Increasing Natural Gas Prices and Utilities
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The natural gas glut couldn't last forever and now prices are starting to edge upward. The calming of the fracking boom means that natural gas is expected to keep rising for the time being. Utilities with a large amount of natural gas capacity and little coal capacity will be in a tougher situation than their competitors that have a large amount of coal capacity on which they can rely. Over the next couple years investors should be aware of these trends and how this will affect more natural gas-dependent players.
Exelon (NYSE: EXC) is a major utility and has almost no coal in their portfolio. Only 4% of their capacity is from coal while nuclear makes up 55% and natural gas is 28%. At 6% of capacity even hydro is more significant than coal. Exelon's large number of nuclear plants should help to lessen the impact of natural gas though there is a good chance the price of uranium will increase over the coming years.
Exelon's total debt to income ratio is only .89 but their payout ratio of 112 is not encouraging. Additionally, the company's return on investment of 3.4% and return on assets of 1.8% are less than that of their peers. The rise in the price of natural gas relative to coal should not have a major impact on Exelon as they still have cheap baseload capacity with their nuclear plants.
Regardless, the coming expiration of the megatons to megawatts program will most likely increase uranium prices in the coming years. With low ROI and reports that some of its subsidiaries are unacceptably unreliable, Exelon does not appear very attractive for the time being.
In 2011 62% of Wisconsin Energy Corp.'s (NYSE: WEC) installed capacity was coal, 18% was combined cycle natural gas, 18% was natural gas and oil peaking units, while only 2% came from renewables. The company's businesses are split between their electric and gas division along with a significant stake in the American Transmission Company. The diversified nature of WEC and their significant coal capacity will help to lessen the impact of rising natural gas prices.
This firm looks healthier than Exelon with a superior return on assets of 4.1% and return on investments of 6.7%. Wisconsin Energy's yield of 3.7% may look paltry in comparison to Exelon's 7.2% but Wisconsin Energy has a healthy payout ratio of 48. WEC shouldn't be ignored and their mix of electricity and natural gas segments helps to stabilize earnings as commodities continue to be volatile.
In the first three quarters of 2012 Southern Company's (NYSE: SO) generation portfolio was 45% gas/oil, 37% coal, 16% nuclear, a small 2% from hydro. Southern continues to grow their assets with new nuclear plants, which are set to be brought online in 2016 or 2017.
Even in the midst of operating in the southern U.S. with hurricanes and other weather-related issues, they have managed to maintain a return on assets of 3.7% and a return on investments of 6.0%. Their total debt to equity ratio of 1.11 is between Exelon and Wisconsin Energy. The long-term development of nuclear plants will help to decrease exposure to natural gas, though in the short term Southern's large amount of natural gas assets will expose it to rising natural gas prices.
Conclusion
Wisconsin Energy is in a great position to benefit from the increase in natural gas relative to coal. They have a large amount of coal capacity already installed and baseload natural gas is only 18% of installed capacity. Exelon has a high payout ratio, a low ROI, and a low ROA, which means it is best ignored for the time being. Over the long run Southern's nuclear assets should help the company to diversify away from the cycles in the natural gas and coal market.
Rising natural gas prices will not affect every utility equally and it is important to understand who is best ready for the changes.
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