Dividends and RWE purchases Con Edison’s Clean energy business

We all live in a particular region and once you are established the normal reaction is to use the local goods and services and begin to believe they have your best interests at heart. If you live in the New York City area, one of your suppliers is Con Edison. The Edison part of the name is from Thomas Edison who invented the light bulb. Companies in the utilities business will use whatever power source which is less expensive over the long run. All methods to generate electricity have high capital costs (which helps keeps competitors away) but once the building is in operation the costs to operate fall drastically. Examples are hydro plant on a river, a nuclear plant, building solar and wind facilities. In terms of coal plants once they became expensive, companies switched to oil, then natural gas.

Con Edison had a large green energy power generation aspect to their business, including highlights on the webpage. In an article by Christopher Steitz and Tomas Escritt of Reuters, Con Edison has decided to sell the division to Germany’s largest power producer. The deal is for $6.8 billion and will vault RWE from solar being 3% of their US portfolio to 40% and become the 4th largest renewable player in the US behind NextEra.

RWE is financing its purchase through a $2.43 bullion convertible bond with Qatar Investment Authority (QIA) eventually allowing QIA to become a 9.1% shareholder in RWE. QIA is a major shareholder in VW, Deutsche Bank and Porsche.

Con Edison was going to issue $850 million in new shares this year, but that is off the table.

Linking to dividend paying stocks, the business model is what is important when you buy or consider buying into utilities. The high capital costs limits competitors and with a regulatory monopoly, the company can generate electricity for years to come and make a profit to pay for dividends. Oil rich investment companies such as QIA understand they may derive their profits from the oil industry, but they need diversification into renewables or utility like companies. It is good for the average investor too.

There are more questions than answers, till the next time – to raising questions.


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