New Zealand is a beautiful country with a total population that is less than metropolitan Toronto, straddling two islands that are 1,600 km from tip to toe.
I’ve just returned from a two week trip, traveling in a camper van, the Kiwi way. The country has a staggering list of natural wonders and the trip also offered an insight into how a global transition to green energy can work. In the same way that Canadians believe in universal healthcare, Kiwis believe in a clean and green environment, blending energy policies with economic growth.
New Zealand generates 82% of its electricity from renewable sources, with a goal of 100% from renewables by 2035. The current mix is hydro (60%), geothermal (17%), and wind and solar (5%). To meet its 100% goal, New Zealand plans to increase its wind-generated power to 20% of overall needs. That is within reach as it straddles the Roaring 40s, the latitude of strong westerly winds that circle the globe.
In Canada, we generate 67% of our electricity from renewables, according to Natural Resources Canada. Where we differ from New Zealand is in a nuclear generated component of 15%, while a similar amount of theirs comes from geothermal sources. Ottawa also has a tougher balancing act. Canada is far larger: New Zealand is roughly a quarter the size of Ontario. Ottawa must also weigh climate policies against livelihoods in the oil patch. The pipeline protests have shown this is no easy task.
New Zealand’s green measures are big and small. In 2018, the government stopped issuing new offshore oil and gas exploration permits. In 2019, it banned single use plastic bags in grocery stores. It is installing free rapid charging stations every 75 km along main highways to encourage electric vehicle (EV) purchases.
Auckland has 60 free charging stations with Swedish-Swiss engineering giant ABB (NYSE: ABB), discussed below, among those providing the equipment. Electric vehicles are exempt from the Road Users Tax, which contributes towards the upkeep of roads.
This sort of national initiative is creating a new industrial revolution according to John Cook, president of Toronto’s Greenchip Financial Corp., who I interviewed a year ago. As we revisit recommendations made last March, I spoke to Mr. Cook again.
He believes the shift from oil and gas to hydro, wind, and solar power is gathering steam and offers a once in a lifetime opportunity for investors. ABB is in the GreenChip portfolios and Brookfield Renewable Resources has been. A new recommendation, Canadian Solar, based in Guelph, Ontario, is currently a top component of both. (Disclaimer: I own Canadian Solar.)
As of Feb. 28, Greenchip’s Global Equity Fund had $115 million in assets. It is backed by pension, endowment funds, and corporations who own 60%. While individual investors can buy in, the minimum is a hefty $250,000.
Greenchip also manages the Mackenzie Global Environmental Equity Fund, launched in October, 2018, which has similar holdings. The Mackenzie fund has $65 million in assets and a more accessible minimum of $500.
Both have performed well, though have sold off as the market rout has accelerated. The Mackenzie fund has a one-year return (to Mar. 6) of 15.5% and is 22.6% higher since inception. Greenchip’s gross one-year return is 17.1% and its gross 10-year average annual return is 11.7%.
Mr. Cook sees a green energy weighting of 5% as a reasonable portfolio weighting for small investors.
“It is one of those great energy transitions,” he says. “It may not be obvious, but we are in the middle of it. In the same way that we moved from wood to coal and then to oil and natural gas, we’re [moving] to solar, wind and renewable electricity generation.”
Mr. Cook notes that solar energy is now cheaper to generate in most parts of the world than natural gas and coal, the next two low-cost generating technologies. Global investments in wind and solar last year were worth US$300 billion, which is significantly outpacing all other forms of generation combined.
Here’s a look at how my clean energy picks have performed.
Brookfield Renewable Partners: (TSX: BEP.UN, NYSE: BEP) Closed Friday at C$60.02, US$42.90.
Background: Brookfield Renewable Partners is one of the world’s largest publicly-traded renewable power generating companies, with operations in 30 countries. Its energy is generated by a combination of hydro (74%), wind (21%), and solar (5%).
Brookfield operates 19,000 megawatts of generating capacity, which is the equivalent to removing six million vehicles from the road, or planting 450 million trees, the company says. It has 8,000 megawatts under development and is a long-time recommendation of our companion Income Investor newsletter.
Performance: Brookfield had a stellar 2019 and the momentum continued up to the market collapse, fueled by strong operating results and good prospects. In 2019, it generated $761 million in free funds from operations (FFO), a key measure of cash flow. That was 13% higher than 2018.
