UTILITIES. there was an informative and lengthy article in the NYT concerning utilities on Nov 29. A "must read". It was mainly about congress and lobbying, but investing/outlook info implies to me that some windfall utility profits are not priced in yet. Utility prices have hung in there vs LT bonds but there may be int rate risk. Or maybe that's over. NEE is my largest holding, and I've always wanted to reduce my holding but tax gains won't allow it. I also own ES and AEP mentioned in the article.
I'll give the link here, but you need a subscription.
NYT utility
Clips here:
With the passage of the climate and economic policy bill known as the Inflation Reduction Act, DTE and other big utilities like AmericanElectric Power, NextEra Energy and Southern Company stand to benefit from the largest package of subsidies ever granted to the industry. Buried in the hundreds of pages are carefully crafted provisions that will eventually help electric utilities gain additional profits for years to come, totaling hundreds of millions of dollars per year for some of the larger players, according to Wall Street analysts.
The benefits come in part from the extension of about-to-expire tax breaks for the industry for as long as two decades, a provision that alone is worth more than $120 billion. Lawmakers also significantly expanded the kinds of things utilities can spend money on and still get a generous tax break for, like new energy storage equipment. The new law also allows utilities that build clean-energy installations to sell large chunks of their tax perks to other companies or WallStreet investors, even those that have no connection to the energy industry. In effect, the legislation is reviving a tax-law loophole that was revoked by Congress.
The law Congress passed is so generous — with tweaks pushed by industry lobbyists — that it surprised even some veteran corporate tax lawyers. No company is better positioned to cash in on the subsidies than NextEra Energy, which serves six million customers in Florida as well as millions more in 38 other states that rely on electricity produced from wind and solar installations it has built to supply other utilities... “If they now put $2 down instead of $1, instead of making 10 cents, now they are making 20 cents,” said Julien Dumoulin-Smith, who tracksNextEra for Bank of America. “The profits are going up that way.”
Elsewhere across the nation, NextEra plans to build an additional 37 gigawatts of renewable power over the next four years — enough to serve about 25 million homes — more than doubling its existing inventory, which is already the largest in the nation. It earns an even higher profit on those contracts as the investments are not regulated. It can also get tax credits on upgrades to its existing wind and solar projects and to add battery capacity to store renewable power — all again increasing profitability.
The provision in the new law that will allow NextEra and other utilities to sell these tax credits to the highest bidder — including buyers that have nothing to do with the clean-energy business — gives them the opportunity to take in billions of dollars in cash payments in the coming years. But the overall financial benefits for many of these companies over the long term remains clear, he and other analysts said.
The tax subsidies have also increased the value of renewable projects owned by utilities, which is in part why many companies —including American Electric Power, North Carolina-based Duke Energy and Boston-based Eversource — are already putting some of them up for sale. “It is a game changer,” Joe Nolan, the chief executive at Eversource, said in an interview, noting that it had spent $1 million six years agoto lease an offshore wind site that it now intends to sell, potentially for hundreds of millions of dollars. “There is no two ways about this." |
