Duke Energy (DUK) derives most of its value through its U.S. franchised electric and gas business that accounts for nearly 84% of our $25 price estimate for the company's stock.

Duke reported sound growth in domestic customer addition in its recently announced first-quarter results. Additionally, it also benefited from increasing electricity tariffs, especially in the Carolinas. A noteworthy emerging trend in the U.S. power generation market is the shift to natural gas power generation, and that has potential for margin improvements.

The company provides electricity and natural-gas distribution services in the U.S. It owns diverse power generation assets in North America and Latin America, including a portfolio of renewable energy assets.

Here, we highlight three of the most important drivers for Duke Energy's stock and the upside or downside potential.

1. Revenue per MWh: Duke Energy generated $76 in revenues per MWh sold in the U.S. in 2011.
2. Number of customers: Duke Energy served slightly more than 4 million domestic customers in 2011. Its customer base increased to nearly 4 million from 2.2 million from 2005 to 2007.
3. US franchised electric and gas margin: EBITDA margins hovered between 38% and 44% between 2008 and 2011 as commodity prices wildly fluctuated.

18% Upside Scenario | $29 Trefis Price Estimate

1. Higher revenue per MWh (+5%):

Since 2000, average U.S. electricity rates have increased 2.5% a year. The Carolinas saw a price increase during the first quarter and other states will also see higher tariffs in the near future on account of rising demand and an expected rise in commodity prices. We see an upside of 5% to our current price estimate as revenues per MWh to increase to nearly $100 by 2019.

2. Growth in customer addition (+8%):

The EIA, in its Annual Energy Outlook 2011, has estimated that between 2008 and 2035, total electricity demand will increase by around 30% but production capacity by around 20%. We expect residential electricity demand to pick up on improving economy. We see a 8% upside to our price estimate as total customers reach nearly 5 million by the end of the Trefis forecast period in 2019.

3. Margins to improve (+2%):

Power generation companies are trashing many of their coal-fired plants and switching to natural gas, which is environmentally friendly as well as cheaper. The shale gas boom in the U.S. has caused natural gas prices to plummet and it does not look like recovering soon. Accessibility to abundant and cheaper natural gas is expected to improve the company's margin, as are increases in electricity prices and economies of scale. There could be an upside of 3% to the Trefis price estimate if the company is successful in realizing improved margins, and its margin could reach 46.7% by the end of the Trefis forecast period in 2019.

13% Downside Scenario | $23 Trefis Price Estimate

1. Number of customers remain flat (-5%):

Competition from players including Southern Co. (SO), NextEra Energy (NEE) and PPL Corp. (PPL) will get intense as improved margins make the business more lucrative. Duke Energy may lose some of its potential market in the form of customers. We believe if customer additions slow down, Duke will have nearly 4 million customers by the end of 2019. There is a downside of 9% to this scenario.

2. Margins fall lower than current expectations (-5%):

The price of fossil fuels such as natural gas, coal and crude oil, which are the key inputs for electricity generation, is volatile. If the prices are unfavorable for Duke, it is likely to increase the cost of energy production in the future and might not be able to pass it to customers due to regulatory issues. If the margins fall by nearly 2% to our current estimates, there will be a nearly 5% downside to our price estimate.