Integrys (NYSE: TEG) announced this week that it's selling off one of its hydro dams, marking yet another utility's unease with hydroelectric power. Let's take a closer look to see whether this power company's piddling away profits -- or making smart moves for its future.
Integrys subsidiary Wisconsin Public Service is handing over ownership of its Otter Rapids dam to Renewable World Energies, a privately run Midwest company with 22 hydroelectric facilities to its name. According to the press release, Otter Rapids' "size and location" make it a mismatch for Integrys' generation portfolio, despite a regulatory license lasting through 2037.
It seems that one man's trash is another man's treasure, as Renewable World Energies is confident that it will be able to make a series of improvements, optimizing power output for years to come.
Integrys' latest move is more and more common in the world of utilities. NextEra Energy (NYSE:NEE) made a similar motion last December, when it announced it was selling all 351 MW of its hydro generating assets to Brookfield Renewable Energy Partners, another hydro specialist. NextEra President and CEO Armando Pimentel spoke of the need to "further optimize our power generation portfolio" and concentrate on growth opportunities.
Debt-heavy FirstEnergy (NYSE:FE) is also attempting to exit its 1,180 MW of hydro assets. The company originally wanted out by early 2015 but is attempting to scoot up its schedule to clear cash for its transmission investments. This utility is downsizing fast, as it also announced last month that it will shut down 2,080 MW of coal-fired plants. Hydro currently comprises 9% of total capacity, while the coal plants will knock off another 10%.
All dried up
As the energy sector becomes increasingly competitive, utilities are focusing their generation fleets on what they believe to be winners. Simply put, these companies are looking to specialization and economies of scale to give them a competitive edge.
While a lack of energy diversity might seem like a dumb move, there's more risk in hydro than most investors are aware of. Low reservoir levels at just eight hydro facilities knocked 5% off Duke Energy's (NYSE:DUK) Q1 EPS. Rainfall levels have been increasingly erratic around the world, and recent studies are pointing to even less real power for high-capacity hydro plants. In New Zealand, a country dependent on hydro for around 15% of its total capacity, two more weeks of drought last summer would've pushed the entire country into rolling blackouts.
Watering down profits
Hydro isn't dead just yet. Dams provide much-needed baseload energy, and for utilities with strategic assets, they can still help their bottom line. For Integrys, its latest sale won't do much at all. At only 0.5 MW of capacity, the utility still has 82.9 MW of water power to its name. Compared with 1,616 MW of coal and 502 MW of gas and oil assets, hydro's a drop in the bucket. But as other utilities have shown, it may be a drop worth drying up.