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AGA/EEI Accounting Leadership Conference
The Good Times May Be Ending!
EQUITY RESEARCH
Daniel F. Ford, CFA+1 212 526 0836
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Customers of Barclays Capital in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-253-4626 to request a copy of this research.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 35.
Power & Utilities
June 2009
2
2H’09: The Power & Utilities Landscape
What the Market is Focused On:
3
2H’09 – What Now?
Source: FactSet, Barclays Capital estimates
The recession, which began in 4Q07, caused an unwind of the long power/short regulated utility trade. Power regained leadership in April. Two questions remain: Is it too late to buy defensive regulated utilities?Is it too early to buy power?
Cumulative Relative Performance vs. UTY (2001 - Present)
-30.0%
-20.0%
-10.0%
0.0%
10.0%20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
May-092Q082Q072Q062Q052Q042Q032Q022Q01
Regulated Power
Power leadsUteslead
Power leads?
4
Too Late For Utilities? Is the Recession Over?
Source: FactSet, Barclays Capital estimates
Historically, regulated utilities begin to outperform six months prior to, and then throughout, recessions. Barclays Capital believes the recession ends in 3Q09.
2.4%1.5% 1.9%
3.4%
5.5%
-5.4%
-6.7%
-8.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
6 Months Prior 3 Months Prior 3 Months In 6 Months In Span ofRecession
3 Months After 6 Months After 12 MonthsAfter
Absolute Relative to S&P 500
Utility Performance Through Recessions
5
Historically, the market has paid up for quality going into, and in the early stages of, a recessionLower quality, smaller names usually outperform as we emerge
What Regulated Utilities Work Late in Recessions?
Note: Higher quality includes: DUK, ED, NST, PCG, PGN, SO, WEC, XELLower quality includes: LNT, AEP, CMS, DPL, DTE, HE, NI, NU, NVE, PNM, PNW, POM, POR, SRE, TE, WR
Includes all US recessions since 1970.
Source: Factset, Barclays Capital.
Historical Relative Performance, Lower Quality vs. Higher Quality
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
6 Mo. Prior to 3Mo. Prior
3 Mo. Prior to 3Mo. In
3 Mo. In to 6Mo. In
6 Mo. In toTrough
Trough to 3Months After
Relative Performance: Lower Quality vs. Higher Quality
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
5/31
/08
6/30
/08
7/31
/08
8/30
/08
9/30
/08
10/3
1/08
11/3
0/08
12/3
1/08
1/31
/09
2/28
/29
3/31
/09
4/24
/09
5/28
/09
6
Regulated Utilities – Recommendation Now
Market performance has been diverging from the “big cap safety” trade for the last three months
Historically, changes in leadership tend to occur as we emerge from recessionsA similar theme may be playing out now
Lower quality names now more attractively valued based on:Earnings multiplesP/B ratiosDividend yields
Note: Higher quality includes: DUK, ED, NST, PCG, PGN, SO, WEC, XELLower quality includes: LNT, AEP, CMS, DPL, DTE, HE, NI, NU, NVE, PNM, PNW, POM, POR, SRE, TE, WR
Group 2010 P/E Current P/BV Dividend Yield Payout RatioHigher Quality 10.9x 1.4x 5.6% 64.8%Lower Quality 9.5x 1.1x 5.9% 57.7%
Source: FactSet, Barclays Capital estimates.
7
Is It Too Early for Power?
We believe the inflection in two key Power catalysts have taken place.Natural Gas prices have likely bottomedHigh yield credit spreads have likely bottomed
Significant uncertainty remains in two other drivers needed to confirm a sustainable recoverySupply/demand conditions still deterioratingPolicy uncertainty still great for polluters
8
Gas Bottoms by Summer’s End; Surprise Bias for 2010/11 Is Up
56
57
58
59
60
61
62
63
64
65
2006 2007 2008 2009 2010
Supply Demand
US Aggregate Supply and Demand (Bcf/d)
y/y change
2008
Bcf/d
y/y change
2009
Bcf/d
y/y change
2010
Bcf/d
US Supply 3.99 0.29 -3.58
Canadian exports to
US
-0.81 -1.13 -0.50
LNG -1.15 1.18 1.08
Total Supply
1.80 0.43 -3.00
Total demand
0.35 -1.53 0.32
Price outlook $8.90 $4.10 $6.50
Source: EIA, Barclays Capital
9
Source: LehmanLive, Barclays Capital.
