The U.S. energy landscape is gradually drifting away from coal power. This is not only forcing utility companies like Duke Energy (DUK) to reassess their energy assets, but is also putting a question mark on companies' ongoing coal businesses.

It is especially bothersome to Duke as its U.S. Franchised Electric & Gas gets 13k MW of power from coal-fired stations, implying almost 50% of its 27k MW total power generation capacity in the segment.

Duke would need to phase out some of its old coal-fired units and substitute them with renewable power or cleaner coal on a continual basis. Several steps are being considered to improve the investment attractiveness of the renewable power projects in the country. Let's look at how these measures could impact utility companies like Duke.


The popularity of coal is diminishing as many coal-fired plants across the nation have shuttered over the last few months and many more will follow over the next few years. The primary reason for the closures is the environmentally unfriendly nature of coal plants.

Most of the plants don't comply to the carbon emission norms while others produce harmful chemicals that can be injurious to residents that live near the plans. For example, Duke's Catawba plant was found to discharge mercury in a nearby river. It is believed that a tax structure adjustment for renewable energy projects could help. U.S. Senator Chris Coons suggested that legislation to allow wind, solar and other renewable energy projects to operate under the master limited partnership (MLP) structure would boost the segment.

Presently, the MLP structure is available to only oil, coal and natural gas projects. MLPs typically help unlisted companies raise money through the stock market and avoid paying corporate income tax by distributing its profits. This could help improve the gloomy investment climate in renewable energy across the nation. Since Duke is already listed, it can still avail the tax benefit part of the legislation if it idles its renewable energy business into a separate MLP, if the legislation were enacted.

We believe this could help Duke in making up for the phasing out inefficient coal power plants and enjoy better margins in its largest division, the U.S. Franchised Electric & Gas.

We have price estimate of $25 for Duke's stock, which is about 10% above the current market price.

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