Robert W. Baird & Co. Analyst Ben Kallo says the solar market is becoming less dependent on subsidy-driven markets like Europe. He says as the market for solar power expands into new regions, SunPower Corporation (SPWR) is a likely beneficiary.
“Over time, as costs have come down, new markets have opened up,” Kallo says. “In 2013 we saw China become a very real market, we saw Japan become a very, very strong market. The United States is entering its stride…”
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Kallo credits SunPower’s relationship with Total as one of the reasons SunPower is best positioned to enter new markets. He says Total could help SunPower establish a presence in Chile and South Africa.
“Total is one of the largest integrated oil and gas companies. They operate in all of these different regions that will become very viable solar markets,” Kallo says. “So they’ll help SunPower enter these regions in a cost-effective way.”
Robert W. Baird & Co. Analyst Ben Kallo upgraded SolarCity Corporation (SCTY) when the company issued its first asset-backed security. He thinks SolarCity is likely to issue larger asset-backed securities in 2014.
“It was a small piece of their overall portfolio that backs that asset-backed security, but the rate that came in at 4.8% I think was surprising not only to me but I think to the overall investment community,” Kallo says. “I think that they tested the water with that small asset-backed security and I think in 2014 we’ll see them do a much larger asset-backed security.”
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Kallo says that SolarCity is his top stock pick for 2014, in part because the company is pursuing solar securitization, which he believes is an important strategy that energy efficiency companies can use to lower their cost of capital.
“SolarCity inside of their leasing business [has] the capacity to offer asset-backed securities, which will allow them to raise capital at really the cheapest form of any other type of security,” Kallo says.
Sanford C. Bernstein & Co. LLC Analyst Hugh Wynne says that both Edison International (EIX) and PG&E Corporation (PCG) are trading at material discounts to their peers. He says both stocks are trading at about a 15% discount as a result of regulatory uncertainty that he believes will be resolved in the near term.
“The reason for those discounts is an overhang of regulatory uncertainty, in the case of PG&E with respect to the penalty for the San Bruno gas pipeline explosion and in the case of Edison, the shutdown of its San Onofre nuclear power plant,” Wynne says. “We basically think that these discounts compensate and indeed materially overcompensate for the risk of those two regulatory overhangs.”
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Wynne says he expects that when the penalty for San Bruno is levied by the CPUC, and when the decision is made about cost recovery at San Onofre by the CPUC that Edison International and PG&E will begin to trade close to their peers. In fact, he says that in a more favorable regulatory environment, he expects both stocks to trade at a premium to the peer group.
“But for now, they allow investors to have access to very high quality regulated utility franchises at a discount to their fair value,” Wynne says.
Plug Power Inc (PLUG) CEO Andy Marsh says the company is pursuing opportunities outside of the throughput food distribution centers and manufacturing areas in the material-handling area, which are currently its primary focus areas.
“We also are looking to expand into other offerings, some of them this year. We will be doing deployments with Federal Express at their Memphis Airport where we will be providing fuel cells for ground-support equipment,” Marsh says. “We have another deal for fuel cells with Federal Express in the LA Basin where we will be converting their electric trucks with Smith Electric to hybrid electric trucks using fuel cells to extend the range of those trucks from 80 miles to 160 miles.”
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In addition to work with FedEx, Marsh says Plug Power is also doing projects for the New York State Energy Research and Development Authority, the Department of Energy and Sysco.
“Plug Power has focus first on a set of fleet vehicles, which are forklift trucks, which are there over six million in the world, but we are expanding that reach into other mobile applications and I believe that you will see in 2015, 2016 those applications will become a good portion of our future revenues,” Marsh says.
Ballard Power Systems Inc. (BLDP) CEO John Sheridan says telecom backup power and material handling have historically been the key markets for the fuel cell sector. But, Sheridan says he now sees significant opportunities in different markets that could develop over the long term.
“The other thing that’s developing, which we’re excited about, particularly with progress of the technology and the productization of the technology, there is more and more interest around the world in fuel cell powered buses, fuel cell powered cars, continuous power and distributed generation,” Sheridan says. “So, in the short term, the key product sales opportunities are telecom backup power and material handling, but over the longer term, we see a number of big opportunities in different markets.”
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Meanwhile, Sherian says Ballard’s market share in the telecom backup power and material handling markets remains very small. He says both of those global markets are very large and that Ballard is poised to capture greater market shares.
“So, we see a big, big upside there,” he says.
CMS Energy Corporation (CMS) CEO John Russell says the company plans to make $15 billion in capital investments over the next 10 years. He says management’s goal is to make sure capital investments ultimately pay dividends to customers.
