Post by
no1coalking on Jan 14, 2008 3:50pm
Power Wanted:
Some day the stuff will hit the fan again, we're heading toward a situation where power blackouts will be commonplace. Unless the political arm-wrestling over the carbon dioxide boogeyman comes to an end and utilities are able to plan long-term they will continue to postpone capacity additions until they are forced to build by a public that can't turn the lights on. EEE's deal with TXU was stopped because of the global warming hysteria drummed up by AlGore and his ilk.
The geologic record tells us that global warming is a natural phenomenon, there have been four ice ages during the past one million years, between each is a warm period. AlGore won't debate, he wants to dictate, his lies and distortions are well known, yet the Green Movement clings to his forecast of fear for mankind and they continue to oppose new power construction based on falsehoods. AlGore's biggest lie of all is that a consensus of scientists agree that we can control or reverse global warming. We can't, nor should we. Thanks to global warming we don't live in an ice age.
Stocks That Can Power Up
By NAUREEN S. MALIK
THIS WINTER SEASON, INVESTORS have given the heave-ho to electricity merchants that cater to businesses and residents in unregulated environments.
Seen as pure commodity plays in a weakening economy, mid-cap companies NRG Energy and Dynegy have become some of the worst industry performers. Since touching highs in October, NRG shares have fallen 16% to $39.54 and Dynegy has slipped 34% to $7.25.
But U.S. demand for electricity continues to rise steadily while the ability to produce more power is restricted. That should turn those low-voltage shares into power plays over the next few years.
Dynegy and NRG have a strong presence in the tightest markets in Texas, California and the Northeast. They look even more compelling based on their diversified electricity-plant portfolios, growth rates, strong management teams and the reasonable value of their shares.
Higher prices of natural gas that is used to produce electricity should bolster power rates and expand profits. Both companies should also continue to use strong free cash flow to buy back shares.
Eric Green, a senior managing partner at PENN Capital Management, says this is a buying opportunity because "we are going to have demand in electricity that increases every year, recession or not."
Stocks of power merchants could rally 25% to 50% over the next 18 months with Dynegy and then NRG leading the pack, says Green.
Other stocks that should perform well are Mirant, which has fallen sharply after failing to find a suitor, and Reliant Energy though it has a pricey valuation.
But looking at their balance sheets and capital structures, Green likes NRG and Dynegy for more than their common stocks: The companies have quality bonds that offer high yields.
Last month, Fitch Ratings raised its outlook on all four merchant generators to Positive from Stable. Other agencies have not followed. They appear hesitant after the meltdown of Enron and a flurry of projects to build new power plants led to bankruptcies in the industry, including NRG. Dynegy barely avoided this fate.
NRG Chief Executive Officer David Crane says this has been a sore point, but that the credit markets appear to be shrugging aside NRG's B rating. "We have the same rating [since] the day we came out of bankruptcy; it just makes no sense," Crane says.
Gordon Howald, an analyst with Calyon Securities, says that the power market is "entering the sweet spot and there isn't a lot of elasticity of demand."
Evidence of strong power prices from auctions of electricity-generation capacity by plant owners over the next few months could spark interest in these stocks.
Recovering natural-gas and coal prices should continue to drive up "spark spreads" -- the operating margin calculated by subtracting the cost of fuel from the selling price of power.
A modest 1% increase in electricity demand would require another 300-400 billion cubic feet of natural gas a year, potentially driving up the commodity's price even more, says Lasan Johong, a senior analyst at RBC Capital Markets.
The volatility in electricity prices could get sharper as reserve margins catering to peak demand for electricity shrink. Measured as a percent, the reserve margin compares the amount of extra power that can be generated from idle capacity versus the amount of power needed during normal conditions. Howald expects reserve margins to narrow from 18%-19% in the Northeast and 20% in Texas, to 15% and 12.5% by 2011, respectively.
While NRG has some exposure to these plants, 42% of Dynegy's business is from peak power plants. Peak power prices averaged $74.05 per megawatt hour last week, according to Howald. The 10-week average is $66.02 versus $56.81 a year earlier.
Environmental concerns are making it harder for companies to get permits to build new plants. Jefferies & Co. electric utility analyst Paul Fremont expects high power prices to persist in this bullish cycle for the next two to four years.
Meanwhile, political wrangling over whether to peg a cost to carbon emissions is creating an overhang on the industry. A slew of wide-ranging bills make it difficult to value electricity merchants' assets, says Howald. This plus the tough credit environment has dried up merger-and-acquisition activity in this fragmented industry.
Jefferies' Fremont does not expect a carbon cost or tax to be resolved till 2009, although a favored bill could add clarity.
NRG is expected to be hit harder by the carbon legislation because it operates more in mixed markets where electricity is generated by a combination of coal and natural-gas producers.
Natural gas produces less carbon. This could squeeze margins at coal-fired plants operating in markets where natural-gas plants set electricity prices.
NRG CEO Crane says fears over "how draconian the carbon regime that ultimately passes is exaggerated." He is expecting a moderate cost that will be offset by NRG's greener programs in nuclear, wind and cleaner coal electricity production.
Calyon's Howald says the long-term value in NRG and Dynegy is apparent, but that we "don't have a sense of urgency" that could drive the stock higher in the near term.
Mild weather, a collapse in commodity prices and reports of new plants projects could also pressure shares.
Dynegy generates 19,642 of power in the Midwest (48%), Northeast (19%) and West (33%). About 50% of its near-term production is hedged while its long-term capacity is unhedged. NRG hedges nearly all of its production, effectively serving as a surge protector for earnings against volatility in commodity prices. It has 47 plants that generate nearly 24,000 megawatts of power.
In the near term, NRG expects to drive growth by increasing earnings profitability by cutting costs, synergies and other internal controls, says Crane. This year is also a pivotal year -- some projects have progressed enough that the company can sell stakes in them at lucrative rates.
Even in a tough economic environment, the companies' solid business models in a tightening electricity market could provide a spark for these beaten-down shares.