Duke Energy Playing It Smart – Analyst Blog

Duke Energy Corporation (DUK) in a prudent move sold 50% stake in its subsidiary DukeNet to Alinda Capital Partners LLC for $137 million in cash. Duke Energy will continue to own the remaining 50% in DukeNet. As a result, DukeNet will become an equally owned Joint Venture between the two companies. The deal is expected to close in the third quarter of fiscal 2010.

 

The transaction will provide double benefit for Duke Energy. Firstly it will result in a GAAP gain for the company, boosting its fiscal 2010 numbers. Secondly, tying the fortunes of DukeNet with cash rich Alinda will erase the crease lines of worries over funds for capital expansion of the company.

 

Duke Energy had cash and cash equivalents of $1.1 billion at the end of the first quarter of 2010 compared to $1.2 billion at the end of the year-ago quarter. At the end of the first quarter, total debt was $17.2 billion with a debt-to-capitalization ratio of 44%. Total debt, however, was only $15.5 billion at the end of the first quarter of 2009 (debt-to-capitalization was 42%). A higher debt balance increased the interest expense to $210 million in the reported period from $184 million in the first quarter of 2009.

 

Headquartered in Charlotte, North Carolina DukeNet develops, owns and operates a fiber optic communications network, primarily in the Southeast U.S. (North Carolina, South Carolina, Tennessee and Georgia).

 

Alinda Capital Partners LLC, an independent firm, is the largest manager in the U.S. of pension assets for investment in infrastructure. The company has over $7 billion of assets under management. Alinda’s investors are predominantly U.S. pension funds for public cum private sector workers, and some of the largest institutional investors in the world.

 

Duke Energy is one of the largest electric power holding companies in the United States. Its regulated utility operations serve approximately 4 million customers located in 5 states in the Southeast and Midwest, comprising a population of approximately 11 million. Its Commercial Power and International Business segments own and operate diverse power generation assets in North America and Latin America, including a growing portfolio of renewable energy assets in the U.S.

 

Duke Energy Corporation’s stable U.S. electricity and gas operations, spread over the five states of North Carolina, South Carolina, Indiana, Ohio and Kentucky, provide a relatively stable and growing earnings stream. Looking ahead, our bullish outlook for the company is supported by higher rates, strong balance sheet, ongoing capital expansion projects, and an above average dividend yield for the industry.

 

Duke Energy based on forward earnings estimates at present is trading at a premium compared to its peers like FirstEnergy Corporation (FE), Pacific Gas & Electric Corporation (PCG), Public Service Enterprise Group Inc. (PEG) and Edison International (EIX).

 

Moreover, the present unfavorable macro backdrop, fossil-fuel based generation assets, lower demand for electricity, foreign currency exchange volatility and pending regulatory cases continue to restrain valuation. Thus we maintain our long-term market Neutral recommendation on the Zacks Rank #2 (buy) stock.