Duke Energy (NYSE: DUK) CEO Lynn Good faced intense scrutiny last Thursday as activists and investors alike questioned her leadership on environmental issues.
Last year, coal ash from one of Duke’s power plants in Eden, North Carolina spilled into the nearby Dan River, poisoning the water for 70 miles.
Despite the CEO’s attempts to quell concerns, saying the company takes the environment “very seriously,” several demonstrators had to be removed from last week’s shareholder meeting.
Some accused the company of using its wealth and political influence in an attempt to block legislation in North Carolina that would allow residential homeowners to buy rooftop solar panels directly from renewable energy companies like SolarCity (NASDAQ: SCTY).
Whether or not you agree with solar as a power supply, in my humble opinion, it should be up to individual homeowners to choose how they want to power their homes — not the powerful lobbyists who work for Duke.
So I can understand the anger held by many in the belief that the company is meddling with state affairs and attempting to force homeowners to use dirty coal power instead of rooftop solar.
As far as investors go, there is plenty of reason for anger with Duke’s management.
Although the stock has performed well compared to other coal power stocks (more on this in a moment), it is only a matter of days before the company takes a huge hit…
In February, Duke was charged with nine separate counts of criminal charges for its history of negligence and pollution. According to management, the company plans to plead guilty to the charges in a settlement deal sometime next week for over $100 million.
Now, $100 million may not seem like much for Duke, seeing as its market cap is over $50 billion, but in what is now a crowded energy and utility market, each and every dollar wasted on fines represents a loss for the shareholders’ bottom line.
Lynn Good isn’t taking a massive pay cut to help pay the fine, and the company has had to hire more employees in a PR move to make it look like progress has been made on past negligence.
That means all the funds to do this come directly out of Duke investors’ dividends.
So it’s no wonder investors are angry, and if the stock slides because of the settlement or any other issues, Duke will face even more criticism.
But maybe I’m being a little harsh on Duke. Coal power suppliers across the board have performed poorly over the last couple of years…
Coal is Dead
It is pretty unfair of me to criticize only Duke Energy. Its stock price has held up fairly well amid controversies surrounding the business…
Unlike Peabody Energy (NYSE: BTU), which has had a rough year:
Peabody is the world’s largest private-sector coal company, and its share price has fallen 75% in a year. The stock is down 85% compared to the S&P 500 over that same time frame.
You’ll hear many analysts call this a real blood-in-the-streets play, a contrarian dream that’s poised to bounce back. But those investors fail to recognize one simple fact of the contemporary energy market…
Coal is dead.
The head of the Environmental Protection Agency, Gina McCarthy, said as much at a recent conference, when she claimed the transition from coal to other forms of power is “inevitable.”
She knows this to be true because the EPA is in charge of sweeping new rules given the go-ahead by the Obama administration to regulate coal-fired power plant emissions.
The overarching goal of the new regulations is to reduce carbon dioxide emissions from U.S. utilities by 30% from 2005 levels by 2030. Although not explicitly mentioned as the target, coal emissions cause the lion’s share of the pollution the EPA wants to cut.
New restrictions on the amount of carbon allowed to leave smokestacks will either force companies to shutter older, dirtier plants or equip them with expensive and largely untested carbon dioxide capture and sequestration technology.
Although many investors and CEOs of coal companies are fighting against this plan, it’s going to happen.
So if you’re a coal investor, instead of getting angry about it, you can simply use this as an opportunity to gain leverage in the opportunities it creates.
Here’s what I mean…
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We Have to Get That Power Somewhere
McCarthy offered us a pathway for investment when she explained that the end of coal will be a boon to solar and other renewable technologies, as well as natural gas.
There’s no doubt about that, either. The best-performing sector year-to-date in 2015 is solar, while countries all over the world have begun to adopt offshore wind.
Natural gas prices in the United States, meanwhile, are so cheap that utilities are building new plants with natural gas in mind instead of coal, and President Obama has even called it a “transitional fuel.”
Add to this the fact that low natural gas prices have many manufacturers returning to the United States because it is the cheapest place to find it.
Indeed, the smart investors among us are ditching coal stocks in the most economically viable way possible and buying up renewable energy and natural gas.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
