Duke Results a Warning to Others

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Those who think that energy demand can do nothing but rise should take heed to the quarterly report of Duke Energy (NYSE: DUK).

The North Carolina-based electric utility missed street estimates badly.  But it's the reason for the miss that should give investors across the sector pause.

Apparently the prices being paid at PJM Interconnection (http://www.pjm.com/), which handles transfers of electricity across the eastern U.S. grid, have crashed, from $110 per megawatt all the way down to $16 per megawatt. Companies that routinely produce more power than they consume took the hit, companies like Duke Energy.

CEO Lynn Good said in an interview she is confident this is just a weather-related glitch, and that she expects prices to reach $126 next year at PJM. Maybe it is. But in the long run, it's not. 

Duke and oversupply

Duke was reporting the end of its first full year since acquiring Progress Energy last July 2. Net income was $339 million, $0.48 per share, on revenues of $5.88 million. The consolidated balance sheet for the company shows three more quarters, with net income of $594 million, $435 million and $634 million. This shows the magnitude of the miss.

Like all electric utilities Duke's return within its service territory is regulated, based on the capital it has invested. The company had been investing in a Crystal River, Florida nuclear power plant but has now abandoned it, after its Progress unit was billing customers for costs since 2009. The company insists it has a firm commitment to coal, and is presently building a plant that turns coal into a gas, then burns it. While the technology is sound, this is an expensive undertaking, and as with the nuclear plant, there's risk if markets can't be found for what is being produced.

Despite the rising supply of higher-priced coal-based energy and its nuclear problems, Duke did not end North Carolina's renewable energy program. It is buying 7 megawatts of commercially-produced solar, for instance, and will continue to purchase solar power from rooftop owners.  The company also has installed over 1,000 megawatts of wind power. 

Duke's policy of grabbing energy with both hands for re-sale to others should be subject to question, because the Energy Information Agency notes that wind farms are becoming more efficient, and total demand is down.  Efficiency pays, it's the cheapest renewable fuel there is, and the more efficient the economy gets the harder it will be for marginal electricity suppliers to profit on their investments.

Southern also disappoints

Duke was not the only electricity producer to report disappointing results. Southern Co. (NYSE: SO) also saw numbers that disappointed the street, managing net income of $0.34 per share, or $313 million, on revenues of $4.246 billion. Results have been highly seasonal for Southern Co., with net for the September quarter of last year totaling $994 million, for December $399 million, and for March just $97 million, not nearly enough to maintain the quarter's dividend of $0.49 per share.

Southern is continuing with its nuclear program, with two plants being built at an existing facility near the Savannah River. The company has had cost overruns at its “clean coal” facility in Mississippi, and natural gas has surpassed coal in its energy mix.

Watch out, coal

These results among utilities, slackening demand and a glut of natural gas, and problems with coal gasification, are why coal stocks are down, and may remain down for a long time to come.

Despite its current low, low price of $15.94 per share, and a market cap that represent just half the company's annual revenues, Peabody Energy (NYSE: BTU) is looking particularly ugly. The company actually lost money in 2012, and has barely broken even so far in 2013. Cash flow has collapsed, and the company is trying to cover $10 in debt with each $1 in cash on the books.

Just the beginning

It may be time for investors to change some fundamental assumptions about the energy sector. Utilities that are big suppliers of energy to the market, like Duke and Southern, are no longer the buys they once were. And marginal suppliers of electrical energy, like Peabody, are actually shorts even at today's low, low prices.

Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool recommends Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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