“We could spend more than $15 billion but as I said earlier, we want to ensure that our run rate, as far as rate increases are concerned, is at or below the rate of inflation,” Russell says. “So, we limit the amount of capital that we invest.”
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Russell says CMS Corporation’s capital investment plan focuses on three key areas. The first area of focus is increasing capacity in the natural gas business and converting propane customers to natural gas. The second way in which CMS will invest capital it to increase reliability for electric customers. Finally, Russell says the capital plan includes investments to convert the CMS fleet to a balance energy portfolio with lower emissions.
“In the big coal plants that we continue to have, we’re making major investments in emissions and the good news about that is the results,” Russell says. “The air is cleaner today in Michigan than it’s been in the last 50 years.”
Edward Jones Research Analyst Andy Pusateri has a “sell” rating on Integrys Energy Group, Inc. (TEG), and he says he doesn’t envision a scenario that would make the stock more attractive to him in the near future.
“Integrys was a company that in my view was earning very, very much lower than its allowed ROEs. The company set forth on a plan to close that gap and I think did a very good job of doing that to the point where they are earning at or at least very near their allowed ROEs at most of their utility subsidiaries,” Pusateri says. “It’s my view that a lot of analysts and investors on the Street were basically pricing in the fact that Integrys was going to earn their allowed ROEs for the foreseeable future. Now that may be the case. They may continue to do that. But I don’t think there is any room for improvement there. They couldn’t surprise to the upside and I didn’t see a real positive catalyst.”
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Pusateri also says he doesn’t expect Integrys to deliver significant earnings growth.
“I prefer companies that are lower yielding, higher-growth companies, [and] Integrys kind of fits the opposite of that for me,” Pusateri says. “It’s one of the highest-yielding utilities that I cover and my expectation for earnings growth going forward for Integrys is slightly below average.”
Gas Natural Inc (EGAS) is expanding its business model to include compressed natural gas and liquid natural gas. Gas Natural CEO Gregory Osborne says his company has formed a partnership with Boston-based Global Partners to deliver compressed natural gas to commercial customers in Maine who don’t have a pipeline.
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“It doesn’t make sense to own a pipeline tube, but it does make sense to bring them CNG, if it is a large savings to the companies and it is a good margin for us,” Osborne says. “We are excited about that — that new business and then on a larger scale, if there is enough load there, we are actually bringing LNG into a customer in Maine, and that’s a good business too.”
Edward Jones Research Analyst Andy Pusateri says that while American Water Works Company Inc (AWK) currently trades at a discount to its water utility peer group, he believes that gap is closing as the company continues to earn closer to its allowed ROEs. He says American Water Works’ regulatory relationships deteriorated while it was under the ownership of a German utility, but began to improve when it went public again in 2008.
“I think over the past five years since it has been public, the company has done a tremendous job repairing those regulatory relationships, pruning the assets in areas where they didn’t think they could earn a regulated return that was reasonable and adding to their businesses where they felt those regulatory relationships were the strongest,” Pusateri says.
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American Water Works has done a good job of investing in regulated utility assets, and he believes there is additional opportunity for them to continue executing on that goal. Additionally, he thinks the company will continue to earn closer to its allowed ROE.
“And when you look at valuation, I still think American Water still trades at a slight discount to the water utility peer group,” Pusateri says. “It’s the biggest company, and I think as they continue to implement the strategy that they have laid out in a successful manner that that discount to peers will close.”
Edward Jones Research Analyst Andy Pusateri says that if Dominion Resources, Inc. (D) follows through on plans to create an MLP in the first half of 2014 that it will generate higher cash flow. He says he expects Dominion to reduce taxes by putting mid-stream assets from its Blue Racer JV into an MLP. The ultimate result, he says, will be an increased dividend for Dominion shareholders.
“I would expect on the earnings call maybe a little more clarity around when they would file the S1 or when they would expect to IPO the MLP,” Pusateri says. “But I think that’s going to be important.”
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In addition, Pusateri says Dominion is one of few companies with exposure to the Cove Point LNG facility. He says the company is making progress toward getting approval to export to non-free trade agreement countries. Eventually, Pusateri says Dominion might drop Cove Point assets into an MLP, which would also likely lead to higher earnings and dividend growth.
“They have contracts, construction will begin this year,” Pusateri says. “And I think that we are still a few years out from an in-service date on Dominion, but I think as they kind of make the progress along the way they will start to get more and more credit for the ultimate exportation of this LNG.”
