Cost overruns threaten Duke Energy 3Q earnings

The rising cost of a new coal plant may offset benefit of high power demand from a hot summer

Associated Press

NEW YORK (AP) -- Cost overruns at a complex new coal plant under construction in Indiana are expected to dent Duke Energy Corp. earnings in the third quarter.

Duke reports its third quarter results before the market opens Thursday.

Duke announced this month it will take a charge against earnings of about $220 million to cover some of the cost overruns at the coal plant it is building in Edwardsport, Ind. The plant is designed to turn coal into a gas before it is burned to create power. The process is more efficient and produces fewer pollutants than traditional coal plants.

Duke originally estimated the plant would cost $1.87 billion. Now the company says higher labor and material costs have pushed the price to $2.98 billion. Indiana regulators have said they will allow Duke to charge customers $2.35 billion for the plant, but Duke has asked to charge $2.72 billion. Regulatory hearings on the plant's costs are taking place this week.

Hugh Wynne, an analyst at Sanford C. Bernstein & Co., wrote in a research report to investors that Duke could be on the hook for up to $750 million beyond what the company has already announced it will write off.

The third quarter is typically Duke's best because demand for power rises during the summer as homes and businesses keep air conditioners running in an effort to keep cool. The summer of 2011 was scorching, so analysts expect Duke's revenue to grow. Last year's third quarter was also historically hot, though, so growth is not expected to be dramatic.

Duke, based in Charlotte, serves 4 million electric and gas customers in the Carolinas, Kentucky, Indiana and Ohio. It is seeking to buy Progress Energy Inc. in a deal that would create the largest U.S. utility. The deal is expected to close by the end of the year, but state and federal regulators have not yet approved it.

WHAT TO WATCH FOR: Utility earnings have been helped by a sweltering summer that pushed up demand for power. But adjusted for weather, power demand from homeowners and businesses has been weak across much of the country, according to Paul Franzen, an analyst at Edward Jones. Industrial demand, however, has been surprisingly strong. This suggests that while manufacturing and other heavy industries are producing more goods, homeowners, office buildings, restaurants and other businesses are still struggling.

WHY IT MATTERS: Electric power demand is a good indicator of economic growth. Companies use more power when they make more products or serve more customers.

WHAT'S EXPECTED: Analysts polled by FactSet expect a profit of 47 cents per share on revenue of $4.11 billion.

LAST YEAR'S QUARTER: In the third quarter of 2010 Duke earned 51 cents per share on revenue of $3.95 billion.

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