Utilities have recently turned a cold shoulder to coal, and these past couple of weeks are no exception. With new environmental regulation and rapidly changing energy prices, utilities clutching to coal might have trouble staying in the black. Here's what you need to know.
Cutting out coal
FirstEnergy (NYSE:FE) announced this month that it plans to shutter two coal-fired power plants in Pennsylvania by October. Coal plants are no lightweights when it comes to capacity, and the closure will knock 2,080 MW (around 10%) off FirstEnergy's total generation capacity.
But with decreasing electricity use, FirstEnergy may be making a smart decision to shrink its size. The utility's been working on its debt addiction, and excessive spending to bring its coal capacity up to environmental par isn't what FirstEnergy needs. These two plants alone would cost the company around $280 million in compliance costs, equivalent to 30% of the utility's total estimated environmental spending.
American Electric Power (NASDAQ:AEP) added its own coal-cutting announcement two days after FirstEnergy. The utility plans to retire a 585 MW facility, bringing its Ohio subsidiary's grand total to 3,123 MW of coal generation to be retired by 2016.
AEP expects to take a $150 million to $170 million non-operating pre-tax hit for Q2 but will avoid environmental regulation costs. "Current market conditions" were also cited as a main reason for the closure, a not-so-subtle assertion that coal's cost-competitive days may be behind it.
Dominion (NYSE:D) is dusting off three smaller coal plants for conversion to biomass. The company announced two weeks ago that its first facility is officially online, creating electricity with wood waste from nearby timber operations. The other two plants are expected to be operational by 2014, with total capacity clocking in at 153 MW.
"Clean coal" to the rescue?
Not all utilities are bidding adieu to coal just yet. Integrys' (NYSE: TEG) Wisconsin Public Service subsidiary is applying for a rate increase to cover "clean coal" conversion costs. The utility hopes to add a coal dust collection system to one of its coal plants. The 824 MW facility upgrade comes with a $17 million price tag, but the move would put Integrys on a straighter path to environmental compliance. If the company's recent $220 million approval is any evidence, this latest request might just make it past Wisconsin regulators.
Can coal cut it?
In Dominion's press release, its Generation subsidiary CEO David Christian made a telling statement:
Today marks another achievement guided by Dominion's philosophy that balanced fuel diversity -- from coal to natural gas to nuclear to renewables -- leads to reasonable rates that best serve the needs and interests of customers and shareholders.
Seemingly contradictory to its latest biomass conversions, Dominion is simultaneously rejecting and embracing coal as an energy source -- and it might be right on track.
All coal is not created equal, and utilities expecting to survive will need to pick the winners and drop the losers. President Obama's latest climate change policy report made clear that existing power plants are now under the ax, meaning old coal-fired power plants will need to clean up their act . The POTUS refers to "clean coal" countless times (well, actually six) times throughout his 21-page document, sending a not-so-subtle hint to utilities about what he expects.
Utilities are making moves, but coal plants don't close in a day, and energy prices have remained extremely volatile over the past year. Coal or not, calculated decisions for the long term are the only true way to choose dividend stock winners from losers. Keep a close watch on your picks to make sure they keep pulling profits -- not pinching them.