Duke wrestles with merger, Edwardsport, Crystal River issues

Duke Energy (NYSE: DUK) has a lot of major infrastructure issues to tackle in addition to resolving a North Carolina investigation into the Duke merger with Progress Energy.

This was the message that Duke CEO Jim Rogers presented analysts during the Charlotte-based company’s third quarter earnings call Nov. 8. The conference call was Duke’s first combined earnings report since its July consolidation with Raleigh-based Progress.

Deciding whether to repair or retire the 860-MW Crystal River 3 nuclear plant in Florida remains among one of Duke’s highest priorities, as does bringing online the 600-MW Edwardsport IGCC (integrated gasification combined-cycle) power plant in Indiana in mid-2013.

Rogers said extensive testing is ongoing at the IGCC, which is now estimated to cost $3.5bn once financing costs are included. The facility has produced synthetic gas from coal. In addition, Rogers said the project is undergoing a battery of tests that General Electric (NYSE: GE) uses for new technology.

The Indiana Utility Regulatory Commission has been looking at an Edwardsport settlement for some time now, officials said. The value of this next-generation coal plant will be more obvious over time, Rogers said.

“First, it’s the most efficient coal plant in the world,” Rogers said. The CEO added that the IGCC will provide a long-term hedge against higher natural gas prices.

Cliffside, other generation near operation in Carolinas

There is some good news in North Carolina, where Rogers said Duke expects to achieve commercial operation of a more conventional coal plant, the 825-MW Cliffside expansion project, by the end of this year. The estimated $2.2bn plant being developed by Duke Energy Carolinas is 99% complete, according to the Duke presentation.

In addition, Rogers said the Dan River and Lee combined-cycle natural gas units are on schedule and could achieve operation by year end.

The 620-MW Dan River combined-cycle plant is being developed by Duke Energy Carolinas and the 920-MW Lee plant is being developed by Progress Energy Carolinas. Both are 98% complete.

Meanwhile, the 625-MW Sutton combined-cycle gas plant being developed by Progress Energy Carolinas is 35% complete and expected to come online in late 2013.

With completion of the Progress Energy merger, Duke now holds more than 48,000 MW of regulated generation. It’s nearly 7,000 MW of commercial power generation includes 1,200 MW of wind and 50 MW of solar power. The company also has 4,500 MW of international power in North America.

Rogers wants high confidence in nuclear repair

As for Crystal River 3, it will be repaired “only if there is a high degree of confidence that the repair can be completed” within a reasonable and defined timetable and budget, Rogers indicated.

The nuclear reactor has been offline since fall 2009 when cracks were discovered in the building during a regularly-scheduled outage to replace steam generators.

Earlier this year, Duke revealed that the Zapata consulting firm said repair appears technically feasible, though risks and technical issues remain. Cost estimates range from $1.5bn to $3.4bn, the latter being a worst-case scenario with a broader scope of work.

It’s unlikely that repairs will start prior to 2013. This means that Duke will be required to refund certain costs to Crystal River ratepayers.

Duke will soon hold non-binding mitigation with its reactor insurer, Nuclear Electric Insurance Limited (NEIL). The non-binding talks are an effort to determine how much of the outage expense that NEIL will pay. Binding arbitration could result if the negotiations fail, Rogers said.

Merged company seeing ‘new normal’

Duke is nearing completion of a $9bn fleet modernization program that will culminate with the retirement of 6,800 MW of older, less-efficient coal-fired generation. In connection with that effort, Duke has a number of regulatory hearings coming up.

Duke’s various utility subsidiaries have near-term rate cases pending to recover costs in the Carolinas as well as in Florida, Indiana, Ohio and Kentucky.

Duke recently marked its first 100 days since its combination with Progress Energy. Duke is now dispatching its fleet in North and South Carolina as one combined fleet, officials said.

“As a combined company we are off to a great start,” said Duke CEO Rogers. Voluntary buy-outs and are helping Duke reduce the employee head count for the combined company, Rogers said.

The CEO would not speculate on when the North Carolina Utilities Commission will complete its post-merger probe, but added that all parties want to get the issue behind them.

Duke’s third quarter 2012 adjusted diluted earnings per share (EPS) were $1.47, compared with $1.50 for the third quarter 2011. Reported diluted EPS for third quarter 2012 was $0.85, compared to $1.06 for the third quarter 2011.

The commercial power quarterly results decreased primarily due to lower results for the Midwest coal generation fleet (-$0.06 per share) resulting from the new market-based energy security plan in Ohio, partially offset by the ESP’s non-bypassable stability charge. The new market-based ESP became effective Jan. 1, 2012.

Third-quarter weather-normalized load growth for certain company sectors showed a modest decline.

“We are planning the business for very modest growth,” said CFO Lynn Good. This is the “new normal,” Good said.

Rogers said the company is realistic in looking at only 1% demand growth in the short term.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.