Dividend Sleuthing: Four Sustainable Energy Utilities

Summary

  • This article wraps up our look at the companies in the Utilities sector on MoSI’s “All Stocks” watchlist.
  • In recent months, we’ve introduced some stalwarts and some speculative utilities, with varying degrees of safety and growth potential.
  • Know your long-term goals and your risk tolerance. Determine the margin of safety you seek and patiently wait for an attractive buy price.
  • This is a brief introduction to four sustainable energy utilities: Atlantica Sustainable Infrastructure, Azure Power Global, Clearway Energy and New Fortress Energy.
  • MoSI’s current “All Stocks” watchlist includes eleven companies in the Utilities sector.

This wraps up our look at the Utilities sector representatives on MoSI’s Very Short List In recent months, we’ve introduced some stalwarts and some speculative utilities, with varying degrees of safety and growth potential.

Know your goals and your risk tolerance. Determine the margin of safety you seek and patiently wait for an attractive buy price. Like the market, MoSI’s watchlists are fluid. Currently, the “All Stocks” watchlist includes eleven utilities. Duke Energy (DUK) is no longer on the watchlist.

Prior utility articles

Atlantica Sustainable Infrastructure

Atlantica Sustainable Infrastructure PLC (AY) was founded in 2013 in Brentford (West London), United Kingdom, which is headquarters. From page 41 of their 2020 SEC Form 20-F:

“We are a sustainable infrastructure company that owns and manages renewable energy, storage, efficient natural gas, transmission and transportation infrastructure and water assets.”

AY has 28 assets in the U.S., Canada, Mexico, Peru, Chile, Uruguay, Spain, Algeria and South Africa, with 1,591 MW of renewable energy generation capacity. Its strong solar portfolio generates 90% of its power. AY has 343 MW of efficient natural gas-fired power generation capacity, 1,166 miles of electric transmission lines and 17.5 M ft3 per day of water desalination.

In 2020, renewables represented 74% of revenue.  Algonquin (AQN) owns 44.2% of AY shares.

Atlantica’s credit profile is a weakness. In January 2018, Standard & Poor’s raised AY’s credit rating from BB- to BB, with a stable outlook. In May 2019, S&P raised the outlook to positive, reflecting S&P’s “expectation that Atlantica will grow its scale, but continue to have fairly predictable cash flows with a debt/EBITDA of 3.0x to 3.5x….” The company has an opportunity to leverage its predictable cash flow and its relationship with AQN.

Threats include counter-party risks and disruptive weather.

Atlantica’s average high yield for the past 5 years was 7.0%, with the highest yield of 9.4% reached in 2020. 

The average payout ratio for the past 6 years was 33.2% of OCF (operating cash flow). The average Price/OCF was 6.2. The current P/OCF is 7.9, based on a $4.45 trailing twelve month OCF and a $34.94 closing price on 3/17/21.

The current quarterly dividend is $.42, annualized to $1.68. At $34.94, the current yield is 4.8%.

F.A.S.T. Graph

AY FAST Graph

From F.A.S.T. Graphs

Azure Power Global

Azure Power Global Ltd (AZRE) is an Indian company that develops, builds, owns, operates, maintains, and manages solar generation facilities to sell electric power. A strength is AZRE’s partnership with India’s central and district government utilities. The company also sells power to independent industrial and commercial customers at predictable fixed prices.

AZRE’s 2021 fiscal year ends March 31, 2021. From SEC Form 20-F for FY 2020 (page 7), assets were $1.756 billion (in US dollars). Total liabilities were $1.192 billion. A weakness (for dividend investors) is that the company does not pay a dividend.

This is a sustainable energy company with an opportunity to participate in one of a large, developing economy. AZRE’s mission is to become the world’s lowest cost producer of energy to help facilitate India’s growth. It does not have a S&P credit rating. The Azure website includes an informative 5-minute video. Threats include potential competition from other power producers and from providers of distributed energy.`

F.A.S.T. Graph

AZRE FAST Graph

From F.A.S.T. Graphs

Clearway Energy

Clearway Energy Inc, Class C (CWEN), headquartered in San Francisco, develops and operates 4.7 gigawatts of wind, solar and energy storage assets in 25 states. Clearway produces 1.2 GW from solar, 3.2 GW from wind, and 300 MW of community solar and distributed solar power. It also facilitates 4.3 GW from O&M and asset management services. A strength is its geographic and generation diversity.

weakness is CWEN’s low BB credit rating. However, in June 2020, S&P said Clearway’s “stable outlook reflects our expectations that the company will continue to operate efficiently and grow prudently through acquisitions while maintaining debt to EBITDA around 4.5x and FFO to debt around 16% over the next few years….”

