Duke Energy (DUK) has decided to permanently shut down its crippled Crystal River nuclear power plant in Florida, choosing not to carry out repairs that could have cost the company as much as $3.4 billion. The reactor, which the company acquired through its purchase of Progress Energy in 2012, has been offline since 2009 after its containment shell formed cracks while undertaking maintenance activity.

Considering the high costs and risks involved in repairing the reactor, we believe that the company has taken a prudent decision and can better invest its capital towards building new lower cost generation capacity, to replace the plant.

What it means for Duke Energy

Financial Impact:

The company is likely to take an impairment charge of around $195 million in the fourth quarter, relating to the closure of the plant. Since the reactor was shut down in 2009, the company has been partly purchasing power to meet the shortfall and will have to continue doing so until a replacement plant is commissioned. While the details of the costs of purchased power are not available, they are likely to be higher than generating the power in-house and could marginally impact profitability.

Recouping Costs:

The company will seek to recoup its $1.6 billion investment in this reactor through future rate increases that will span a period of 20 years, a move that is likely to be allowed under its settlement with Florida officials last year. The company also stands to receive $530 million in insurance proceeds, in addition to the $305 million that it has already received.

Replacement Capacity:

While the company does not have a definitive plan for the new generation capacity, it is most

likely to use natural gas fired generation and the capacity could come online as soon as 2018. Natural gas fired generation has several advantages given the lower fuel costs, lower capital investments and environmental benefits, compared to other fuels like coal.

Gas prices have fallen by around 75% over the last five years and capital investments for gas fired plants are around 50% lower than those for coal per megawatt. The total cost of a megawatt-hour of power generated through gas is estimated to be around $90 as compared to around $143 at a nuclear plant, and $140 for coal fired plants. Adopting gas fired generation could help bring down costs and improve the company's margins going forward.