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Electric utility provider Duke Energy (NYSE: DUK ) saw an uninspiring third quarter as sales were flat and income was sour with the heavy burden of increasing costs and emission charges. Additionally, mild weather conditions in the U.S. this year did not help the company's cause.
Let's dig deeper.
Net sales were flat at $3.96 billion, falling short of the market expectation of $4.11 billion. Duke's inability to make more revenue this quarter was mainly due to milder weather conditions compared to last year. Summers were more tolerable while winters were warmer. This reduced demand for electricity-based products such as coolers and heaters.
However, there is more to Duke's lackluster performance than unfavorable weather. Profits fell 30% compared to last year's quarter, to $472 million. Expenses such as increasing construction costs of a plant in Indiana and heavy emission charges hurt Duke's income. Barring the effects of such nonrecurring items, Duke earned $0.50 per share, above the market expectation of $0.47 per share.
Where are these costs coming from?
Duke is building a coal gasification power plant in Edwardsport, Ind., which was initially estimated to cost $1.87 billion. However, expenses have exceeded the prior budget, and now investment in the unit is at $2.98 billion. In the quarter, the company incurred an additional $220 million charge because of rising construction costs. This project, which will start operations next year, will be the world's cleanest coal-fired power station.
Moreover, Duke's commercial power segment incurred a $79 million charge as emission allowance under the new air pollution control regulations. There were other special costs the company incurred owing to its planned merger with Progress Energy (NYSE: PGN ) . Although Duke is now feeling the pinch on profitability and margins, these costs are not here to stay.
Looking at the brighter side, Duke's international segment performed very well. This business contributed nearly 18% to the company's profits before tax, growing at the rate of 52% from the previous year. Higher prices and better volumes from regions such as Central America and Brazil helped the business. Peer PPL (NYSE: PPL ) beat the street's top-line and bottom-line estimates, benefiting from better business in the U.K.
Barring the effect of weather, Duke's commercial and industrial customers seem to be using more power. A better economy would mean more factories and growth and thus more use of power and electricity. Industries such as automobile and textile are generating more demand, whereas slower moving industries, such as real estate and construction, have been performing poorly for the power industry.
The Foolish afterthought
Duke seems confident about its performance in the next quarter, lifting its full-year earnings expectation. I think that makes sense. The company recently bought three solar farms in North Carolina, and it plans to merge with Progress Energy in a $13.7 billion deal soon, which would make the merged entity U.S.' largest utility company, serving more than 7 million customers in six states. Once the deal fulfills legal obligations, it will be huge for the company. Fools should keep a close watch on Duke and the developments on this deal.