Power Suppliers’ Stocks Fall Under Strain of Public Attack

Gov. Gray Davis and other critics call them “pirates” and “snakes.” State power officials allege they’re price gougers making “excessive” profits. But for investors, many of the major independent power companies simply look like losers this year.

The companies’ stocks are taking a beating lately from public allegations that these unregulated electricity and natural-gas providers are unfairly exploiting California’s power crisis for their bottom lines.

And Wall Street is split on whether the stocks’ lower prices make for a good entry point to buy now--or whether the controversy still makes them too dangerous a bet. The stocks tumbled again Wednesday amid heightened calls in Washington and Sacramento for more restrictions on what the companies can charge, and a profit warning issued by Reliant Energy Inc.

Consider: The stocks of Enron Corp., Dynegy Inc., El Paso Corp. and Williams Cos. all are showing losses for the year so far--even though some hit record highs this spring as electricity prices soared in California. But they’ve since turned lower, and their overall declines in 2001 have wiped out a combined $36 billion of the companies’ total stock-market value, according to analyst Donato Eassey of Merrill Lynch & Co.

That loss of investor wealth is more than 22 times the four companies’ current exposure to California--that is, what they’re owed for electricity and gas already sold to the state--which is $1.6 billion, Eassey noted.

Shares of some other major power suppliers and traders, such as AES Corp., also have taken a hit. Even those players whose stocks still had been rising a few weeks ago--such as Calpine Corp., Duke Energy Corp. and Reliant Energy--recently have turned down.

But it’s not the companies’ existing dollar exposure to California that has investors skittish. Several of the companies already have set aside reserves in case they’re never paid by the state’s major utilities: Edison International, parent of Southern California Edison, and PG&E; Corp., whose Pacific Gas & Electric unit filed for bankruptcy reorganization in April.

Rather, Wall Street frets that the companies’ hot growth rates are in danger of slowing if various proposals by California and U.S. officials are enacted to help ease California’s power crisis, analysts said. Also weighing on the shares are state and federal investigations of the pricing policies of some companies, and the potential for penalties if any wrongdoing is found.

For example, the Federal Energy Regulatory Commission--responding to appeals from stateofficials, lawmakers and consumers--is considering a major expansion of its plan to limit California electricity prices, agency officials said Tuesday.

Investors Spurred to Capture Profits

California accounts for a minority of the overall revenues of the power companies. But California’s economy and power needs are so vast that any successful effort to limit prices in the state could stall the companies’ overall growth. And that’s prompting many investors to sell and capture profits from the stocks’ sizzling rallies during 2000 and early this year.

But Enron’s stock has plummeted 40% since Jan. 1. The stock of El Paso, which has been a particular target of California’s ire and attendant investigations of its power prices, is off 21% year-to-date and now trades for just 17 times the $3.34 per diluted share it’s expected to earn this year, according to analysts surveyed by First Call/Thomson Financial.

“There is concern about the potential loss of growth that could come about if California is successful in getting price caps” for electricity, which is one solution some state officials are seeking, said Robert Christensen Jr., an analyst with FAC/Equities in New York.

“The stock market doesn’t know which way to turn right now” with regard to these power companies, Eassey said.

The stocks also have weakened on investors’ fears that, in the coming years, electricity supplies in California and elsewhere will be more abundant, driving prices--and earnings growth--lower. The concern is heightened by the fact that several of the power companies are planning to build new, more efficient electricity plants.

“The fear is the forward curve [for prices] looks bad and, with all of these plants coming on line, that there’s no way the profit margins will be there in two to three years,” said Craig Shere, an analyst with Standard & Poor’s in New York.

“That’s in addition to the California hubbub” regarding “potential draconian moves by California politicians” to cap power prices, “and on top of that you’ve got the fact that power prices have fallen quite a bit over the past couple of months,” Shere said.

But while all of that is bearish for the stocks today, Shere and others maintain that many of the stocks are “buys.”

Eassey of Merrill Lynch said he sees the companies’ earnings-per-share growth rates “remaining strongly intact”, and with the stocks having fallen “we would be aggressively building positions” in the shares.

However, on Wednesday, Reliant appeared to be the first major power supplier to warn of lower earnings for 2002. The Houston-based company said its regulated utility and pipeline unit won’t meet profit forecasts as Texas opens its retail electricity market to competition. Its shares dived $5.49, or 13%, to close at $37.50 on the New York Stock Exchange.

S&P;’s Shere has “buy” ratings on Dynegy, Mirant Corp. and a few others as he expects the stocks “will rebound to new highs, and that many of these concerns” about potentially negative political and economic trends “are unfounded.”

And international markets, especially Europe and the Far East, represent tremendous growth prospects for many of the companies, he said. “AES is a good example, because two-thirds of its revenue already comes from outside the U.S.,” Shere said.

Christensen of FAC/Equities isn’t as sanguine, however. “Until there’s a constructive view” between the politicians and the companies “about the growth of energy and its infrastructure in California, the P/E [price-to-earnings] multiples of these stocks are going to remain under pressure.”