Seeking Alpha: As Power Markets Improve, NRG Energy Can Better Leverage Its Assets

There is a chance that independent power producer NRG Energy (NRG) can offer investors the best of both worlds. NRG's management quality has served it well through tough market periods, as the company has executed good deals to improve its market positioning and capital structure. Now, it may be approaching a period where its operating assets can outperform on the back of higher gas prices and tight capacity in key markets like Texas.

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As Power Markets Improve, NRG Energy Can Better Leverage Its Assets

Investopedia: Exelon's Discount May Offer An Opportunity

It feels like investors and analysts have spent the better part of two decades arguing that power prices in regions like the Midwest and Mid-Atlantic should be higher than they are. Along the way, several independent power producers ((including Dynegy (OTC:DYNIQ)) have faltered badly as consumer-friendly regulators and stubbornly lower power prices have made this a perennial "wait 'til next year" market. With power prices recently testing historical lows, Exelon (NYSE:EXC) shares have been quite weak. Is this an undervalued high-quality utility story, or just another utility doomed to struggle with lower-than-expected power prices in its core regions?

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Investopedia: Shaw Group Still Looking For More Energy

Although the economy is slowly getting better, commitments to major engineering and construction projects are still scarce and erratic. Making matters worse for Shaw Group (NYSE:SHAW), there's still a great deal of uncertainty in the U.S. power space as it pertains to licensing new nuclear facilities, retrofitting old plants and building new fossil-fuel power stations. While Shaw Group does look like a potential value today, investors have to be willing to exercise patience to see that value come to light.

Mostly Good News for the Nuclear Business
While Japan's Fukushima disaster chilled the nuclear power market, Shaw is seeing respectable progress in this large business. SCANA (NYSE:SCG) and Southern Co. (NYSE:SO) have both gotten the go-ahead to move forward with nuclear plant projects, which de-risks a substantial part of Shaw's backlog. On the other hand, while there's still hope that Progress Energy (NYSE:PGN) (in the process of being acquired by Duke Energy (NYSE:DUK)) will get the go-ahead of a new facility in Florida, the company has been beset by a variety of problems with its nuclear plants.

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Investopedia: Can EnergySolutions Drive Value From Scarce Assets?

Usually, scarcity means value in the equity markets. Unfortunately, anything relating to the nuclear power sector in the U.S. is colored with risk and uncertainty, and small engineering services firm EnergySolutions (NYSE:ES) has had trouble leveraging its expertise and assets in nuclear decommissioning. Although budgets and schedules are likely to remain uncertain for the foreseeable future, it would seem that the valuation on this stock has factored in quite a lot of bad news already.

Ahead of Schedule and Under Budget  
The biggest project at present for EnergySolutions is the decommissioning of Exelon's (NYSE:EXC) Zion plant. Although there were fears that the early margins on this project would be weak, overall results have not been bad at all so far. More to the point, as of early 2012, it looks like this project is on target or better, and the company is working to renegotiate a cumbersome letter of credit. (For related reading, see Analyzing Operating Margins.)

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Investopedia: 2011 In Review - Utilities

Utilities have a long-held reputation as being safe havens during difficult economic times. After all, while demand for utilities does show some correlation with economic activity, the bottom doesn't usually fall out when times are tough. While it is not fair to say that utility investing was a risk-free way of earning market-beating returns in 2011, it was not hard to find winners in this broad sector.


Deals Drive Results
One thing that quickly jumps out from the list of top performers in the past year is the heavy impact of mergers in the sector. Utilities continue to consolidate as the regulatory and financing burden of new capacity construction works against smaller players, and the benefits of operating efficiency become more significant.

Central Vermont (NYSE:CV), Constellation Energy (NYSE:CEG) and Progress Energy (NYSE:PGN) all posted solid above-market returns this year on the back of buyout bids (from Gaz Metro, Exelon (NYSE:EXC) and Duke Energy (NYSE:DUK), respectively). (To know more about acquisitions, read Analyzing An Acquisition Announcement.)


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Investopedia: Utilitarian Dividends

It is hardly controversial or innovative to look for quality dividend-paying stocks in the utility space. These companies typically operate as monopolies in their respective regions, and regulators are generally quite willing to grant rates to utility operators that all but ensure solid dividend payouts. That does not mean, though, that the entire industry is uniform and undifferentiated. As with any sector, investors do well to pick and choose among the best options available for their portfolio needs. (For more, see Trust In Utilities.)

Consolidated Edison (NYSE:ED)  
Con Ed is a staple on lists of quality dividend-paying utility companies. Con Ed is the utility that provides electricity, gas and steam to New York City, and the company has a long dividend-paying history and a very secure corporate structure. Today's 4.5% yield is above the industry average, as is its payout ratio. Dividend growth and return on assets (ROA) have been below average, but Con Ed is a strong choice as a cornerstone utility holding.

