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Duke Energy's Latin America exit is EPS dilutive, but eliminates overhang

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Duke Energy's Latin America exit is EPS dilutive, but eliminates overhang

Wall Street analysts, by and large, agree that 's exit fromits international generation business is EPS dilutive in the near term, butwill eliminate an earnings overhang as the company focuses on its core holdings.

Duke Energy entered into two separate deals Oct. 10 tosell its LatinAmerican assets to China ThreeGorges Corp. and ISquared Capital for about $2.4 billion in combined cash and assumeddebt. Analysts estimate that Duke Energy has approximately $750 million in debtat the international business.

The deals are subject to regulatory approvals in Brazil andChina and other customary closing conditions, and are expected to close withintwo to four months.

"[W]e view the decision favorably from a longer-termstrategic standpoint as we believe it will reduce [Duke Energy's] earningsvariability and better allow management to focus on the company's core domesticutility franchises," Wells Fargo analyst Neil Kalton wrote in an Oct. 11flash report.

Duke Energy said in February that it was of and itspower generation assets. The company, however, is holding on to its 25% equity investment in Saudi Arabianmethanol producer National Methanol Co.

The international business presented an in 2015, based onnegative movements inthe foreign exchange rate and hydrology concerns. Despite improvement in recentmonths, Duke Energy pressed forward with its decision to sell the business andfocus more on its regulated holdings.

"With the divestiture of remaining [Latin American]assets, [Duke Energy] will have essentially returned to a fully-regulated U.S.utility, with a gas infrastructure growth platform now that the []acquisition has beenclosed, which provides incremental LDC or midstream opportunities,"Guggenheim Securities LLC analyst Shahriar Pourreza wrote in an Oct. 10 report.

The company plans to use proceeds from the transactions toreduce its holding-company debt. Wells Fargo estimates that the debt reductionwill offset approximately 3 to 5 cents of the 25 cents of lost internationalEPS.

Lower estimates

SunTrust Robinson Humphrey reduced its 2017 and 2018 EPSestimates for Duke Energy to $4.67 from $4.81 and $4.90 from $5.02,respectively. However, the brokerage on Oct. 11 raised its price target to $80from $79 based on the elimination of overhang from expected earnings dilutiontogether with the latest utility peer valuations.

Analyst Ali Agha wrote that the sale adds $440 million inincremental cash to Duke Energy's planned redeployment of cash from itsinternational operations. The company already assumed the of $1.2 billion in cashover the next five years, Agha noted.

"[O]ur calculations suggest that the International saleis $0.20 dilutive to annual earnings, while the Piedmont acquisition is$0.06-$0.08 accretive to annual earnings," Agha wrote.

Evercore ISI, which lowered its price target to $80 from$81, said the overall international transaction is 16 cents dilutive to DukeEnergy's earnings based on the loss of international EPS offset by a 9-centincrease in EPS from lower interest costs.

"The proceeds are less than the $2.5 [billion]'placeholder' sale price we had in our prior forecast, but only impacts ourearnings estimate by ~$0.04," Evercore ISI analyst Greg Gordon wrote in anOct. 11 report.

Evercore ISI said it is maintaining its 2016 EPS estimate of$4.60 but lowering its 2017 and 2018 estimates by 5 cents to $4.55 and $4.80from $4.60 and $4.85, respectively.

UBS Securities LLC said the sale price for Duke Energy'sinternational assets was above the firm's initial expectations of $1.8 billion,while the Brazil assets could have fetched more, based on exchange rate andenergy price improvement.

UBS analyst Julien Dumoulin-Smith said the sale is"incrementally accretive" by 2 cents per share versus initialexpectations, resulting in a net dilution of 22 cents off the 2016 estimatedEPS base. This dilution is offset by approximately 12 cents of net EPSaccretion from the Piedmont deal, the analyst wrote in an Oct. 10 report.

"With both critical portfolio transitions underway, wesee clear path towards reiterating the longer-term EPS growth guidance, likelywith greater clarity on the near term," Dumoulin-Smith wrote. "We maintainour confidence in ratebase growth ultimately translating to EPS growth."

Duke Energy executives said in February that the company's core businesses are"well-situated to grow within 4% to 6% off of their 2016 base of $4.30 pershare" through 2020.

Duke Energy's stock closed at $77.06 on Oct. 10 and wastrading down on Oct. 11.