Investing in Green-Friendly Minnesota

The recent post “Juhl Still a Player in Renewable Energy” discussed the renaissance of Juhl Energy (JUHL:  OTC/PNK) three years after the company stopped filing reports with the SEC.   Juhl claims the successful development of over 350 megawatts of wind power generation capacity at 25 different wind projects.  The company is developing a mixed-source project in Red Lake Falls, Minnesota, Juhl’s home state, that is expected to be the first commercial solar-wind power generation source in the U.S.  When construction is complete in August 2017, there will be two 2.3 megawatt wind turbines and 1.0 megawatt solar conversion capacity. 

Small power projects under 20 megawatts are Juhl’s sweet-spot in the renewable energy industry.  Despite the shift in thinking that emanates from the White House that prefers oil and gas, Minnesota appears to be particularly friendly toward renewable energy.  Legislation is in the works to increase Minnesota’s renewable energy standard to require 50% of power from renewable sources by the year 2030.  The current renewable energy standard in Minnesota is 25% by 2025 , which was set through the state’s Next Generation Energy Act.  That legislation had bipartisan support when it was passed in 2007.  Fast forward through some interesting political years, finds the Minnesota legislature still of a common mind about renewable energy.

Yet, it may be more the case that Minnesota legislators are in agreement on the creation of jobs.  Proponents of the more ambitious renewable energy standard believe that it could create as many as 1,500 jobs in clean energy businesses, which can be read solar and wind power in land-locked Minnesota.  The view seems to be in agreement with Juhl Energy’s assessment of strong demand from industrial, commercial and municipal customers for small-scale renewable energy generation.  For states like Minnesota that have no appreciable coal, oil and gas deposits, renewable energy may present more economic growth opportunity than a chance to address environmental concerns.

Minnesota currently ranks in tenth place in the U.S. for generating energy from wind but is among the least intensive users of solar power, owing largely to Minnesota’s location in the cloudy, wind-swept northern plains.  Xcel Energy, Inc. (XEL:  NYSE) is the state’s largest electric utility, which serves customers in eight states in the nation’s middle section.  Xcel recently reported sourcing of 110,833 million kilowatt hours of total energy in 2016, of which 36.7% originated from wind, nuclear and hydroelectric sources.  Xcel has no solar installations of its own and apparently does not purchase power from any solar power producers other than participation in programs for residential solar installations.

Xcel presents an interesting play on Minnesota’s green-power friendly atmosphere.  The company is well entrenched in its markets, especially in Minnesota.  Xcel’s business model appears to be in-line with Minnesota’s economic and environmental priorities as least as suggested by plans for a higher standard for renewable energy generation. 

In 2016, the most recent fiscal year reported, Xcel earned $1.1 billion in net income or $2.21 per share on $11.1 billion in total sales.  Operations generated $3.1 billion in cash flow, representing a sales-to-cash flow conversion rate of 27.9%.  Strong cash flows have helped support a 60% payout ratio and a $1.44 dividend slated for 2017. 

XEL is now trading at 19.8 times trailing earnings and the forward multiple is 18.8 times.  Analysts who follow XEL are apparently not expected considerable growth in 2017.  Nonetheless, with a current dividend yield of 3.2%, the stock has an appeal for investors with an interest in current income and a preference for environmentally friendly companies.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.