I just wrote a check this morning for my monthly power bill, made payable to American Electric Power (NYSE: AEP) in the amount of $260.02.
I'm not alone. AEP serves five million residential and business customers in 11 states.
Rain or shine, that's five million checks that pour in each month. They add up fast. AEP's utility segment collected $14 billion in revenue in 2011. But on closer inspection, the company only retained $2.8 billion in operating profits.
Where did the other $11 billion go?
Well, nearly half ($4.4 billion) was spent on fuel needed to run the firm's power plants. AEP burns through a mountain of coal each day. So much, in fact, that the company has its own fleet of 7,600 railcars, 3,300 barges, 61 towboats and a dedicated coal handling terminal with the capacity to move 18 million tons of the black rock annually.
By my math, AEP has to spend about $85 million per week to procure coal and other consumable fuels to generate electricity.
Most other electricity generators are in a similar position.
Exelon (NYSE: EXC) doesn't use much coal, but it does need to stockpile costly uranium to feed its hungry nuclear reactors. Just in the United States, nuclear plants consume about 60 million pounds of enriched uranium per year. Prices have fallen from their $135 a pound peak since Japan's Fukushima disaster nearly two years ago, but at $42 a pound, they can still take a large bite out of profits.
Exelon, AEP and their peers must replenish these feedstocks over and over again, surrendering a good chunk of their income in the process. Without hedges, they are at the mercy of rising commodity prices. So naturally there is some incentive for investors to seek out companies that use the cheapest fuel sources.
There is one company that's found a fuel cheaper than coal, cheaper than gas, and cheaper even than water. In fact, its plants run on a resource that is essentially free. That's right -- zilch, nada, nothing.
Now, the company has salaries and other bills to pay like anybody else. But it doesn't pay a dime for its feedstocks.