High Yield Credit Has Improved Dramatically – Leading IPP Higher
Average CDS Spreads by Grouping
0
100
200
300
400
500
600
700
800
900
1000
1100
Se
p-0
3
No
v-0
3
Jan
-04
Ma
r-0
4
Ma
y-0
4
Jul-
04
Se
p-0
4
No
v-0
4
Jan
-05
Ma
r-0
5
Ma
y-0
5
Jul-
05
Se
p-0
5
No
v-0
5
Jan
-06
Ma
r-0
6
Ma
y-0
6
Jul-
06
Se
p-0
6
No
v-0
6
Jan
-07
Ma
r-0
7
Ma
y-0
7
Jul-
07
Se
p-0
7
No
v-0
7
Jan
-08
Ma
r-0
8
Ma
y-0
8
Jul-
08
Se
p-0
8
No
v-0
8
Jan
-09
Ma
r-0
9
Ma
y-0
9
High Grade Power Low Grade Power Regulated
10
Industrial Load Still a Challenge
Source: EIA, EEI, Barclays Capital
Industrial Capacity
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
J-73 J-76 J-79 J-82 J-85 J-88 J-91 J-94 J-97 J-00 J-03 J-06 J-09 J-12 J-15 J-18 J-21
GW
s
Note A
Note B
Note A: 23 years (1999-2022) until return to all-time peakNote B: 11 years (2007-2018) until reutrn to pre-recession peak
Reserve Margin Changes
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Underbuilt below 15%
Overbuilt above 20%
Recession impact
11
Possible Impacts of Federal Cap and Trade – Waxman / Markey
Impacts of Federal Carbon RegulationTotal Transition Year Open Estimated Current Estimated
Ticker 2013 Total Production - Unregulated Mkts, by Fuel (MMWh) (M Tons) Upside Upside Per Share 5/29/2009 % of PriceCoal Gas / Oil Nuclear Hydro CO2 Produced EPS EPS Open NPV Stock Price Open NPV
EXC 10.8 2.3 138.0 1.0 12.9 $1.39 $1.39 $8.90 $48.16 18.5%CPN 0.0 86.1 0.0 5.7 35.7 ($0.29) $0.38 $2.43 $13.72 17.7%FE 57.2 2.7 28.4 0.6 63.2 $0.87 $0.87 $5.55 $37.56 14.8%
DYN 23.7 8.5 0.0 0.0 30.0 ($0.14) $0.05 $0.30 $2.12 14.1%CEG 19.7 0.3 16.3 0.0 21.4 $0.60 $0.60 $3.82 $27.23 14.0%ETR 0.0 0.0 40.9 0.0 0.0 $1.44 $1.44 $9.19 $74.19 12.4%NRG 43.6 9.9 9.3 0.0 52.2 $0.38 $0.38 $2.41 $22.22 10.9%PEG 13.3 30.2 28.8 1.8 29.9 $0.50 $0.50 $3.17 $31.36 10.1%PPL 28.6 2.5 16.4 3.1 32.2 $0.40 $0.40 $2.58 $32.29 8.0%RRI 22.6 4.8 0.0 0.0 26.9 $0.07 $0.07 $0.42 $5.70 7.3%ORA 0.0 0.0 0.0 3.2 0.0 $0.05 $0.45 $2.89 $40.00 7.2%MIR 16.3 11.0 0.0 0.0 23.2 $0.17 $0.17 $1.06 $15.60 6.8%AEP 77.4 0.2 0.0 0.2 83.7 $0.25 $0.25 $1.63 $26.22 6.2%AEE 30.2 0.7 0.0 0.0 33.0 $0.18 $0.18 $1.13 $23.14 4.9%
D 21.9 3.6 16.8 0.0 25.6 $0.21 $0.21 $1.35 $31.48 4.3%EIX 41.2 6.2 0.0 0.0 47.7 $0.20 $0.20 $1.25 $29.13 4.3%AYE 31.9 0.7 0.0 0.9 40.0 ($0.92) $0.16 $1.05 $24.89 4.2%DUK 71.0 6.9 0.0 0.4 80.2 $0.08 $0.08 $0.52 $14.13 3.7%FPL 0.3 0.0 8.3 3.6 0.3 $0.18 $0.18 $1.15 $56.24 2.0%PNM 2.1 0.0 0.0 0.0 2.3 $0.02 $0.02 $0.15 $9.25 1.6%POM 1.8 3.5 0.0 0.0 3.8 $0.03 $0.03 $0.19 $12.96 1.4%SRE 0.0 11.9 0.0 0.0 6.1 $0.06 $0.06 $0.38 $45.39 0.8%DPL 0.0 0.1 0.0 0.0 0.0 $0.00 $0.00 $0.01 $21.70 0.0%AES 8.8 0.0 0.0 0.0 9.6 ($0.00) ($0.00) ($0.01) $9.77 -0.1%
