This is from "Standard & Poor's":
Power Producers (Independent)
We continue to recommend growth-oriented investors overweight the Independent Power Producer (IPP) industry. Year to date through August 3, the S&P Power Producers (Independent) was down 26.2%, versus a 7.2% decline in the S&P Super 1500. During 2000, this industry index soared 75%, while the broader market declined 8%. Despite very strong second quarter earnings reports and reiteration of strong EPS growth projections for 2002, IPP shares have been battered by fears of a longer term power "glut," initiation of FERC mandated soft-price caps across the Western U.S. and growing demands for California "refunds." While we believe the industry will maintain 20%+ EPS growth over the next several years, we favor those companies with strong energy marketing operations (such as Dynegy and Mirant), which offer diversified sources of income and improved fuel expense management.
Fears of a longer term power glut assign far to much credence to press releases announcing power development plans and ignore the impact of decommissioning older plants. Also, the effects of Western soft price caps haves been significantly mitigated by declining gas prices. This underscores the point that IPP profitability is derived from margins over fuel costs (mostly natural gas) - not on an absolute level of power prices. Perceived exposure to potential "refunds" has been vastly diminished by a FERC judge recommendation for refund levels around 1/10th the size of California's original $9 billion demand (and much less than the size of receivables owed to generators by the state's utilities). Underscoring progress on the receivable front, Calpine successfully concluding negotiations in July with the bankrupt PG&E over its unpaid receivables.
In an era of deregulation, independent power producers have a competitive edge over their utility brethren. Regulated utilities have historically earned a profit on the distribution of energy; while IPP's earn a profit from competitive electricity generation. Given their incentives and experience in cost effective energy production and power marketing, IPP's should benefit longer-term from continued deregulation of domestic electric power generation, increased privatization of global electric utilities, and rising demand for global power services. |
