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American Electric Power Company Inc (AEP), Duke Energy Corp (DUK)- US Coal Utilities: Effects of New Limitations

The new climate change plan from Obama’s administration is expected to shift the competitive landscape of energy production in the United States. This will certainly impact coal mining companies and coal-burning electricity producers as the president is developing a plan in which the Environmental Protection Agency (EPA) would limit carbon dioxide emissions from coal and gas burning utilities by 2015 and implement it in 2016. This will be a fierce lobbying battle to set grounds that could benefit either side of the equation, but what is certain is that coal-burning utilities will be hit by this ruling.

American Electric Power Company, Inc. (NYSE:AEP)

The EPA and utilities: round one

There are several utilities that will have to migrate to cleaner sources for energy production or succumb trying. In this article we are going to review what could be the impact of this new climate change policy in American Electric Power Company Inc (NYSE:AEP), DTE Energy Co (NYSE:DTE) and Duke Energy Corp (NYSE:DUK).

American Electric Power: An intricate transition

American Electric Power Company Inc (NYSE:AEP) will be heavily affected by this new implementation by the EPA because it is highly dependable on coal as it uses more than 70% of that source to generate electricity and only 17% of natural gas. It consumed 57 million tons of coal in 2012 and remained the biggest buyer of coal in the US. Although the company has been decreasing almost all of the toxic emissions, its carbon dioxide emissions are still high at 122 million metric tons and have only been reduced slightly from 2007 to present date.

According to Melissa McHenry, AEP’s spokeswoman, stated that “There’s a significant portion of the current fleet of coal-fueled power plants that is going to be retired in the next few years”; “American Electric Power Company Inc (NYSE:AEP) has 5,000 megawatts of generation that is retiring. About a fifth (of all coal-fired plants) are retiring by mid-2015 as a response to regulations on mercury.” The company’s approach seems to be closing down the coal-burning facilities and burning gas instead. This will generate huge costs for American Electric Power Company Inc (NYSE:AEP) in the coming years. The company posted almost flat operating earnings for the first quarter of 2013 compared to the same quarter of 2012 totaling $387 million and EPS is flat at $0.80 for the same period of comparison. Some companies will try to pass some of the transition costs to costumers and that will be another battle they will have to win. American Electric Power Company Inc (NYSE:AEP)’s share has not suffered the impact of this ruling yet although last month it lost 5.5%.

DTE: Strong balance sheet could be helpful

DTE Energy Co (NYSE:DTE) is an electricity producer mainly based in Michigan that will also feel the heat of the new regulation. The main fuel type used for the generation output is coal with 76% and then nuclear with 15%. Shifting to gas or other fuel type to produce energy will impact consumers as some of those hiking costs will also be translated into heftier bills. The company could soothe the EPA’s emissions shock by focusing on other revenue segments it has but it will be costly as electricity accounts for almost 70% of its expected operating earnings in 2013 and gas only 17%.

DTE Energy Co (NYSE:DTE) has some margin to turn around its complicated situation. It has a strong balance sheet as it generated $600 million in cash from operations; it had Moody’s and Fitch credit upgrades; its free cash flow generation stood at $200 million and funds from operations over debt is expected at 22% in the first quarter of 2013. This could give the company some space to increase capital expenditures and modify its plants to decrease carbon emissions. A point worth considering is that Michigan is dependent on this company for electricity and it has more possibilities to increase electricity prices for consumers and lessen the transition burden.

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