Coal's Not Dead - Just Ask Carlyle
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fossil fuel-generated power is a bit of a conundrum in the US. We can't seem to live without resources such as coal, which accounts for about 50% of the country's electricity needs, according to the Department of Energy, but yet about 75% of emissions caused by individuals stems from the burning of fossil fuels, according to the DOE.
Coal-fired power generation has an uncertain future in the US. Its role is largely tied to the next wave of public policy, which makes the timing of buyout firm The Carlyle Group's (NASDAQ: CG) acquisition of coal assets from Goldman Sachs (NYSE: GS) curious given the political uncertainty that promises to hover for the next 60 days or so.
Nonetheless, Carlyle has decided to forgo political clarity surrounding fossil fuel production while other coal producers - with futures that are undoubtedly hanging in the balance. - must be dumbfounded.
Carlyle Group's recent decision to acquire coal-fired power assets from Goldman is a seemingly bullish indicator for the fate of US coal plants. The buyout firm is using its $1.14 billion infrastructure muscle to acquire Charlotte, North Carolina-based Cogentrix from Goldman, which includes a collection of five coal and solar power projects across the Southeastern and Western US, for an undisclosed sum. It will add 550 megawatts of power generation to Carlyle's power portfolio.
Goldman made the acquisition in 2004 and at the time added some 3,300 megawatts of power generation to its portfolio. The investment bank turned holding company said the decision to shed the assets was merely "commercial" in nature. Given Goldman's decision in May to invest more than $400 million to acquire Brazilian coal miner Vale, the firm appears committed to the commodities sector.
The coal assets include power plants across: Jacksonville, Florida, a campus dubbed Cedar Bay and in which Goldman retains some minor stake; in addition to Hopewell and Portsmouth, Virginia - a state where industry leader Ohio-based American Electric Power (NYSE: AEP) has a presence.
Just last month, however, AEP declared its intentions to shut down a trio of coal power plants by 2016 due to tightening environmental standards. The power producer, which relies on coal-fired production for about two-thirds of its generation capacity, has been spending money hand over fist to either upgrade coal plants or invest in natural gas. AEP is a regulated utility with revenue streams across coal, natural gas and some alternative power assets.
Despite the headwinds power producers face from stubbornly-low natural gas prices and tough and infringing environmental standards, AEP's performance has not disappointed. Earnings remain steady thanks to the utility's regulated business, which is part of its core operations, and AEP continues to maintain a respectable dividend yield.
In terms of the Carlyle deal, the most recent transaction includes the development of gas pipeline assets in addition to renewable power projects. In true buyout fashion Carlyle also inherits the expertise surrounding the operation of the assets, which includes the Cogentrix team, who - while based in North Carolina near some of the power assets - will be retained. Carlyle, for its part, plans to continue to invest in the power sector. So does AEP, as the company will commit up to $7 billion to invest in environmental upgrades between now and 2020.
Political Headwinds
President Obama touted clean coal when he eluded to the future of US energy during his presidential nomination speech at the DNC in Charlotte last week. He said that the US will continue to invest in this fossil fuel in addition to natural gas and alternative segments including solar, which erupts memories of the tainted $500 million in loan guarantees extended by the government to the now-defunct Solyndra last year.
"We're offering a better path where we — a future where we keep investing in wind and solar and clean coal, where farmers and scientists harness new biofuels to power our cars and trucks, where construction workers build homes and factories that waste less energy, where — where we develop a hundred-year supply of natural gas that's right beneath our feet. If you choose this path, we can cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone."
The President's view on coal power plants or any fossil fuels for that matter has been unfriendly. In fact, only four years ago President Obama declared that in as little as a decade the country's dependence on fossil-fuels could be eliminated entirely. His most recent comments touch on clean coal and the type of solution that natural gas can bring to the country's energy and employment needs. I doubt that energy investors are relishing in any of these remarks, however.
President Obama's environmental policies are seen to put such strenuous demands on coal for scrubber technology and other expensive upgrades - many of which companies deem unnecessary - that it is preventing coal plants from operating anywhere near full capacity - let alone adding any new capacity to the nation's power grid.
Nonetheless, Carlyle's acquisition sends a message to the industry - one that involves the role of coal in the energy landscape despite public policy and an uncertain administration through 2016. Alternative power has a part to play - absolutely - but as long as firms like Carlyle continue to invest it seems that fossil fuels, including coal, will continue to be a part of the energy solution for the foreseeable future.
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