Duke Energy: An Overview Of The Chilean Operations

Apr. 8.13 | About: Duke Energy (DUK)
    Quick Take
  • Duke energy owns 380 MW of thermal and hydroelectric generation capacity in Chile.
  • Chile faces an acute shortage of electricity and demand is still projected to grow by around 6% going forward. This compares with the 1% growth rate in the United States, providing growth opportunities for Duke.
  • Electricity rates in the country are as much as four times the U.S. rates.
  • Risks in Chile include fuel supply issues and drought, which could impact costs and electricity output.

Duke Energy‘s (NYSE:DUK) international energy business is viewed as a cornerstone of the company’s growth strategy due to its access to the growing Latin American electricity market. The division owns and operates power generation capacity and sells and markets electricity and natural gas in Latin America. In this article we take a look at Duke’s operations in Chile, a market which it entered just last year.

Overview Of The Operations

Duke entered the Chilean market last July through its acquisition of a 240 MW diesel-fired power plant. Later in the year, it acquired two hydroelectic power plants with a total of 140 MW of capacity. Both plants are run by water used from the Duqueco River, which flows through southern Chile. All of Duke’s power plants in Chile are connected to the country’s central SIC grid, which serves the populous central region, and the major consumption centers around the capital city of Santiago. Although Duke’s Chilean facilities account for less than 1% of its overall generation capacity, we believe that they give the firm an opportunity to test the waters before scaling up operations in the country.

While Duke doesn’t report the financials for its Chilean operations, the international division as a whole has outperformed its domestic business on most fronts. In 2012, revenue per megawatt-hour (MWh) was around $77, compared to around $56 for Duke’s North American commercial power operations. Margins have also been higher at over 40% compared to around 20% for the U.S. commercial operations. Since the Chilean assets have been with Duke for less than a year, it’s unlikely that they have had much of an impact on the 2012 revenues and profitability. However, given the demand and high rates in Chile, we believe it could be slightly accretive to the division’s earnings going forward.

Opportunities And Risks In The Chilean Market

High Demand Growth, Low Capacity: Chile is one of Latin America’s fastest growing and wealthiest economies. Its GDP grew at around 6% in 2011. Per capita electricity consumption in Chile is around 3,297 kWh per year. Although this is higher than some other South American countries such as Brazil, it still trails more developed countries like the U.S., where consumption exceeds 13,000 kWh per year. Electricity demand has been growing rapidly due to industrialization and the rising economic empowerment of the middle class. Annual load growth is expected to be around 6% to 7% per year through 2020. In contrast, load growth in the U.S. is expected to be just about 1%. This would mean that Chile needs an additional 8 Gigawatts (GW) of new generation capacity to satisfy the growth in demand. [1] The country presently has a generation capacity of around 15.5 GW [2]

High Electricity Rates: Electricity prices in the region are also very high. In 2012, some retail customers were paying as much as $0.25 per kilowatt-hour (kWh). [3] In comparison, rates in the U.S. are around $0.06 per kWh. The high prices are due to strong demand and also because the country relies heavily on oil and gas imports (Chile imports around 75% of its energy needs).

Risk Of Drought And Volatile Fuel Prices: Chile has been facing a drought for the past two years, and this has slowed down hydroelectric power generation in the central part of the country. If this were to continue into the future, the output of Duke’s hydro-power operations could drop. The diesel power facility also faces some risks since it is likely that it depends on imported fuel. Any price volatility or supply cuts for diesel and natural gas could impact its operations and drive up costs.

We have a price estimate of $67 for Duke Energy, which is around 5% below its current market price.

Notes:

  1. Ministry Of Energy
  2. IEA
  3. Greentech Media

Disclosure: No positions