Total 522.4 192.0 303.2 20.5 659.9
Notes: Renewable energy sources such as geothermal, solar and wind are excluded to avoid double-counting of PTC benefitsTransitional effects reflect hedges currently in place, while "Open" figures ignore extant contracts
Allowance Cost ($/ton) $10.00Proportion Auctioned 60%
2010 Integrated Multiple 8.5xDiscount Factor 10%
Years Discounted 3Proportion NPV Included 100%
Source: Barclays Capital estimates
12
Spreads Are Contracting, but Nuclear Fares Best
($10.00)
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
2007 2008 2009 2010 2011 2012 2013 2014
Spark Spread Dark Spread Quark Spread
2007 2008 2009 2010 2011 2012 2013 2014Spark Spread $13.22 $15.00 $7.44 $7.36 $7.22 $9.23 $10.96 $11.41Dark Spread $19.57 $16.37 ($1.78) $14.09 $23.41 $26.12 $31.34 $40.04Quark Spread $43.71 $54.41 $25.87 $40.51 $43.78 $48.71 $53.57 $53.90Source: Barclays Capital estimates.
CEG, CVA, D, ETR, EXC, FPL, ORA, PEG
AEP, AES, AYE, DYN, EIX, FE, MIR, PPL, RRI
CPN
13
Regulated Utilities
Longer Term Fundamentals
14
Trading Rally Near Term; Challenge Long Term
We believe longer-term capital expenditure cycle will likely lead to Regulated Utility performance differentiation based on strength of balance sheet, quality of regulatory jurisdiction and focus of strategy.
15
Long Term: Capital Cycle May Have Negative Consequences
A robust capital spending program for regulated utilities is underway and will likely introduce multi-year cash flow issues.
We believe the need for external capital funding is likely to stay at a heightened level.
Rate Case frequency and sizing of requests should increase, which will likely cause a squeeze in returns and increase problems with lag.
Strong balance sheets, favorable regulatory jurisdictions and focused strategy will likely outperform, in our view.
16
CapEx and Rate Base Growing
Environmental compliance, renewables and transmission spending appear to be driving investment.
Spending will likely remain elevated into the next decade.
Capital Expenditure ProjectionsShareholder Owned Regulated Utilities($ in millions)
2006 2007 2008 2009E 2010E 2011E 2012E 2013E TotalMaintenance / Distribution $28,528 $32,120 $33,161 $35,917 $37,536 $167,263Generation 16,087 13,916 13,356 12,741 12,408 $68,508Environmental 5,081 3,400 3,653 2,063 2,123 $16,320Transmission 8,597 10,967 12,372 13,004 11,148 $56,088
Total $46,827 $55,258 $63,154 $58,293 $60,403 $62,542 $63,726 $63,214 $308,179Y/Y Increase 18.0% 14.3% -7.7% 3.6% 3.5% 1.9% -0.8%
Note: Figures reflect Barclays Capital utility coverage scaled up by a factor of 1.08x to reflect companies not in Barclays coverage universe.
Source: Company filings, Barclays Capital estimates.