Despite the recent price retreat, the units are up 43% since they were recommended last March and are pretty well flat year-to-date. This compares with a decline of 16% for the S&P 500 and 19.6% for the TSX at the time of writing.
Recent developments: Brookfield invested $2 billion in nine transactions in 2019, doubling the size of its Asian and distributed generation businesses, adding a global solar developer, and investing in a Canadians hydro portfolio.
In January, it offered US$1.5-billion to buy the remaining 38% stake in TerraForm Power Inc., it does not own. TerraForm operates wind and solar power facilities in North America and western Europe.
In the 2019 annual report, CEO Sachin Shah said purchasing the minority share will streamline operations and strengthen Brookfield’s position.
Dividend: Brookfield raised its quarterly distribution in January by 5%. The new annual distribution is $2.17 per share and yields 4.43%.
Outlook: Brookfield sells 87% of its power under long-term contracts, which locks in prices, allowing it to generate stable cash flow.
The partnership is creating a new company with publicly-traded shares that are equivalent to the existing units. Unitholders will receive one new share for every four units they hold. The conversion will make it easier for ETFs and investors from outside North America to invest in the company.
ABB Group (NYSE: ABB) Closed Friday at $17.62. (All figures in U.S. dollars.)
Background: ABB Group is an engineering and technology pioneer with 2019 revenues of $28 billion. The company has a strong presence in electric vehicle charging stations, automated factories, and industrial robots.
Performance: Last year was one of transition. ABB sold its power grid division to Hitachi at the end of 2018 in a deal which should close this spring. It also tightened its focus and aggressively cut costs.
Revenues for 2019 rose 1%, but net income of $1.43 billion was down 34% as restructuring costs affected the bottom line. Even so, investors liked the strategy and the shares have gained 11% in the past 12 months. They were up as much as 30% in mid-February, hitting a 52-week high of $25.16 before the coronavirus selloff.
Dividend: Like many European companies, ABB pays one dividend a year, based on profitability. The current $0.77 payment yields 2.46% and appears safe.
Outlook: ABB is well positioned to gain from the transition to renewable energy. It manufactures the gas station of the future – the bays, plugs, and software that run electric charging stations. It is a leader in clean, automated factories.
As a global company, it is affected by global disruptions. CEO Peter Voser said in an earnings call last month that Chinese generate 15% of its sales. Operations have been curtailed with the impact as yet unknown.
Canadian Solar Inc. (NDQ: CSIQ) Closed Friday at $16.80. All figures in U.S. dollars.
My new green energy recommendation is Canadian Solar Inc.
Background: Canadian Solar is based in Guelph, Ontario and is one of the world’s largest manufacturers of solar panels. It sells the panels as part of turnkey solar power plants.
The company was founded in 2001 and has been public since 2006. It employs13,000 people in 24 countries. Most of its manufacturing facilities are in Canada and China, including two plants in Ontario. It has delivered over 38 GW of solar capacity and has 10 GW of projects in its pipeline.
Performance: The shares hit a low of $14.50 in November as China-U.S. trade rhetoric peaked. After the sell-off of the last two weeks, they are down 18.8% year-to-date, having been up as much as 13% through the third week of February.
Obviously, the share price has been volatile. Despite a strong financial performance, the trailing 12-month p/e ratio is at 4.75. That offers a lot of upside for patient investors.
Financials: Canadian’s Solar’s trailing 12-month revenues are $3.2 billion, and its net income is $214 million. In its latest nine months, gross margin improved. It held $1.04 billion worth of cash and cash equivalents, up from $981 million in the previous quarter. It has plenty of projects in its pipeline.
Recent developments: Canadian Solar expanded its board in December and announced several new projects. In February, it signed a multi-year agreement with a subsidiary of U.K. oil and gas major BP to provide 1.2 GW of modules for solar projects in the U.S. and Australia. It is involved in a project in Chile to supply solar power to 28,500 rural homes. In the first quarter it completed the sale of a turnkey solar plant to a Japanese power company.
John Cook of Greenchip Financial acknowledges that Canadian Solar is volatile, but believes the current price is far below fair value. “We are very confident about the company long term,” he says.
Dividend: The company does not pay a dividend, but has a share repurchase program.
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(This is an edited version of am article that appeared in the Mar. 16, 2020 edition of the Internet Wealth Builder.)