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Duke Energy Corporation’s (DUK - Analyst Report) business wing Progress Energy Florida announced that it will permanently put the shutters down on the Crystal River Nuclear Plant (“CR3”) located in Citrus County, Florida.

Although a late 2012 report established the viability of refurbishing the plant, uncertainty regarding the nature and scope of repairs led the company to arrive at this decision. The company’s estimated cost of maintenance and repairs of the plant came to $1.3 billion to $3.4 billion. After the nuclear plant catastrophe in Japan in 2011, nuclear operators in the U.S. have increasingly focused on abiding by safety procedures.

The nuclear facility has been idle from the fall of 2009 owing to a crack on the outer layer of the wall of the containment building. The crack occurred during refueling and replacement works on the steam generators. In 2011, Duke Energy’s efforts to repair the containment damages turned futile when new fractures emerged in other parts of the containment building.

The company is contemplating to construct a high-tech natural gas-fired facility in place of the plant, which could come into service by 2018. It is also evaluating prospective sites, including Citrus County, for new plant capacity additions needed to meet rising customer demand in the future.  The other four coal plants in the energy center will however keep running for the time being.

Apart from this, the company and its insurance agent Nuclear Electric Insurance Limited (“NEIL”) reached an agreement for coverage claims in which Duke Energy will receive $835 million. The company intends to utilize the proceeds to refund its consumers via reduction in electricity rates.

Duke Energy is reviewing plans for decommissioning the plant and expects the entire closure to take around 40 to 60 years. The company aims to recuperate the investments of $1.65 billion in Crystal River in 20 years by seeking rate hikes from the regulatory body.

Of late, the company has been aggressively taking steps to redress its escalating cost structure and has retired two of its coal fired units in the Charlotte area, namely, the Buck and Riverbend stations in the wake of environmental regulations. The company’s North Carolina business has also filed for a rate increase to the regulatory body.

Going forward, we believe the closure of the nuclear plant will lead to substantial cost savings for the company thereby improving margins. Moreover, the company will derive significant benefits from its natural gas assets given its recovering prospects.

However, possibility of a negative ruling in the rate hike case and weather variations could deter the company’s growth goals. Currently, Duke Energy carries a Zacks Rank #3 (Hold). We presently prefer the Zacks Rank #1 utilities Ameren Corporation (AEE - Analyst Report), DTE Energy Company (DTE - Analyst Report) and Pike Electric Corporation (PIKE - Snapshot Report).

Based in Charlotte, NC, Duke Energy together with its subsidiaries generates, distributes and sells electricity through nuclear, coal-fired, hydroelectric, combustion turbine, and combine cycle stations.

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