The Winds of Change are Filling These Companies' Sails

The use of windmills to harness the power of the wind is a technique that goes back hundreds of years and plays an iconic part in wonderful stories like Don Quixote. The technology has come a long way, but its many drawbacks limit its widespread adoption. And that's why coal has little to fear from wind power, even though it will play an increasingly important role at some utilities.

Wind is great, but...
Wind power is environmentally friendly -- though fast moving turbine blades have been known to kill birds -- because it uses no fossil fuels. This makes it a highly desirable power source with companies like Xcel Energy (NYSE: XEL  ) and Berkshire Hathaway's (NYSE: BRK-B  ) MidAmerican Energy making big commitments to it.

For example, Xcel generated about 3% of its power from wind in 2005, but increased that to 12% by 2012. It plans for wind to hit 22% of the total by 2020. MidAmerican, meanwhile, started investing in wind power in 2004 and today, about 30% of the power it owns comes from wind. It wants to get that closer to 40%.

For investors interested in wind, Xcel and Berkshire Hathaway are ways to play the game on the utility level. Berkshire is notably more diverse than Xcel and, thus, a far less direct option. However, the ability of these two companies to generate more than a token amount of wind is a notable distinction in the utility industry.

But, the fact is, you can't plop a wind turbine down just anywhere and expect to generate enough power to make the investment worthwhile. That's why the U.S. Energy Information Administration notes a disproportionately large increase in wind use in Texas. In fact, some energy industry watchers report seeing wind energy prices at a level that's competitive with coal and natural gas, but only in the midwest. In other areas, it just doesn't work as well.

Still using coal
Interestingly, Xcel's 2020 target includes coal providing 43% of its total power. In fact, natural gas, which is supposed to be displacing coal industry-wide, is to fall from 23% of Xcel's total in 2012 to just 18% in 2020. If you do the math, fossil fuels will still account for more than half of Xcel's power. Fossil fuels make up over 60% of Berkshire's MidAmerican Energy's portfolio today and will likely remain around 50% even if wind expansion takes "share" just from fossil fuel options.

The reason why this duo is sticking with fossil fuels, while expanding into wind, is because utilities can control coal and gas power generation. They have to suffer with the unpredictable nature of wind even in "wind rich" areas.

That's why companies like Cloud Peak Energy (NYSE: CLD  ) and Peabody Energy (NYSE: BTU  ) have more positive outlooks than the market seems to believe. Both are major players in the ultra cheap Powder River Basin, or PRB, coal region. In fact, Cloud Peak has managed to remain profitable throughout coal's recent malaise, a feat that industry giant Peabody didn't manage.

To be fair, Peabody's business isn't focused solely on PRB thermal coal like Cloud Peak. So the steep drop in metallurgical coal prices, coupled with weak thermal markets, drove earnings into the red in three of the last four quarters. The real pain, however, is likely behind the giant and results should improve from here as global coal markets stabilize. Cloud Peak, meanwhile, should continue to hold up reasonably well even though the U.S. thermal market has yet to turn higher despite increased thermal coal use in 2013.

What's the best opportunity?
The market tends to get fixated on stories. Wind is a good story, coal is a bad one. However, the changes taking place at Berkshire's MidAmerican Power and Xcel Energy show that both will be important in the U.S. power market, which means that Cloud Peak and Peabody are also potentially good investments on the energy front—particularly since the stocks are market pariahs today.  

Warren Buffett's portfolio company believes in wind. What else can we learn?

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