Duke Updates: Edwardsport Impairment Expenses, Progress Acquistion Keep Lid on $21 Value

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DUK
Duke Energy

Duke Energy (NYSE:DUK) reported modest Q3 results a few days back. The highlight of the release was the impairment expenses related to the Edwardsport Gasification Combined Cycle plant it realized in the latest quarter. Duke Energy is one of the largest electric utilities in the U.S. with approximately 35,000 megawatts of electric generating capacity in the Carolinas and the Midwest as well as natural gas distribution services in Ohio and Kentucky. Its competitors include companies like Exelon Energy Corp and Allegheny Energy (NYSE:AYE).

Our price estimate for Duke is about $21, which is roughly in line with the current market price.

See our complete analysis for Duke Energy here

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The revenues in the latest quarter were at the same levels to that of the Q3 2010, however the impairment expenses it realized has pushed the net income for the quarter down to $472 million as compared to $670 million during the same period last year. If we consider the results of first nine months of 2011, the total earnings jumped by 58 percent over Q3 2010

Edwardsport cost overruns may hurt Duke

The company has been forced to construct a coal to gas conversion facility at its Edwardsport electricity generation facility in order to meet the environmental norms. The projected cost of construction the facility is now nearly $3 billion, more than $1 billion above the initial estimate of $1.96 billion. Duke is now looking to recover the incremental cost from the customers. The hearings in front of Indiana regulators began a few days back to determine how much of these costs the company’s customers can bear. However, opponents claim that the company may have concealed key information regarding the costs and now are forcing the customers to pay for its own inefficiency. They also have questions about secret meetings Duke officials allegedly held with regulatory board officials. This would be a violation of the regulatory process. Duke has agreed to bear $222 million of excess costs. However, if any of the regulatory accusations prove to be true, Duke could not only be forced to absorb all of the cost overruns but also face substantial penalties.

$28 billion Duke – Progress Merger in Focus

Duke Energy will pay $28 billion for the acquisition of Progress Energy, which implied a close to 6 percent premium to Progress Energy’s value in January. The merged entity will be called Duke Energy, which is estimated to be worth $65 billion in enterprise value and $37 billion in market capitalization. The entity will have country’s largest regulated customer base, providing service to approximately 7.1 million electric customers and approximately 57 gigawatts of domestic generating capacity. The merger will help the companies reduce their environmental footprint and increase efficiency by the development of new technology. However, with the merger, there will be significant downsizing in the number of the employees that both the companies have. ((Duke Energy Shareholders Approve Progress Energy Merger, Duke Energy))

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