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What are we looking for?

Power utilities well-positioned for tomorrow’s greener economy.

The screen

It’s important for investors to be aware of seismic shifts that affect the competitive landscape for an entire industry.

Power generation is just such an industry: It has been a very stable source of returns for investors over the past couple of decades, as utilities operated as government-regulated monopolies with prices fixed at a certain level above costs.

Now, European countries are beginning to set increasing minimum thresholds for non-fossil-fuel inputs. According to a recent study by Harvard Business School, investors in European utilities missing this major shift led to the destruction of US$551-billion in economic value.

On the assumption European policies can sometimes inspire similar changes in the rest of the world, let’s look at utilities elsewhere that will benefit from this shift and have positioned themselves to be leaders in a greener economy. We will look for electric utilities outside of Europe that 1) have made significant progress in the proportion of their energy sources that are renewable; 2) have been able to do so in an economically viable way; and 3) have policies in place to foster continued progress in the future.

For the first consideration, we look at renewable energy purchased as a percentage of total energy purchased and require at least 10 per cent. For the second, we require a profit margin of at least 10 per cent and growth in free cash flow of at least 40 per cent over the past three years. For the third, we screen for companies that have set targets for reducing their emissions.

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What we found

Only three companies pass the screen – a Chilean power generator and two U.S. utilities. (Canada’s Fortis Inc. gets 40 per cent of its energy from renewable sources and has a healthy margin of 13 per cent, but has negative free cash flow.)

Enel Chile SA is a subsidiary of Italy’s Enel SpA, which was specifically called out in the aforementioned Harvard paper as a promising case study. Rome-based Enel gets more than half of its energy from renewable sources and is generating higher profit margins for these sources – promising for the Chilean subsidiary if it is able to replicate these efforts. At present, Enel Chile gets 30 per cent of its energy from renewables.

Portland General Electric (PGE) of Portland, Ore. – not to be confused with San Francisco-based Pacific Gas & Electric Co. (PG&E) – now produces electricity from wind and hydro sources roughly equal to that from natural gas, and almost twice what it produces from coal. Furthermore, the company will cease coal-fired generation at one facility by 2020 and is testing the possibility of replacing this capacity with renewable biomass. PGE has also installed smart meters that can be read remotely, which means meter readers no longer have to drive to sites, saving 80,000 gallons of gasoline and reducing CO2 emissions by 1.5 million pounds a year, according to the utility. PGE has stated that its new actions will reduce and avoid carbon emissions by an estimated 2.2 million tonnes annually but, as reflected in the table, it has not set an explicit percentage-reduction target by a specific year.

By contrast, PG&E did not make the screen. Currently applying a series of wildfire-prevention blackouts in California affecting millions, the state’s largest utility is in bankruptcy proceedings, has a profit margin of minus 41 per cent and burned more than US$10-billion in cash during the last fiscal year.

Investors are advised to do their own research before trading in any of the securities shown below.

Select non-European utilities

CompanySymbolCountryMkt. Cap. (US$ Mil.)Renewables (%)Profit Margin (%)FCF, 3Y Chg. (%)Emission Target %Target YearDiv. Yld. NTM (%)1 Yr Return %Recent close (US$)*
Enel Chile SAENELCHILE-SNChile5,9993014.775.42520207.39.063.00
Portland General ElectricPOR-NUSA5,0116310.742.2n/an/a2.827.556.07
Allete Inc.ALE-NUSA4,4133711.640.34020302.916.485.43

Source: Refinitiv

* Enel Chile stock price close in Chilean pesos.

Hugh Smith, CFA, MBA, is manager of Refinitiv’s investment management business for the Americas and a director on the board of the Responsible Investment Association of Canada.

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