Monday, March 25, 2013

Will Duke Energy's Dividend Get Nuked?

Year-to-date, the share price of Duke Energy (DUK-$70.28) has outperformed the S&P 500 Index by 180 basis points, posting a total return of 8.31%. However, at current prices the stock looks fairly valued, based on PE ratio, trading at a premium to other large-cap, regulated utilities, such as The Southern Company (SO)American Electric Power (AEP), and Consolidated Edison (ED).

What, therefore, could trigger an earnings miss and pressure Duke Energy’s stock price and targeted dividend payout ratio?

The unrecovered investment on the Crystal River Unit 3 asset is approximately $1.64 billion, which is equal to 70% of prevailing and agreed-upon ROE (calculated on the prevailing cost of equity), according to terms of a settlement with the Florida Public Service Commission (FPSC). In written correspondence, company spokesman David Scanzoni confirmed that the company cannot begin to recoup its embedded costs through future customer rate hikes until the billing cycle starting in January 2017 (with collection accreting over a 20 year span). Additionally, $20 million listed as an offset (liability) in removal costs could prove too conservative, as the approved SAFSTOR decommissioning strategy will take between 40 – 60 years to complete!

While the foregoing reflects current estimates with respect to the retirement of the Florida facility, there is significant risk and uncertainty, too, with respect to the cost and recoverability of replacement power.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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