CH Energy Group (NYSE:CHG)  
CH Energy, the holding company of Central Hudson Gas & Electric, is the electricity and gas distributor for much of upstate New York, as well as operating cogeneration and ethanol operations in other states. Paying a 4.1% dividend yield today, the company could be in position to raise the payout in a year or two. Like Con Ed, CH Energy's payout is above average and the ROA is below average, but the financial stability looks good. (For more, see Dividend Facts You May Not Know.)

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http://stocks.investopedia.com/stock-analysis/2011/Utilitarian-Dividends-ED-CHG-EXC-NST-SO-EONGY-CVA0513.aspx

Note: It should be Southern Company, not Southern Energy. I'll make sure that correction gets made. I don't know why, but I keep making that mistake...

Investopedia: The Biggest Nuclear Operators In The United States

There is no question that the disaster in Japan has refocused investor attention on nuclear power's future both abroad and in the United States. Although it is true that nuclear power is not nearly as important to the U.S. power infrastructure as it is in some countries (notably France, Belgium, Sweden, Germany and Japan), it is more pervasive than some investors may realize. 

More to the point, while there is a wide range of company-level exposure to nuclear power, the reality is that a very large percentage of U.S. utilities have some level of exposure. Given the difficulties of decommissioning nuclear facilities and the trouble of installing alternate capacity, this is unlikely to change.
Nevertheless, investors may find it helpful to keep a cheat-sheet on the exposure levels of major U.S. utilities. Please note that the following tables to include somewhat arbitrary distinctions between "regulated" and "diversified" and that the numbers do not include power purchased under long-term contracts (which can be significant for some utilities). 


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Investopedia: Nuclear Energy - The Emotion Trade Is In Full Swing

There are plenty of old sayings that advise investors to swim against the tide and invest into troubled sectors when pessimism is at its worst. That is all well and good, but precious few investors have the self-confidence and long-term focus to just ignore a 20% or 30% near-term loss on a new position. With that in mind, then, investors should certainly do their due diligence on now-troubled nuclear power stocks but let the dust settle a bit before taking on new positions.

Shoot First, Ask Questions Later
In the wake of the combined earthquake and tsunami disaster in northeastern Japan, and the resulting emergencies at multiple nuclear facilities in Japan, public fear about nuclear power is once again running high. With activists already jumping on their airwaves to exaggerate and misinform, it seems inevitable that the nuclear industry has lost whatever momentum and credibility it had rebuilt in the 25 years since the Chernobyl disaster.

Investors need go no further than the stocks of those companies exposed to the nuclear power industry. Go-to names like uranium miners Cameco (NYSE:CCJ) and Denison (AMEX: DNN) and engineering and construction firm Shaw (Nasdaq:SHAW) were among those that took a significant drop in the early trading after the disaster struck. Since then, even well-diversified names like General Electric (NYSE:GE) (which has some, but not a lot, of nuclear energy exposure) have come under selling pressure.

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Investopedia: Does Getting Bigger Make Duke Energy Better?

Utility deals are not like other deals. Utilities do not buy each other to get access to cutting-edge technology or popular products nor to take a competitive asset off the market so that it cannot fall into a competitor's hands. Instead, utility mergers are often about finding a few tenths of a percentage of savings here or there and perhaps about creating a more desirable profile of operating markets. To that end, then, it does not really seem all that likely that Duke Energy's (NYSE:DUK) acquisition of Progress Energy (NYSE:PGN) is going to be the start of a wave of utility M&A. 

The Deal as It Stands
Duke Energy announced Monday morning that it had reached an agreement to acquire Progress Energy in an all-stock deal. Duke will give each Progress Energy shareholder 2.6125 shares of its stock - a ratio that valued Progress Energy at $46.48 per share based on Friday's closing prices. That in turn represents a 4% premium to Progress's Friday close, and a 7% premium to the price of the utility before deal chatter started to build and push the stock higher.

A Logical Deal ... To a Point
Assuming that the various regulators allow the deal to go through unchanged (more on that later), it will produce the largest utility in the country with over $8 billion in annual operating EBITDA and 57 gigawatts of generating capacity in the U.S.. Impressive as that sounds, it is still a small fraction of the total U.S. electrical generation market.

Where this deal makes sense is in the familiar operating environments of the two companies. For both banks and utilities, the Southeast U.S. is an attractive market for the same basic reasons - above-average population growth and relatively friendly regulatory regimes. Both utilities are major players in the utility-friendly Carolinas, and Progress will give Duke good exposure to the also-friendly (and attractive) market of Florida and increase the percentage of earnings it gains from regulated markets.

Beyond that, this deal will help to mitigate some of Duke's risk exposure to possible troubles in Ohio and Indiana. In Ohio, for instance, Duke is losing out to competitive suppliers due to above-market rates and is trying to convince regulators to allow it to move to "market rate option" pricing. 


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