Blinking green for renewable energy adopters
In these days of over-indexing and overworked algorithmic trading, the strongest players in an industry often soar and crash along with the weaker ones, depending on the latest investing fad. On the bright side, we now have a historic opportunity to buy shares of high-quality renewable energy users at very low prices.
A year ago, the opportunity was on the sell side. The surprise victory of two Democrats in the US Senate election in Georgia has propelled “green” ETFs to new heights, and the prices of successful adopters such as NextEra Energy (NEE) with them. We took the opportunity to recommend Conrad Utility Investor the members reduce their positions in half a dozen actions then overloaded.
Now we are in a 180 degree opposite location. the S&P Global Clean Energy Index has lost almost half of its value in the past year, including almost 25% since I analyzed it in the October 23 Income Outlook.
We had another chance to take profits in NextEra Energy at the end of December, when the stock exceeded my 90 “Consider taking profit” target. several years.
Ironically, the company reported its best fourth quarter results this week, capping a record year for both the regulated utility (profit up 10.9%) and the unregulated Energy Resources unit (up of 13.1%). Management also raised the midpoint of the 2022 earnings forecast to $2.80 per share from $2.65 previously, and the midpoint for 2023 to $3.055 per share from $2.87. And the long-term annual earnings growth target of 6-8% has been extended to 2025.
The main driver of growth is NextEra’s accelerated deployment of wind and solar generation systems. The Florida utility unit will meet its 2030 goal of installing 30 million solar panels five years ahead of schedule, generating $2.5 billion in fuel savings. And with a long-term rate agreement with state regulators underway, there are 4.8 gigawatts of approved solar development underway, as well as battery systems like the 409-megawatt Manatee Energy Storage Center started. in December.
In 2021, Energy Resources added 7.2 GW of new wind, solar and energy storage projects to the backlog, which has grown at a compound annual rate of 20% since 2017. It placed 3.8 GW in service and pre-contracted 80% of the necessary capacity additions. to reach the midpoint of its 2024 deployment target. Profits from its unregulated transmission lines unit grew 20% on opportunistic asset additions.
Before NextEra announced its results, some analysts predicted a slowdown in the deployment of renewable energy in the United States. Reasons given included supply chain issues, soaring commodity prices, labor shortages and rising interest rates, which together would squeeze margins and reduce the attractiveness of new projects for utility regulators and business customers.
Fueling this fire was Dominion Energy (NYSE:D) announced in early November that its 2.6-gigawatt Coastal Virginia offshore wind farm will cost $9.8 billion when commissioned in 2026, down from an initial estimate of around $8 billion. dollars. The project’s levelized average energy cost is now largely locked in by contracts. And that’s still just $87 per megawatt-hour, well below previous forecasts of $80 to $90. Virginia regulators approved the spending as part of the three-year rate review. And the company has clarified the impact on rates of its entire switch to green energy, as its average annual bill has only increased by 2% over 15 years.
This limits Dominion’s financial risk. But its rising costs understandably raised concerns that other offshore wind developers would disclose higher costs with their fourth-quarter results. Including Avangri Inc. (AGR), its 81.52% owner Iberdrola S.A. (IBE, IBDRY) and partner ORSTED A/S (ORSTED, DNNGY). And the fear has even spread to onshore wind and solar developers like NextEra and Enel SpA (ENEL, ENLAY), whose projects are much less sensitive to cost increases because they are generally contracted, located, authorized, financed and built within 12 to 18 months.
My first takeaway from NextEra’s fourth quarter results and guidance: there is no evidence of margin erosion due to cost inflation in its renewable energy development pipeline. Nor is there any sign of a waning appetite for new projects from current and potential customers.
During the company’s earnings call, outgoing NextEra CEO Jim Robo said he was “optimistic” about the renewable energy component of President Biden’s “Build Back Better” legislation. But he also claimed it would only be “an accelerator” of growth, not “something we would need to provide” in terms of guidance.
Mr. Robo led the team that transformed NextEra from a well-run but slow-moving utility company in South Florida into the world’s largest producer of wind and solar power. And I believe it is one of the main reasons that US utilities have become major beneficiaries of the ongoing global energy transition, rather than victims of it.
It’s no surprise that NextEra shares are selling off after the announcement of Mr. Robo’s retirement. But the numbers and advice simultaneously announced by the utility are an unequivocal testament to the strength of the business it is leaving behind. And that includes a very deep management bench to keep it on its very profitable path.
This is the best possible reason to buy the suddenly cheap shares of NextEra, when they are trading well below my highest recommended entry point of 80. This also applies to the company’s yield subsidiary , NextEra Energy Partners (NEP), which also reported strong fourth quarter results. Partners also increased its dividend 3.2% sequentially from last quarter, pushing its payout 15% above last year’s rate.
For more on the best deals on premium renewable energy stocks, stay tuned for the February issue of Conrad Utility Investor. And click on the link below to learn more about my e-book: