How Will Nuclear Power Shape Duke Energy’s Focus Post-Merger?

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Duke Energy

Duke Energy‘s (NYSE:DUK) Progress Energy acquisition has increased the number of nuclear plants in its fleet of power plants, and this is likely going to shape Duke’s strategy going forward given the increased contribution of nuclear to its power generation going forward. We have a $70 price estimate for Duke, nearly 5% ahead of the current market price. We recently updated our analysis to account for the merger and subsequent reverse stock split.

See our complete analysis for Duke Energy here

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Progress’s Q2 results were adversely affected due to refueling outages to nuclear plants during the quarter, and nuclear power generation has had its string of safety concerns as well. One such example is the Crystal River nuclear reactor (CRNR) in Florida. This plant has been offline since September 2009 when it was shut down to address certain maintenance issues. During the upgrades, the plant’s 42-inch thick concrete containment building cracked. Since then the repair work for the plant is pending. Recently, Duke’s management has been actively trying to resolve the issue, but it might take longer than anticipated.

The decisions regarding CRNR upgrades and Levy County nuclear project (LCNP), a new power plant about to be set up, are the most critical for Duke in the near term. The company may either choose to permanently shut down the 860 MW CRNR plant or go ahead with its repair work. But for the moment, its major concern is the mounting costs for the upgrades.

Through June 30, 2012, the company has incurred $839 million for the plant repair and it is estimated to rise to between $900 million and $1.3 billion. [1] [2] Further, Crystal River’s insurer, the Nuclear Electric Insurance Limited (NEIL), made only a partial payment of $305 million on the initial crack and has held off on paying further claims based on its investigation.

Duke’s management is going to meet the insurer in Q4, 2012, after which there will be more clarity on insurer’s contribution to the upgrades. Duke’s CEO, meanwhile, has indicated that CRNR could be retired if NEIL does not agree to pay. However, if the board decides otherwise, the additional expense would be borne by Duke’s customers. Duke earlier got a $150 million increase in base rates in relation to CRNR while receiving approval for the merger from regulators, which also requires Duke to pay refunds of $288 million for its shut down over the last two years. [3] The company will need to give away the base rate hikes as well if it wants to retire the plant.

The CRNR plant repairs could result in a significant cash outlay for Duke if it goes ahead with the process. A part of this expense is likely to be covered by the insurer and rest by the utility’s customers. However, the company will need to negotiate with regulators for rate hikes for the plant upgrades. Failing to convince the regulators could result in Duke shelling out more money from its cash reserves. If that expense is significant, the company’s approach could change toward nuclear power.

The CRNR is due for license renewal post 2016. Duke may withdraw the filing Progress previously made for extending it further by 20 years. Duke is also planning for the upcoming $24 billion Levy County nuclear project, which could also get delayed.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. Duke CEO supports Fla. deal; fate of Crystal River nuclear plant unknown,, August 13, 2012 []
  2. Repair costs rise at Crystal River nuclear plant,, August 3, 2012 []
  3. Duke Energy still mulling fate of Crystal River plant,, August 14, 2012 []