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Duke Energy Stays the Course on Power Plant Sales

Stocks in this article: DUKAESNRGDYN

NEW YORK (The Deal) -- After a peer pulled a sale of a like business, Duke Energy's (DUK) process to sell its generation business in the Midwest is going "strong" and is on track for an announcement after Labor Day, said sources familiar with the matter.

If the sale goes through, it could reach a valuation of between $2 billion and $2.3 billion, according to industry bankers.

Industry participants started to question whether Charlotte, N.C.-based Duke would be successful with its merchant generation sale following Arlington, Va.-based AES' (AES) announcement on July 14 that it was pulling the sale of subsidiary DPL Inc.'s generation and retail businesses, a similar business to Duke's. That business had been expected to garner $1.5 billion to $2 billion in a sale.

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A spokesman at Duke said the process is continuing and the company does not have any firm dates at this time. Duke advisers Morgan Stanley and Citigroup Inc. either declined to comment or did not return calls.

Duke has gone down this road before as it tried to sell this business in September 2012, also with the assistance of Citigroup and Morgan Stanley. That auction, however, didn't result in a transaction.

The seeming difference between Duke's current sale process and the AES DPL auction that didn't work out, is that Duke now has a better understanding of the valuation, according to industry observers. Plus, Duke is committed to the regulated model and the need to sell these assets.

In February 2014, Duke again announced plans to exit the commercial electricity generation business in the Midwest and sell its ownership stakes in 13 coal, natural gas and oil-fired power plants located in Ohio, Illinois, and Pennsylvania. The portfolio has approximately 6,600 megawatts and the plants are owned or partially owned by Duke, with some plants jointly owned by AES' DPL and American Electric Power Co.

Duke's sale is attracting both financial and strategic buyers, the sources said. Industry bankerS said they expect many of the players who showed up in AES' process to show up for Duke's. AES' auction had mostly attracted independent power producers (IPPs) and private equity firms.

In the AES process, IPPs such as NRG Energy (NRG) and Dynegy (DYN) were seen as logical acquirers, while PE firms Blackstone Group and ArcLight Capital Partners LLC also made sense as buyers, though it could not be confirmed if these companies and firms had ever placed bids.

Read More: 4 Stocks Warren Buffett Is Selling in 2014

Regarding Duke's sale, The Deal previously reported that Dynegy, the Blackstone Group LP, Riverstone Holdings LLC, Energy Investors Funds and Energy Capital Partners were all interested in the power plants.

Duke operates the electric power plants in a separate division from its utility business in Cincinnati and Northern Kentucky. Midwest commercial generation sells electricity generated by its power plants to the PJM Interconnection.

The Midwest power plant portfolio's revenues represent 3% to 5% of the utility's total earnings. Duke prefers the regulated model and since these assets are unregulated, the company has been trying to sell the assets.

Duke, with a $50 billion market capitalization, supplies energy to 7.2 million electric customers and 500,000 gas customers and has 57,500 megawatts of generating capacity.

Duke is among a number of companies trying to reduce their exposure to the competitive power markets through merchant power plant divestitures.

Ameren Corp. closed on the sale of its merchant business, Ameren Energy Resources Co. LLC, to Dynegy Inc. in December 2013. Dynegy did not pay cash for the business, but assumed $825 million in existing debt.

--Claire Poole contributed to this report

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