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Duke Energy, Sumitomo Cut a Deal

DUK WR

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Duke Energy’s (DUK - Analyst Report) commercial arm Duke Energy Renewables has entered into an agreement with Sumitomo Corp.’s U.S. subsidiary, Sumitomo Corp. of America.

Per the agreement, Sumitomo will have equal ownership rights over Duke’s two Kansas wind projects, the 131-megawatt (“MW”) Cimarron II Windpower Project and the 168-MW Ironwood Windpower Project. Sumitomo has already invested approximately $353 million to meet construction and operating expenses.

Once the project comes online, Duke will be in charge of operations and maintenance of the wind farms, while Sumitomo will focus on project management.

Duke had already signed two 20-year contracts with Kansas City Power & Light and Westar Energy, Inc. (WR - Snapshot Report) to sell all of the electricity and allied renewable energy credits (“RECs”) produced by Cimarron II and Ironwood projects. Both the companies are expected to complete the construction work later this year.

We view Duke Energy as a well positioned organization with accelerating investment in power plants and transmission, and ongoing cost containment efforts. Besides, the company has also planned a strategic merger with another utility holding company, Progress Energy Inc. . This initiative bodes well for the company’s future growth.

We believe this contract with Sumitomo will be incremental to Duke’s future revenue and earnings. Green power generated from these projects will enable Duke to meet the guidelines of the Kansas Renewables Portfolio Standard Program. Per the guidance, utilities are required to produce or acquire 20% of their power from renewable sources by 2020.

But, at the same time, we are concerned about an unfavorable macro backdrop, predominantly fossil-fuel based generation assets, commodity risk at the company’s Commercial Power segment, foreign currency exchange volatility and pending regulatory approval for the merger. However, we currently retain a Zacks #3 Rank on Duke Energy, which translates into a short-term Hold rating.  

Duke Energy is slated to release its first-quarter 2012 numbers on May 4, 2012. The Zacks Consensus Estimate for the first quarter 2012 is currently pegged at 36 cents per share.

Based in Charlotte, North Carolina, Duke Energy is a diversified energy company with a portfolio of domestic and international, natural gas and electric, regulated and unregulated businesses. These businesses supply, deliver, and process energy for customers in North America and selected international markets.

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