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.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

This is an earlier story from the Charlotte Business Journal on the same issue.

Feb 14, 2014, 5:40pm EST UPDATED: Feb 14, 2014, 5:53pm EST

Duke Energy’s Midwest fleet could go on block as Ohio nixes capacity charge

 John Downey Senior Staff Writer-Charlotte Business Journal

Ohio regulators have shot down Duke Energy’s request for a capacity charge to support its Midwest power-generation fleet, increasing the likelihood that Duke will divest its stake in the 13 plants.

Duke (NYSE:DUK) executives have said for more than a year that the Public Utility Commission of Ohio’s decision on the charge would be an important factor in whether Duke would keep or sell its interest in the plants.

Duke spokesman Blair Schroeder emphasizes that Duke’s position on the capacity case has been that “the outcome will help inform our decision, not determine our decision” on the plants.

“We are reviewing the order to determine impact on the company and our customers,” he says.

Open door

Analyst Hugh Wynne, who covers Duke for Sanford C. Bernstein & Co., calculates in a report issued Friday that the commercial division that operates the Midwest plants could be worth as much as $2 billion.

“Based on our conversations with management, we believe that the PUCO’s decision opens the door for Duke Energy to consider other strategic options for its Midwest generation fleet, including a potential divestiture,” he writes in the report.

He says selling the operations and buying back stock would be slightly accretive to shareholders. But he says if Duke cannot reach an attractive deal, holding on to the commercial operations would not hurt its value.

In late November, Bloomberg reported Duke had hired the investment bank at Citigroup to work on a potential sale of the fleet.

Appeal possible

Charlotte-based Duke asked the Ohio commission in August 2012 to allow it to collect an estimated $728 million in capacity costs at an undetermined future date. Duke based its request on a July 2012 decision by the commission to allow American Electric Power to collect such costs.

The commission denied the request on several grounds. But at the heart of its argument was Duke’s Electric Security Plan, which the commission approved in 2011. The commission says that plan contained a provision for $110 million a year in charges to customers for capacity costs.

The commission says Duke could file to recover the money it proposes as a rate increase. Duke can also appeal the ruling.

Schroeder says no decision will be made on how to proceed until the company finishes digesting the 66-page order. He said the company may have a better idea about the impact of the order by early next week.

John Downey covers the energy industry and public companies for the Charlotte Business Journal.