Duke Energy Corp.’s integration challenges for its $17.8 billion purchase of Progress Energy Inc. were underscored by a 70 percent decline in the smaller utility company’s second-quarter earnings.
Higher costs for refueling its nuclear plants drained Progress’s profit in its last quarter as an independent company. Duke reported net income rose 2.1 percent, and said it remains on track to meet a prior profit forecast of $4.20 to $4.35 a share for the combined company this year.
“The Duke results look solid, the Progress results didn’t look very good,” Andrew Smith, a St. Louis-based analyst for Edward Jones & Co. who rates Duke hold and owns none, said today in an interview. “The biggest challenge for Duke is going to be delivering results, keeping rates low, keeping customers happy and delivering to the North Carolina Utilities Commission what they said they would.”
Net income for Duke was $444 million, or 99 cents a share, compared with $435 million, or 98 cents, a year earlier, Charlotte, North Carolina-based Duke said in a statement today. Progress said net income fell to $63 million, or 21 cents a share, from $176 million, or 60 cents, according to a separate statement.
Duke’s acquisition of Raleigh, North Carolina-based Progress closed on July 2, creating the largest U.S. utility owner by market value. The company announced the next morning that it replaced Progress Chief Executive Officer Bill Johnson with Duke CEO James Rogers, who was supposed to become executive chairman of the combined companies. The change triggered investigations by North Carolina regulators and the state’s attorney general.
Contradicting Johnson’s testimony to regulators last month, Rogers said he didn’t tell Wall Street analysts the company would be better off if its acquisition of Progress Energy Inc. failed, and said he didn’t have “buyer’s remorse.”
“There was a period after the second rejection by the Federal Energy Regulatory Commission where analysts were raising the question of, ‘Well, what if this deal doesn’t go through?’” said James Rogers, who became CEO of the combined companies in an unexpected switch hours after the merger closed. “I was clear with them, whether the deal goes through or not, Duke would be in a strong position to produce returns for our investors.”
The acquisition included Progress’s Crystal River nuclear reactor in Florida, which Rogers said may cost more to fix than previously estimated.
“It’s our judgment that $900 million to $1.3 billion, based on our analysis, is trending up, but we have more work to do,” Rogers said.
Excluding merger-related costs and other one-time charges, Duke’s per-share profit was 5 cents more than the 97-cent average of 13 analysts’ estimates compiled by Bloomberg. Sales rose 1.2 percent to $3.58 billion.
Higher rates in North Carolina and South Carolina added 14 cents a share, making up for a drop in demand. Milder temperatures in those states crimped earnings by 5 cents-a-share, as weather-driven demand for cooling fell 9 percent from a year earlier, according to data compiled by Bloomberg.
Weather was hotter than a year earlier in Ohio, Indiana, and Kentucky, where Duke sells power to 1.6 million homes and businesses, according to data compiled by Bloomberg. The company had 4 million power customers before the acquisition. It now has about 7.1 million, according to its website.
Duke fell 6 cents to $67.46 at the close in New York. The shares have three buy, one sell and 17 hold ratings from analysts.