Three of the biggest U.S. utilities' second quarters were not exactly what investors hoped for, but the industry seems determined as ever to make good of a bad situation. Southern Company, Exelon Corp., and Duke Energy in particular had disappointing Q2s—from Southern's much talked about Kemper plant budget overruns to EDF calling it quits on its nuclear venture with Exelon and Duke's cancelation of its Levy plant complex in Florida.
These utilities’ earnings calls reveal an industry willing to take the hits as they come while maintaining the ability to rapidly implement the latest plans to secure the business long-term. Utility Dive breaks down exactly what happened this past quarter for these three utilities.
Here's what you need to know:
EXELON
Q2 highlights: Exelon had an eventful second quarter with Electricite de France (EDF) announcing in July its withdrawal from the Constellation Energy Nuclear Group (CENG) it jointly owned with Exelon. In June, Exelon stopped plans to expand production at its LaSalle and Limerick U.S. nuclear power plants.
However, thanks to strong earnings at Exelon’s ComEd utility in Chicago and positive hedging activities, the largest U.S. nuclear plant operator saw its Q2 profit increase 72% up to $479 million compared to $289 million last year. Excluding market-to-market hedging impacts and asset write-downs however, Exelon’s adjusted Q2 profits declined from 61 cents to 53 cents a share. All the while, "the spectacular fall of the price of gas in the U.S.”—which EDF says drove it to call it quits—may continue to haunt Exelon’s quarterly profits in the near and long term.
Takeaway: “We can't control or influence the markets. We can control our actions, business practices and decisions,” says Christopher M. Crane, Exelon President and CEO. To that end, Exelon will focus on getting the most out of its 2012 merger with Constellation, modernizing the grid at ComEd and Baltimore Gas & Electric and maintaining financial discipline as evidenced by its move to cancel Extended Power Upgrades (EPU) at the LaSalle and Limerick power plants. Going forward, Exelon will try to combat low prices in the PJM by working with stakeholders to address PJM’s "increased reliance on planned resources." Exelon plans to focus on the fundamentals of the business operation, seeking to invest $16 billion in its regulated utilities, which is expected to result in rate-based growth of 5% to 6%.
DUKE ENERGY
Q2 highlights: Duke Energy’s Q2 ended on a sour note with the cancelation of its two-plant nuclear complex in Levy, County Florida. After licensing delays by the Nuclear Regulatory Commission and resistance to a rate hike allowing Duke to recoup project spending before the plant went into operation, Duke decided the $19-$24 billion project wasn’t worth the hassle anymore.
In part due to the Levy debacle, Duke reported a significant decline in Q2 profits, with the company taking a taking a $350 million hit for Levy as well as the closing of the Florida-based Crystal River nuclear plant in February. Mild weather and poor prices in the PJM also took root. The largest U.S. utility in terms of customers earned 48 cents per share, down from 99 cents per share from last year’s Q2.
Takeaway: With industrial electricity demand slowing in the Midwest, the utility remains “cautious” about the economy, says President and Chief Executive Officer Lynn Good. Yet Duke remains hopeful future returns will improve once several rate hikes go into effect and the company sheds these one-time nuclear charges
Duke expects its earnings will bounce back by the fourth quarter. “The impact of the Duke Energy Carolinas rate case, the Ohio cost-based capacity case and the deferral of nuclear outage costs will be most significant in the fourth quarter,” explains Lynn Good. The deferral of nuclear outage costs alone will add $0.07 and $0.09 per share to fourth quarter results, Good expects. To position the company for long-term success, Good says Duke will drive down extra costs through improvement efforts, growing the wholesale business and deploying new generation in Florida and the Carolinas.
SOUTHERN COMPANY
Q2 highlights: Escalating costs of Mississippi Power's Kemper coal-gasification project were bound to interfere with Southern Co.’s second quarter profits, which fell 52% compared to last year. Mild weather and slowing industrial demand also played a part in watering down earnings. The utility reported $297 million in profit, or 34 cents a share, compared to $623 million, or 71 cents a share in 2012. While revenue rose 1.6%, Southern Co.’s operating margins shrank to 15.1% from 27.3%. and totally energy sales fell 4.6%, a worrying trend.
Georgia Power also found itself at the center of action this quarter after Southern Co. agreed to discard its rate hike request of $737 million to pay for budget overruns at Plant Vogtle, which is currently about 50% complete. Rather, the utility will seek approval for a $209 million hike to recover funds already spent in 2012. The move will help Southern Co. avoid public disclosure of construction issues for the $6.85 billion plant. Southern is now looking to a series of multi-year rate plans for Georgia Power, Gulf Power and Mississippi Power to shake-up some extra funds .
Takeaway: Aside from plant construction costs, overall economic stagnation will affect electricity demand, explains Art P. Beattie, Executive Vice President and Chief Financial Officer of Southern Co. Despite stagnant or declining demand, executives remain upbeat about the regions’ growing construction activity and consistent sales levels in real estate and retail, which they hope will translate to positive trends for the electric utility industry.
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