Solar energy isn’t only for hot and expensive states like California. Minnesota just approved a law that requires utilities to get 1.5% of their energy from solar by 2020. These changes will require new investment, and the state’s left-leaning government could further increase its solar requirements.
Some utilities like Xcel Energy Inc (NYSE:XEL) are well positioned as they already have a significant amount of experience with renewable energy. Solar manufactures like SunPower Corporation (NASDAQ:SPWR) and Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE) will benefit as Minnesota’s utilities will need to purchase a number of new solar panels.
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Xcel Energy Inc (NYSE:XEL) is one of the major utilities in Minnesota. The state provides 35% to 45% of the company’s earnings. The utility has experience dealing with progressive states with high renewable energy requirements. Colorado’s green energy requirements helped to make wind 12% of the firm’s owned and purchased energy in 2012.
Even with this encouraging experience, the utility industry faces the risk that the majority of government mandated solar use may come from distributed solar. If homeowners start to place solar panels on their homes in droves, then Xcel Energy Inc (NYSE:XEL) would suddenly be competing with millions of small producers.
The reality is that Minnesota is far away from sunny and dry regions like California. Minnesota is well-situated to take advantage of cheap coal and wind energy. While it is possible that roof top solar installations could take off, it is most likely that the new solar mandate will be met through a combination of utility-scale installations and rooftop installations.
Xcel Energy Inc (NYSE:XEL) is financially stable with a total debt to equity ratio of 1.21 and a profit margin of 9.3%. Even before the latest solar mandate, it was planning to use 20% of its 2013 to 2017 capital investment plan for its distribution network. A stronger distribution network is needed to strengthen the grid so that it can handle distributed solar and wind generation. With a 3.8% dividend, Xcel Energy Inc (NYSE:XEL) offers a healthy yield and helps the environment.
ALLETE Inc (NYSE:ALE) is another utility active in the Minnesota energy market. This company is using its interests in North Dakota to help increase its wind generation capacity, but its solar assets are still lacking. It is looking at a number of agreements with Canadian operators to increase its use of hydro generation. With a total equity ratio of 0.82 and a profit margin of 10.7%, it shouldn’t have a difficulty reaching the 1.5% solar mandate. Its return on investment (ROI) of 4.7% and dividend are almost the same as Xcel Energy Inc (NYSE:XEL)’s.
The Solar Manufactures
To meet Minnesota’s new legal requirements, solar manufactures are an integral part of the equation. Chinese manufactures like Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE) have won the cost war and brought their panel prices down to $0.48 per watt in the fourth quarter of 2012. For homeowners who do not need to worry about real estate costs and warranties these cheap Chinese panels are a good fit. More sophisticated buyers look at the total system cost, real estate costs and warranties. These buyers are more inclined to look at panels with higher efficiencies like those produced by Sunpower Corporation (NASDAQ:SPWR).
Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE) has a total debt to equity ratio of 6.55 and a profit margin of -28%. With these numbers it looks like the company could be setting itself to go into receivership. The quick ratio is a measure of the short term ability of a company to pay its bills. Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE)’s quick ratio of 0.5 is significantly less than Sunpower Corporation (NASDAQ:SPWR)’s quick ratio of 1.0. The recent failure of the Chinese solar manufacture Suntech shows that Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE)’s bankruptcy is a possibility.
Sunpower Corporation (NASDAQ:SPWR) is in a different situation as it has a total debt to equity ratio of 0.72 and is backed by the French oil giant Total. Right now Sunpower Corporation (NASDAQ:SPWR)’s margins are not healthy, but it is expected to earn $0.64 per share in 2013 and $0.86 in 2014.
The warranty is a very important part of a product. Sophisticated buyers are not inclined to purchase a product with a standard warranty from a company with a high probability of going bankrupt. It is very difficult to make a bankrupt company compensate you for product failures. For this reason, Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE)’s cheap panels come with a deeper cost. Sunpower Corporation (NASDAQ:SPWR) guarantees its panels to 87% of its initial power for 25 years, while Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE)’s Panda series are only guaranteed to 82%.
Conclusion
Xcel is one of the better investments. With a gross margin of 35.3% and history of green energy in Colorado, it has the necessary tools to meet this recent solar mandate. ALLETE Inc (NYSE:ALE) is a good second choice, but its interests outside its utility operations add in additional complexities.
Although a number of Chinese solar manufactures have effectively avoided U.S. tariffs by moving around production, Yingli Green Energy Hold. Co Ltd. (ADR) (NYSE:YGE)’s high debt load makes its products risky for investors and purchasers. Sunpower is a safer long term investment, but at its current price to book ratio of 2.53 it is rather expensive.
The article Look Out, Solar Is Moving North originally appeared on Fool.com.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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