Playing Utilities With the War on Coal
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Did you know there's a “War on Coal?”
According to coal producers, the Environmental Protection Agency's (EPA) new regulations discouraging coal-fired power plants amount to just that, an attack on jobs.
Of course, it's not just the EPA that's down on coal. A new analysis from Carnegie-Mellon University in Pittsburgh shows that the best places to site solar and wind plants today are where the use of coal-based electricity is highest. According to the report, the health and environmental benefits from displacing a single kilowatt of energy from a coal-fired plant with a renewable source is over $100 in Pennsylvania, Ohio, Indiana and Illinois.
This is not where solar and wind capacity is greatest. The same report shows high wind capacity in only one of those states, Illinois, and that solar capacity is minimal.
For income investors, who rely on dividends, there are important lessons here.
FirstEnergy: King Coal
FirstEnergy (NYSE: FE) is among the most coal-dependent U.S. utility companies. A recent analysis from Ceres.org, which advocates for sustainable business practices, noted that 59% of its power still comes from 55 coal-based power units.
While the company is closing two Pennsylvania coal plants, blaming the EPA, the company is still highly dependent on coal.
The company's $0.55 per share dividend represents a yield of 5.73%, but for the last two quarters that's been far more than the company has earned, the March quarter showing earnings of just $0.47 per share. The company has been cash flow negative for two years running.
Of course, renewable energy is not the real cause of coal's demise. It's natural gas. Since spot prices at the Henry Hub turned below $5 per million cubic feet (mcf) in early 2010, many utilities have been converting, and that demand has just managed to keep the price of natural gas stable – the spot price closed July 9 at $3.69 per mcf. Coal and natural gas fired electricity production crossed for the first time in 2012, according to the Energy Information Administration, with non-hydroelectric renewable sources representing about 10% of the total.
The bottom line is that, as coal fades, FirstEnergy becomes a dicier investment. You don't have to believe in global warming to see that a $0.55 per share dividend on $0.47 per share in earnings is unsustainable.
Pacific Gas & Electric: Riding a solar boom
Pacific Gas & Electric (NYSE: PCG) provides a contrast to FirstEnergy. Its emissions rate is 35% below the California average, which in turn is half the national average, according to The Climate Registry. It has no coal-fired plants, instead getting 37% of its electricity from a variety of renewable sources, and using natural gas for 25%. These were 2011 figures, and the utility has been increasing its intake of renewable energy since then.
What has this done for investors? The stock is up almost 20% over the last five years, and while its $0.46 per share dividend represents a yield of only 3.91%, it earned $0.55 per share in the last quarter. The company's stock buyback plan should keep that yield high, and the balance sheet shows a steadily-rising asset base, even though rooftop solar installations are not owned by the utility, but by ratepayers.
A Foolish conclusion
The historic transition in America's electricity fuel mix was supposed to be very bad for those companies using renewable power, but that does not appear to be the case. Right now, a bet on renewable-heavy utilities like Pacific Gas looks a lot safer than one on coal-dependent ones like First Energy.
Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!