Standard & Poor’s (S&P) lowered its outlook on Duke Energy Corp. (DUK) to ‘Stable’ from ‘Positive’ on grounds of escalating cost for completion of power plant and a more heated Ohio energy market.
Standard & Poor’s decided to lower the long-term outlook on Duke after the cost of completing a 630-megawatt (MW) coal-fired power plant in Indiana spiraled significantly. However, S&P maintained its ratings, including an ‘A-minus’ corporate rating on Duke and on several of its subsidiaries.
Duke had initially estimated that the cost of completing the 630 MW coal fire plant will be $2 billion. However, at present it expects the expense to climb to $2.9 billion. Apart from the rising cost of completing the coal fired power plant, Duke is also facing competition from low-priced power producers and thereby losing customers. The rating agency contends that these factors accentuate Duke’s business risk.
We apprehend the increase in project completion cost will further increase the debt level of the company. Duke ended the first quarter of 2010 with long-term debts of $16.2 billion and cash and cash equivalents of $1.1 billion. The interest expenses of Duke at the end of the first quarter were $26 million higher than the year-ago period due to higher debt balances.
During the first quarter call, Duke provided an adjusted earnings guidance range of $1.25 per share to $1.35 per share for 2010. The Zacks Consensus Estimate on the company’s earnings for the second-quarter 2010, fiscal year 2010 and fiscal year 2011 presently stands at 28 cents per share, $1.29 per share and $1.34 per share, respectively.
The Zacks Consensus Estimate for total revenue in the second-quarter 2010, fiscal year 2010 and fiscal year 2011 is currently pegged at $3.2 billion, $13.4 billion and $13.8 billion, respectively.
Though we appreciate Duke’s initiative to create a more environmentally friendly coal power plant, the rising cost incurred to complete the project remains a cause of concern. It will result in an overall 19% average rate increase in consumer bills phased into rates by 2013.
We presently maintain our short-term Zacks #3 Rank (Hold) and a longer-term Neutral recommendation on the stock.
Based in Charlotte, North Carolina, Duke Energy is an energy company. The company operates through three segments: U.S. Franchised Electric and Gas, Commercial Power, and International Energy.
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