Duke Expands Footprint In Chile Through Hydroelectric Capacity Acqusition

Duke Energy (NYSE: DUK), one of America’s largest electric utility firms, has acquired 140 MW of hydroelectric power capacity in Chile through its purchase of CGE Group’s Iberoamericana de Energía Ibener S.A. subsidiary for $415 million.  ((Duke Energy Press Release)) The acquisition will be made through Duke’s international energy division and marks Duke’s second acquisition in Chile this year following its acquisition of a 240 MW diesel power station earlier this year. Both of the plants that Duke purchased are run-of-river plants that use water from the Duqueco River, which flows through southern Chile. Run-of-river plants do not require large dams to store water and run solely on the currents of the river. The generated power is fed to the Central SIC grid.

We believe that the acquisition will help Duke expand its presence in the energy starved Chilean market and could also allow it to take advantage of the country’s relatively high electricity rates.

Energy Landscape In Chile

Chile is one of Latin America’s fastest growing and wealthiest economies, with a GDP growth rate of about 6.5% in 2010. Electricity demand in the region has been growing due to industrialization and rising economic empowerment of the middle class. However, the country faces an acute shortage of energy and imports nearly 75% of its energy needs. ^[1]  The country’s imports of natural gas from its energy rich neighbors like Argentina have also dried u,p as these countries diverted supplies to feed their domestic demand. A combination of  these factors have contributed to relatively high electricity prices in the region.

Hydropower is an attractive option for the country to meet its electricity needs due to its low generation costs and emission free nature. The southern part of the country is rich in hydropower resources, with the hydropower plants in the region generating almost 40% of the country’s electricity. As of 2010, Chile had a total of 17 GW of installed power capacity.

Expanding In Latin America

Duke’s international energy division owns around 4.5 GW of generation capacity in Latin America, primarily in Brazil and Peru. Over 70% of this capacity is hydropower based. Although the division accounted for just about 6% of the firm’s revenues in 2011, the EBITDA margins are very attractive at around 45% (about 10% more than US Franchised Electric And Gas).  In its press release, the firm said that it was evaluating additional projects in Latin America, thanks to the region’s stable regulatory environment and strong growth potential.

We have a price estimate of around $68 for Duke Energy, which is about 7% ahead of the current market price.

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1. Energy In Chile: An Unexpected Setback, The Economist [↩]