Mary-Lynn Cesar: The Supreme Court backs the EPA's cross-state, power plant pollution regulation. Do electric utility stocks stand a chance in the wake of the decision?
On Tuesday morning the Supreme Court ruled that the Environmental Protection Agency (EPA) has the authority to limit power plant pollution that crosses state lines. The case, EPA v. EME Homer City Generation, centered around the agency’s attempts to regulate pollution that travels from 27 “upwind” Midwestern and Appalachian states to “downwind” eastern states.
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The decision is a win for the Obama administration, which has been described as waging a war on coal after making coal-fired power plants the target of proposed carbon emission standards. Critics, including utility companies and fifteen upwind states from the aforementioned case, argue that the efforts of the Obama Administration and the EPA to limit coal pollution exceed the authority provided by the Clean Air Act.Pro-coal advocates argue that the EPA’s actions are forcing coal-fired plants to close and, consequentially, are moving the country closer to a massive failure of the electrical power grid. The New York Times reports that today’s ruling leaves power companies with two options: install expensive pollution-control equipment, which can cost upwards of $100 million for a single plant, or shutter the facilities. Investing Ideas The following screen focuses on stocks with troubling trends that, following the Supreme Court ruling, could worsen. We began by creating a universe of US electric utility stocks that have coal-fired plants in upwind states. We then screened for stocks with falling diluted normalized earnings per share (EPS) for the past three consecutive years. EPS refers to the amount of profit allocated per outstanding share of common stock. Given the hefty price tag of the pollution-control equipment required by the EPA's regulation, there's a possibility that a number of power companies will shutter their coal-fired power plants rather than shell out cash for the upgrades. In either scenario, investors should note that the companies' profits could due to additional costs, and companies with an established history of falling profits could extend their streak for another year or longer.
This left us with two electric utility stocks on our list.Click on the interactive chart to view data over time. Do you think Tuesday's ruling will hinder the ability of these companies to reverse their falling profits? Use this list as a starting point for your own analysis.
1. Cleco Corporation ( CNL): Engages in the generation, transmission, distribution, and sale of electricity in Louisiana. Market cap at $3.19B, most recent closing price at $51.90.
Diluted normalized EPS decreased from 4.21 to 3.22 during the first time interval (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31).For the second time interval, diluted normalized EPS decreased from 3.22 to 2.7 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31). And for the last time interval, the EPS decreased from 2.7 to 2.66 (12 months ending 2013-12-31 vs. 12 months ending 2012-12-31). 2. FirstEnergy Corp. ( FE): Operates as a diversified energy company and provides services from the Ohio-Indiana border to the Jersey shore. Market cap at $14.41B, most recent closing price at $34.22. Diluted normalized EPS decreased from 4.59 to 2.7 during the first time interval (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). For the second time interval, diluted normalized EPS decreased from 2.7 to 2.65 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31). And for the last time interval, the EPS decreased from 2.65 to 2.04 (12 months ending 2013-12-31 vs. 12 months ending 2012-12-31). (List compiled by Mary-Lynn Cesar, a Kapitall Writer. EPS data sourced from Yahoo! Finance. Monthly return data sourced from Zacks Investment Research. All other data sourced from Finviz.)