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Downside to Duke Energy From Increasing Environmental Regulations

Duke Energy's ( DUK ) annual shareholder meeting last week was marked by protests from environmentalists who are opposed to the company's coal and nuclear projects. Duke bid $13.7 billion for Progress Energy ( PGN ), and if approved, Duke will become the largest combined electrical utility in the U.S. competing with companies like American Electric Power Company ( AEP ), Exelon Energy Corp and Allegheny Energy (NYSE:AYE). We discussed this in Sizing up Duke Energy's Business Before Progress Energy Merger.

Largest Utility Will Bring Increased Scrutiny

Duke Energy is moving ahead with its acquisition of Progress Energy, which will make the combined company the country's largest electric utility. However, the combined company will also become one of the country's largest polluters as it will produce more than 50% of electric power from coal, which is responsible for 37% of the country's greenhouse gases. The electric power industry is also drawing additional scrutiny for pollution.

With a view on reducing pollution, regulators are planning to tighten many of the clean air and clean water regulations. As a result of these initiatives, the costs for utilities are expected to increase as they will have to make a lot of changes to their operations in order to produce and deliver cleaner power. In addition, utility revenues have been slow to recover as power prices have remained low with people and businesses using less electricity, a continuation of tends seen during the recent downturn.

In the case of costs escalating and revenues remaining slow to pick up, there can be a downside to our EBITDA margin forecast for Duke's U.S. Franchised Electric & Gas division. If the EBITDA margin falls to around 35% by the end of our forecast period, it will result in a downside of 30% to our current price estimate for Duke Energy's stock.

We have a $19.38 stock value for Duke Energy , which stands roughly in line with market value.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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