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Duke Energy Seeks Midwest Power Plant Sale After Rate Rejection

Duke Energy Seeks Midwest Power Plant Sale After Rate Rejection

Duke Energy Corp., the largest U.S. utility owner, is seeking to sell its interest in 13 power plants in the nation’s Midwest after Ohio regulators denied its request to raise rates.

Citigroup Inc. and Morgan Stanley are advising Duke on the sale of stakes in the coal, oil and natural gas facilities in Ohio, Illinois and Pennsylvania that together have a capacity of 6,600 megawatts, Duke said in a statement today. The company will record a pretax charge of $1 billion to $2 billion in the first quarter from the sale, which it expects will take 12 to 18 months.

The sale of Duke’s Midwest commercial power interests may be worth $2 billion, according to Sanford C. Bernstein & Co. estimates and comes after the company failed to secure higher rates in Ohio amid plunging wholesale power prices. Duke began working with Citigroup last year on a possible sale of the Midwest plants, according to people familiar with the matter.

“We’ve been expecting this for some time,” Julien Dumoulin-Smith, a New York-based analyst for UBS AG, said today in a phone interview, noting utility investors are seeking stable returns. “We expect a lot of other publicly traded utilities will follow suit in the next 24 months.”

Ohio regulators on Feb. 13 denied Duke’s request to bill customers in the state an additional $729 million through May 31, 2015 to help cover a shortfall between power-plant costs and wholesale electricity prices. The rate request refusal “informed” the decision to sell the plants, Tom Williams, a company spokesman, said in an interview today.

Volatile Returns

“Our merchant power plants have delivered volatile returns in the challenging competitive market in the Midwest,” Lynn Good, chief executive officer of Duke, said in the statement. “The earnings profile is not a good strategic fit for Duke Energy.”

The average price of wholesale power in PJM interconnection LLC, the market for the plants Duke intends to sell, has fallen by nearly half since the 2008 recession due to lower industrial demand and a glut of cheap gas, based on the 2013 average compiled by Bloomberg.

“Sale of Ohio Genco assets would further strengthen Duke’s financial position,” Citigroup analysts led by Shahriar Pourreza wrote in a Feb. 13 note following the Ohio regulators’ decision. Duke could use sale proceeds to pay debt, acquire utility assets, or invest in solar and other renewable generation with predictable returns, the note said.

Duke said the sale would increase earnings per share, without specifying how it would use the proceeds. The 13 plants represent the bulk of Duke’s commercial power segment. Eleven of the facilities are located in Ohio, one is in Illinois and another is in Pennsylvania.

May Improve Earnings

Sale of the company’s holdings in the plants may help Duke improve its earnings if the proceeds are used to buy back shares, Hugh Wynne, a New York-based analyst for Sanford C. Bernstein & Co. wrote in a Feb. 14 note to clients.

Duke’s commercial power segment earned $27 million in the third quarter, down from $41 million in the second, according to data compiled by Bloomberg.

The utility supplies electricity to 7.2 million customers in North Carolina, South Carolina, Indiana, Ohio, Kentucky and Florida, according to its website.

Duke is scheduled to release fourth-quarter 2013 results at 7 a.m. New York time tomorrow.