Green Utilities to Avoid and Others to Invest In

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Going green is a great catchphrase, and evokes the image of running through a field of butterflies and dandelions. Sadly, a green economy cannot be effortlessly dreamed up, but instead needs to be created with real people and real investments. Some companies have been able to integrate green energy into their portfolio in a sustainable manner, while others have not been as successful. Smart investors are able to place their hard-earned funds in sustainable and profitable companies that are able to help the environment without unprofitable investments. 

Ormat Technologies (NYSE: ORA) owns a number of geothermal power plants, in addition to their interests in recovered energy generation and manufacturing. Being a green company is not always easy. With the recent natural gas boom in the U.S. geothermal generation is a tougher sell. Their negative ROIC of -1.40% and short interest ratio of 29.7 are red flags. Though the operating P/E ratio is only 10.42, their P/E ratio based on estimated 2012 earnings is around 32, while 2013's P/E ratio is around 24. Given the slow and steady nature of the firm's business it looks rather expensive considering the low ROIC. 

Calpine (NYSE: CPN) is a utility that operates a number of natural gas and geothermal plants throughout the U.S. The firm has a large number of modern combined cycle natural gas power plants, but this does not automatically make it a great investment. Even in the midst of abnormally low natural gas prices the firm's ROIC has stayed very low; close to zero. The high debt to equity ratio of 2.86 is a definite red flag. At the same time, their operating P/E ratio of 13.74 is high relative to the other firms. The EPA tackling the U.S. greenhouse gas emission through heavy costs on the construction of new coal plants and not through carbon taxes is not a positive development for CPN. With the low ROIC and high debt levels, this firm is not a buy at current prices. 

Wisconsin Energy (NYSE: WEC) is a different story. This utility is not as green as other firms, as around 55% of sales comes from coal. They have a small amount of wind generation and a larger number of natural gas combined cycle plants. Their more diversified portfolio has helped them to a ROIC of 6.3%, which is far superior to that of CPN and ORA. Their healthy P/E ratio around 9.7 and reasonable debt to equity ratio of 1.26 is very encouraging from a strictly financial point of view.

Xcel Energy (NYSE: XEL) is based in Colorado and offers a steady ROIC around 4.5%, and is more environmentally friendly than WEC, with coal accounting for 50% of 2011 sales. This firm is the cheapest of the group, with an operating P/E ratio of 7.3. Their debt to equity ratio is sustainable at 1.2. They are working to expand their wind generation while experimenting with storage devices that would help to make wind energy more dependable.

<img src="http://media.ycharts.com/charts/383d1587cde08b7663e4f4fe8792b7cc.png" />

ORA Return on Invested Capital data by YCharts

<img src="http://media.ycharts.com/charts/a148ea23e982e2d305f27489376dfcfe.png" />

ORA Operating PE Ratio TTM data by YCharts

<img src="http://media.ycharts.com/charts/4cda29072c5474b3dccf5825b66a1a06.png" />

ORA Debt to Equity Ratio data by YCharts

Conclusion

Investing in established utilities that are slowly adding green power generation is one of the best ways to add green investments to a portfolio. Green companies like ORA that are heavily concentrated in a single market are risky investments. Volatile prices in other energy markets can cause extremes swings in profitability. XEL walks a middle line between large scale utilities with few green investments and heavily concentrated green firms. With a healthy ROIC and P/E ratio to complement XEL's wind investments, the firm offers returns that benefit the environment and the investor. 


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