Power stock---CPN
Power Plays: Independent Producers Fueled by Surging Energy Demand
By John Rubino
Special to TheStreet.com
9/15/00 10:53 AM ET
Remember when technology was going to make us energy-efficient? Computer-controlled machines, so went the conventional wisdom, would do more with less juice, shoppers would point and click, and workers would telecommute, turning OPEC into a historical curiosity and malls into ghost towns.
Some of the above has indeed happened: E-commerce is booming, more people are telecommuting and machines are vastly more efficient. Yet energy demand is surging and OPEC is back in the saddle.
What went wrong? We missed one crucial effect of technology. As The Wall Street Journal pointed out recently, microprocessor chips consume as well as save energy, and their numbers are increasing fast enough to offset their energy savings. As a result, power demand is rising faster than virtually anyone expected, in many places swamping supply. (See Christopher Edmond's Aug. 22 column on the mess in California.)
And -- here's where it gets really interesting -- since chips will continue to spread through the global economy for years, if not decades, the recent jump in energy demand is not just a late-cycle imbalance, easily cured by a soft landing or recession or whatever. It's secular, like the Internet build-out, and will be a feature of the New Economy until chips give way to whatever comes next.
In this scenario, decentralized generating technologies like fuel cells and microturbines, which can be added quickly where needed, become that much more interesting (see my May 12 column for more). And independent power producers -- companies which build plants in the hope that the local utility will be willing to pay for the power that they generate -- are starting to look like essential infrastructure plays.
Building power plants on spec was always a good business for the smartest operators. But it was high-risk, since unlike utilities, which are granted guaranteed rates of return on new plants, the independents could lose everything if no one wanted their juice.
But the risk side of the equation will evaporate if demand continues to outstrip supply. And plants already in operation will increase in value as their supply contracts come up for renewal. Another advantage of the independents is their culture. Most public utilities are run by people who have spent their adult lives negotiating with regulators and selling electricity to a captive audience. They won't become entrepreneurs overnight. But the folks running the independent power firms have always thought opportunistically, giving them a better shot at riding the deregulation/high-demand wave.
AES (AES:NYSE - news), for instance, used to get as much press for its radically decentralized management style and environmental initiatives as for its power plants. Back in 1993, when this company was tiny, quirky and speculative, I interviewed its president and CEO. AES had set up a few plants in the U.S., but was looking overseas for future growth, since, the company believed, the industrialized world wouldn't need much more power in the coming decade. I checked back in this week to see if that was still true, and found, of course, that it wasn't. "The U.S. and Europe are our fastest growing markets now," says spokesman Kenneth Woodcock.
Go to the company's Web site for a list of recent deals and you'll see what he means. So far this year, AES has agreed to buy an Indianapolis-based utility for around $3 billion and 70% of a Nevada plant for $667 million. It also has broken ground on new plants in New Jersey and Illinois.
Younger and smaller, but with a bigger portfolio of U.S. facilities is Calpine (CPN:NYSE - news), operator of 45 plants in 37 states. Its cash flow has exploded from $27 million in 1995 to $264 million in 1999. And now comes the real build-out, with U.S. generating capacity scheduled to more than triple in the next few years.
Another way to play this sector is via the utilities that operate independent power-generation subsidiaries, on the premise that the subs will either be spun off or grow fast enough to raise the value of their parents' shares. NRG Energy (NRG:NYSE - news), for instance, is a majority-owned division of Wisconsin-based Northern States Power (NSP:NYSE - news), which buys and upgrades existing power plants. Its June quarter was more dot-com than utility, with revenue rising from $67 million to $522 million, year over year, and earnings from $2 million to $43 million.
Unfortunately, the markets are starting to figure all this out. Utilities were the best performing sector in the past year, and the independent power companies now trade like tech stocks. So the question becomes, do you pay up now and expect long-term growth to work out the price thing? Or do you wait for a correction?
I'd recommend waiting. In the next couple of years, something -- a big OPEC output boost, a slowdown in Europe that infects the U.S. or some other other equally weighty event -- will probably send oil prices back into the mid-$20s. Then, when the pundits declare the energy party over, these stocks might turn back into potential 10-baggers.
Wednesday September 6, 3:58 pm Eastern Time
RESEARCH ALERT-Calpine estimates raised
NEW YORK, Sept 6 (Reuters) - Credit Suisse First Boston said Wednesday analyst Neil Stein raised third-quarter earnings per share estimates for Calpine Corp. (NYSE:CPN - news) 16 percent to 71 cents from 61 cents ``based on strong California power market conditions.''
-- Raised year ``2000 estimate accordingly to $1.61 from $1.50, which reflects a lower share count.''
-- Explained that ``during July and August Calpine sold power from its California geothermal units at an average price of $100 per megawatt hour. Our previous estimate had assumed an average selling price of $60.''
-- "For now we are leaving our 2001-2003 EPS estimates unchanged at $1.90, $2.57 and $3.75. Nevertheless, we are clearly more comfortable with Calpine's ability to meet or beat our projections. This estimate revision indicates that our forecast embodies very conservative pricing assumptions.
-- Reiterating his strong buy rating and $115 price target on Calpine, he explained: ``Our proprietary valuation framework indicates 25 percent upside for the stock.''
Calpine shares, which were trading at $87 midday Wednesday, were still down $2-3/8 to $89-3/8 on composite volume of nearly 2.5 million shares just before the close. |
