-time company record for best quarterly nuclear generation performance."

Duke's total segment earnings before income taxes, depreciation and amortization (EBIT) were $956 million, a 23.15% decrease from third-quarter 2010:

• The U.S. Franchised Electric and Gas segment reported EBIT of $721 million, a 23.78% decrease from the same period last year. Segment revenues were $2.93 billion, a 0.61% decrease.
• The Commercial Gas segment reported EBIT of $67 million, compared to EBIT of $188 million in third-quarter 2010. Segment revenues were $687 million, a 6.78% decrease.
• The International Energy segment reported EBIT of $168 million, a 52.73% increase from the same period last year. Segment revenues were $360 million, a 31.87% increase.
• Other EBIT totaled a loss of $74 million, compared to a loss of $100 million in third-quarter 2010. Other revenues totaled $14 million, a 17.65% decrease.

In the fourth quarter, Duke executives say they will concentrate on completing their Edwardsport and Cliffside projects, which are scheduled to be brought online in 2012, and complete the company's merger with Progress Energy. The current cost estimate of the Edwardsport project, not including financing costs, is $2.98 billion. Meanwhile, the Midwest gas fleet is on track to report record production for a third consecutive year.

"We continue to add customers in both the Carolinas and the Midwest, but at a slower rate than before the recession," said Lynn Good, the group executive and chief financial officer of Duke, in the conference call. "For example, over the last 12 months, we have added an average of around 10,000 customers, as compared to the approximately 60,000 customers we added in 2007."

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