A report evaluating the impact of New York City’s phaseout of heating oil and oil generation facilities (link opens PDF) estimated that ConEd and National Grid plc (ADR) (NYSE: NGG) sent about 462 billion cubic feet of natural gas to its five boroughs in 2009. The figure is estimated to grow about 2% per year for the next several years. While the report considers natural gas replacing heating oil for non-electricity uses in winter months, it also notes that natural gas will enjoy its best growth in summer months as electricity demand for cooling soars.
These two companies have invested heavily in natural gas infrastructure for the city in recent years, thus making them good candidates for our spark spread champion. What can we learn by looking at operating profit margins?
| Fiscal Year | ConEd | National Grid |
|---|---|---|
| 2012 | 21.3% | 25.1% |
| 2011 | 19.8% | 26.2% |
| 2010 | 18.5% | 23.8% |
| 2009 | 17.4% | 16.2% |
Source: Google Finance. Note: ConEd’s fiscal year ends Dec. 31; National Grid fiscal year ends March 31.
Just by looking at the numbers above it would seem that both ConEd and National Grid have found a way to capitalize on the highest spark spreads in the country, although ConEd may have the upper hand. The report linked above noted that the company’s city-leading natural gas infrastructure will allow it to realize a 58% increase in peak day load demand under the city’s current heating oil phaseout program, compared to a 6% increase for National Grid.
It is tough not to ignore ConEd’s focus on natural gas in heating and electricity generation, but are spark spreads really behind the company’s steadily improving operating margins? I would caution that every company has many moving parts – and this is just one metric contributing to the big picture. However, of the $5.2 billion in infrastructure investments going to heating and electricity applications between 2012 and 2014 more than 77% will go toward electricity assets.
Foolish bottom line
Unlike the crack spread, which benefits an entire industry, the spark spread favors more specialized companies. As you can see, sometimes even the smallest trends can make big contributions to a company’s bottom line. I believe that ConEd will continue to capitalize on spark spreads and will make it my CAPScall of the week to back it up. Let me know if you agree in the comments section below.
The article 1 Metric to Lead Natural Gas Investors to Profits? originally appeared on Fool.com and is written by Maxx Chatsko.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and emerging technologies.The Motley Fool recommends Exelon and National Grid plc (NYSE:NGG) (ADR).
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