CWEN has an opportunity to learn from losses incurred in the recent severe storm in Texas. In the Q4 2020 earnings call, President Craig Cornelius explained changes implemented at their wind turbines, which were quickly “ready to run … with types of coatings or fluid changes or heaters that we’ve deployed, we are hopeful that we would be able to mitigate comparable operational risks in a future event.”

Threats include severe weather, competition from large, regulated utilities that are investing in renewable energy, and distributed energy.

The average high yield for the past 5 years was 7.5%, with the highest yield of 9.0% reached in 2016.

The average payout for the past 5 years was 20.8% of OCF (operating cash flow). The average Price/OCF was 3.7. The current P/OCF is 5.7, based on a $4.70 trailing twelve month OCF and a $26.94 closing price on 3/17/21.

The current quarterly dividend is $.324, annualized to $1.296, for a 4.8% dividend yield at a 3/17/21 closing price of $26.94.

F.A.S.T. Graph

CWEN FAST Graph

From F.A.S.T. Graphs

New Fortress Energy

The New Fortress Energy Inc (NFE) was founded in 2014 by current CEO Wes Edens “with the goal of reducing carbon emissions and fostering economic development through universal access to cleaner, affordable, and reliable energy.” The company’s “who we are” website page expresses strong clarity:

“The company funds, builds and operates natural gas infrastructure and logistics to rapidly deliver fully integrated, turnkey energy solutions that enable economic growth, enhance environmental stewardship and transform local industries and communities.”

The company’s 2020 Annual Report (Form 10-K, p. 3) said its long-term mission is to become one of the world’s leading carbon emission-free independent power providing companies. Specifically:

“We are a global integrated gas-to-power infrastructure company … to use natural gas to satisfy the world’s large and growing power needs. We deliver targeted energy solutions to customers around the world, thereby reducing their energy costs and diversifying their energy resources, while also reducing pollution and generating compelling margins.” 

NFE, headquartered in New York City, declared its first dividend of $.10 per share on August 27, 2020. Annualized to $.40, the dividend yield is .075% at a 3/17/21 closing price of $53.07.

weakness is NFE’s B+ credit rating. However, on December 17, 2020, S&P said NFE’s stable outlook “reflects our expectation that the company will generate adjusted EBITDA of about $400 million in 2021, resulting in leverage below 3.5x, below our 5x downgrade trigger. This is because new facilities will come into service that will add EBITDA, as well as full volumes from assets that became operational in 2020.”

The company has LNG (liquified natural gas) storage and regasification facilities in Jamaica and micro-fuel handling facilities in Puerto Rico and Miami. NFE is developing facilities in Mexico, Nicaragua and Ireland.

An opportunity is NFE’s newly-established “Zero” division to develop a hydrogen initiative, announcing in October 2020 its intention to partner with Long Ridge Energy Terminal and GE Gas Power to transition a power plant to be capable of burning 100% green hydrogen over the next decade. From page 13 of the 2020 Annual Report: 

“Within Zero …, two businesses … will … develop commercially viable pathways to scale low-cost, emissions-free hydrogen. Zero Blue will focus on innovative technologies … capable of capturing and sequestering nearly all carbon emissions while producing low-cost hydrogen from carbon-based resources like natural gas and coal.

Zero Green will aim to use innovative, cost-effective water-splitting technologies powered by renewable energy to produce emissions-free hydrogen. We made our first hydrogen-related investment in H2Pro, an Israel-based company developing a novel, efficient, and low-cost green hydrogen production technology.”

Threats come from large, regulated utilities and “big oil” looking for alternatives to fossil fuels. Of course, success could result in an attractive buyout.

A transcript and replay of the recent 2020 Q4 earnings call are now available at Seeking Alpha

F.A.S.T. Graph

NFE FAST Graph

From F.A.S.T. Graphs

Conclusion

Atlantica Sustainable Infrastructure is integrally related to major shareholder Algonquin Power & Utilities. AY is domiciled in the UK and has a large global footprint. It has a BB credit rating and a 4.8% dividend yield.

Azure Global Power is an Indian solar energy company. It does not have a credit rating and AZRE does not pay a dividend. This sustainable energy company is an early mover in a vital, growing market.

Clearway Energy is a renewable energy provider, led by wind and solar. It is well diversified geographically and by sources of generation. CWEN has a BB credit rating and a 4.8% dividend yield.

New Fortress Energy is a speculative play on LNG and hydrogen. NFE has a B+ credit rating and recently initiated a small dividend that yields less than 1%. In 2020, the market dramatically increased NFE’s stock price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.