Duke Energy’s (NYSE:DUK) international energy business is viewed as one of the cornerstones of the company’s growth strategy given its access to the energy hungry Latin American market. The division, which operates in countries including Brazil, Peru, Argentina and Chile, owns and operates electric generation capacity and also sells and markets electricity and natural gas. Although the business accounts for just about 7% of the company’s total sales, it is becoming increasingly important from a growth standpoint since over 85% of Duke’s revenues come from the regulated U.S. utility market, which is expected to witness relatively sluggish demand growth going forward. In this note, we take a brief look at some of the factors that will drive the performance of Duke’s international energy division.
Low Electricity Consumption, Plenty Of Room To Grow: Electricity consumption in Latin America is still very low. Annual per capita electricity consumption in Brazil stands at around 2,400 kilowatt-hour (kWh) while it is around 3,300 kWh in Chile.  In comparison, the per capita consumption in the United States stands at around 13,400 kWh. This gives utilities and power generation companies a lot of room to grow in these markets. For instance, electricity consumption in Brazil is expected to grow at a rate of around 4.5% over the next decade and this would require the overall generation capacity in the country to grow by around 56% during the period.  In comparison, total load growth in the United States is expected to trend at just about 1% over the next few years.
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High Electricity Prices In The Region: Electricity rates in many parts of Latin America are higher than those in the United States. For instance, retail rates in Brazil stand at over $0.12 per kWh while retail rates in Chile can approach as much as much as $0.25 per kWh. Although a part of these high prices could be attributed to higher transmission losses and generation costs, they are also due to high demand and relatively short supply. While Duke does not have retail operations in these countries, it should nevertheless be able to benefit at the wholesale level.
According to our estimates, Duke’s international business generates close to $77 per megawatt-hour (MWh), while the firm’s U.S. commercial power business, which also caters to the wholesale electricity market realized only about $57 per MWh last year.
Low Rainfall And Reservoir Levels Lead To Cost Concerns: Duke Energy’s Brazilian operations are composed entirely of hydroelectric assets and these assets account for more than 40% of Duke’s international generation capacity.  Brazil faced a drought earlier this year leading to lower reservoir levels, which in turn impacted generation volumes and also resulted in higher costs from power purchases. If the drought continues in the next year as well, it could potentially impact the margins for Duke’s international operations. Chile has also been facing a drought in recent times and this has slowed down hydroelectric power generation in the central part of the country. If this were to persist into the future, the output of Duke’s hydro-power operations in the country could also be impacted.
We have a price estimate of $73 for Duke Energy, which is about 10% ahead of the current market price.Notes: