Hugh Wynne is Co-Head of Utilities and Renewable Energy Research at SSR LLC, an independent research firm providing in-depth analyses of industry trends for institutional investors in both the public and private equity markets.
SSR also provides advisory services to electric utilities, utility regulators and the suppliers of power generation and energy storage equipment. Prior to joining SSR, Mr. Wynne was Managing Director and Senior Research Analyst at Bernstein Research, where he was responsible for the regulated utility, independent power and renewable energy sectors.
In that role, he was ranked nine times by Institutional Investor in its annual All-American Research Team poll.
Mr. Wynne’s power sector research has focused on the critical long-term trends driving structural change in the industry, including the scale, structure and cost of the investment in renewable generation and energy storage required for states and utilities to achieve their CO2 reduction targets; the impact of increasingly stringent environmental regulations on the coal, oil and gas-fired fleets; and the challenges that the growth of renewable generation presents both to competitive power markets and the traditional utility business model.
Before joining Bernstein, Mr. Wynne was Vice President of Finance at ABB Energy Ventures, the power project development subsidiary of ABB Asea Brown Boveri, where he was charged with making equity investments in and arranging non-recourse financing for major power generation and transmission projects globally.
Previously, Mr. Wynne was a Senior Vice President at Lehman Brothers’ Utilities and Project Finance Group. Mr. Wynne holds a B.A. degree from Harvard University, where he graduated magna cum laude and was elected to Phi Beta Kappa, and a M.A. degree in economics from Stanford University.
In this 3,801 word interview, exclusively with the Wall Street Transcript, Hugh Wynne gives investors detailed advice on renewable energy stocks.
“So basically, what we’re seeing is that, one, there are state and corporate targets being set for much lower levels of carbon output and thus much higher levels of renewable generation.
Those targets will be met primarily by substituting the output of new wind and solar power plants for the output of the existing coal- and gas-fired power plants. And because the cost of fuel and the variable cost of operation of those fossil fuel plants is relatively high — maybe $25 per megawatt hour — a large portion of the capital cost of building new wind and solar resources — which in the case of solar may be $35 per megawatt hour — will be offset by savings from fuel that’s not burned and variable costs that are not incurred to run the existing fossil fleet.
So we see the opportunity here to make a very large investment in renewables, but to do so in a way that has a limited impact on the cost to supply electricity because of the savings at fossil fuel plants.
Just to give a sense of the scale of that investment, when we did an analysis of 25 of the vertically integrated utilities in the country that have set targets to reduce CO2, we found that in order to achieve those targets, those 25 companies would need to invest capital equivalent to about 20% of their current regulated asset base, or rate base, over the next decade.
So on average this is a big investment relative to their existing assets. Moreover, the range around that average can be pretty large. There are some companies that may have to invest amounts equivalent to half or even two-thirds of their current rate base to achieve their CO2 reduction targets.
While sharing in the rapid growth of renewables, utilities have characteristics that we think will set them apart from other growth stocks in the renewable space.
The most important of these is that utilities are regulated monopolies.
They’re not subject to competition in their service territories. Their returns on capital are supported by regulated electricity rates and revenues, and those allowed returns on equity which are currently over 9.0% or maybe 800 basis points above the yield on long-term U.S. Treasury bonds.
So a very substantial equity risk premium is available on these stocks, and yet their returns are protected from competition and are historically insensitive to the economic cycle. Regulated utilities pursuing investments in renewable generation thus offer growth with very low variability on earnings, so low betas.
In sum, we find regulated electric utilities a unique way to play the growth of renewables, in that they earn returns well in excess of their cost of capital and, in the absence of competition, the stability of these monopoly earnings makes them far less risky growth stocks than some of the other alternatives out there.
Not to mention that they still trade in line with the S&P 500 as opposed to an extravagant premium.”
This important insight leads to specific stock picks from Hugh Wynne:
“Some of the stocks that have quite robust renewable growth opportunities are also stocks that we find attractive in terms of their relative valuations, regulatory environment, and power demand growth.
Two stocks that fall in this bucket are Pinnacle West (NYSE:PNW) and Entergy (NYSE:ETR). What particularly interests us about these two companies is scale of the opportunity for them to invest in new renewable resources as the means to reduce their exposure to coal- and gas-fired generation.
At Pinnacle West, we estimate that the capex required to achieve their CO2 reduction target could be equivalent to as much as 40% of the company’s existing regulated asset base. It’s possible that PNW’s regulators will not permit it to own all those new renewable assets, and will require that some portion be owned by independent power producers.
But as a vertically integrated utility in a regulated state, Pinnacle West is in a good position to incorporate a significant part of this investment into their rate base. We think the same goes for Entergy, where we believe that the scale of investment required to meet their carbon emissions targets for 2030 is equivalent to about a third of their existing regulated asset base.
So we’re bullish about these companies due to their attractive growth potential as they transition to renewable energy to meet their own carbon reduction targets — particularly as their share prices suggest that investors are not incorporating this growth into their valuations.”
Some other recommendations from Hugh Wynne recognize a variety of positive factors in the renewable energy sector:
“During the recent rally in renewable energy stocks, the owners of renewable power projects have underperformed the renewable equipment manufacturers.
Yet we think the yieldcos have become more attractive as their stocks have appreciated and their cost of capital has fallen, allowing for larger and more accretive acquisitions of renewable assets. Among the names we find most compelling in the space are NextEra Energy Partners (NYSE:NEP) and Brookfield Renewable Partners (NYSE:BEP)…
Also, some renewable equipment manufacturers that are currently underperforming may offer opportunities. First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR), for example, have failed to keep up with some of the other renewable equipment manufacturers due to investors’ concerns regarding the expiration of U.S. tariffs on imports of solar panels.
Yet with Democratic control of the Congress, the Biden administration will be in a position to implement policies that are far more supportive of renewable energy. First Solar and SunPower will benefit, and they’re currently the cheapest renewable equipment companies around.”
Get the full insight by reading the entire 3,801 word interview with Hugh Wynne, exclusively with the Wall Street Transcript.
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