Quick Pitch: FirstEnergy Corporation (FE)
Here's a quick pitch for a stock that I just added to my CAPS portfolio.
FirstEnergy Corporation (FE) is a relatively safe stock that pays a 5% dividend and has a catalyst that should help its results in the coming quarters. The company recently announced that it is going to close six coal-burning power plants in Ohio rather than spend big money to upgrade them to comply with new Federal emissions standards.
How is closing plants a good thing for a company? FirstEnergy is the dominant electricity provider in large chunks of Ohio. Consumers have no choice but to buy power from them. A lower supply of power plants with a steady or perhaps slightly increasing demand for power if the economy continues to improve means higher power prices. Higher power prices are obviously a big plus for a utility, particularly at a time when low natural gas and coal prices are driving the price of electricity down.
An analyst from UBS projects that if power prices in the state were to rise from their current $126/megawatt to $200/megawatt it would result in an additional $216 million in annual revenue for FE.
While two hundred million dollars isn't a game changer for a company that has $15 billion in revenue, every little bit helps...particularly in a sector that has been faced with weak pricing for its product. Plus, one analyst is projecting that power prices in Ohio may reach as high as $500/megawatt. Such an increase would obviously have even more impact.
Also, keep in mind that First Energy is actually closing old, inefficient plants to get this increase in revenue not spending big bucks to build new ones.
While I'm not convinced that an increase in the price of natural gas is coming any time soon, many smart analysts believe that at least some strngthening in nat gas is inevitable as a result of a decrease in drilling activity and an eventual shift towards more use of this cheap power source. Any strengthening in nat gas prices should lead to a boost in power prices and in turn higher profits for power companies.
Have a great weekend everyone!