Rate Base Growth ProjectionsShareholder Owned Regulated Utilities($ in millions)
2006 2007 2008 2009E 2010E 2011E 2012ERate Base $435,724 $416,406 $452,887 $492,211 $524,342 $556,167 $587,629Capital Expenditures $55,258 $63,154 $58,293 $60,403 $62,542 $63,726D&A $23,527 $23,831 $26,162 $28,578 $31,080 $33,629Rate Base Additions $31,731 $39,324 $32,131 $31,825 $31,462 $30,097Rate Base Growth % 7.3% 9.4% 7.1% 6.5% 6.0% 5.4%Source: Company filings, Edison Electric Institute, Barclays Capital estimates.
17
Negative FCF Will Likely Require Heightened Debt/Equity Funding
Assuming mild near-term growth in CFO and 3% growth in dividends, FCF should stay negative through 2012. As balance sheets are stretched, equity issuance will likely return to the fore.
Capital and Cash Flow ProjectionsShareholder Owned Regulated Utilities($ in millions)
2008E 2009E 2010E 2011E 2012E 2013EDebt $320,507 $337,552 $355,950 $374,048 $389,529 $401,624Equity $252,380 $267,311 $281,743 $296,677 $311,511 $325,498
Total Capital $572,887 $604,863 $637,693 $670,725 $701,040 $727,122Equity % 44% 44% 44% 44% 44% 45%
Cash from Operations $45,550 $46,730 $48,197 $51,148 $56,013 $59,853CapEx ($63,335) ($58,251) ($59,653) ($61,882) ($63,120) ($62,360)Dividends ($10,879) ($11,205) ($11,541) ($11,888) ($12,244) ($12,611)Free Cash, Post Div. ($28,664) ($22,726) ($22,998) ($22,622) ($19,352) ($15,118)
Debt Issued (Retired) $22,931 $17,045 $18,399 $18,097 $15,482 $12,095Equity Issued (Retired) $5,733 $5,682 $4,600 $4,524 $3,870 $3,024
Assumptions / DriversRetained Earnings Growth 9.5% 7.1% 6.3% 5.9% 5.3% 0.0%Cash from Operations Change 2.6% 3.1% 6.1% 9.5% 6.9%CapEx Change 14.4% -8.0% 2.4% 3.7% 2.0% -1.2%Dividend Growth 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%Proportion Returned to (Drawn from) Debt 80% 75% 80% 80% 80% 80%Proportion Returned to (Drawn from) Equity 20% 25% 20% 20% 20% 20%
Note: Figures reflect Barclays Capital utility coverage scaled up by a factor of 1.08x to reflect companies not in Barclays coverage universe.
Source: Edison Electric Institute, FactSet, Barclays Capital.
18
Regulated Utility Balance Sheets Are Relatively Weak
S&P Long-Term Debt Ratings1970 1980 1990 2000 2007
AAA 14.0% 0.0% 0.0% 0.0% 0.1%AA 65.6% 32.9% 27.4% 14.1% 1.7%A 17.4% 43.8% 34.2% 54.6% 28.8%BBB 3.0% 21.9% 34.3% 26.6% 42.4%BB or lower 0.0% 1.4% 4.1% 4.7% 27.1%
Proportion by GroupingAAA & AA 79.6% 32.9% 27.4% 14.1% 1.8%BBB or lower 3.0% 23.3% 38.4% 31.3% 69.4%Source: America's Electric Utilities: Past, Present, & Future, 8th Edition,
by Hyman, Robert C..; Andrew S.; and Leonard S. Table 37.5, page 432, Barclays Capital estimates.
Balance sheets are not nearly as strong as at the beginning of the last capital cycle, in our analysis.
19
Pricing Increases Will Likely Cause Consumer Level Inflation
Source: Bureau of Economic Analysis, Energy Information Administration, Barclays Capital estimates.
% of Consumer Wallet Spent on Electricity
1.00%
1.10%
1.20%
1.30%
1.40%
1.50%
1.60%
1.70%
1.80%
1.90%
2.00%
2.10%
2.20%
2.30%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Estimates
1.97% with $30 / ton CO2
1.76% with $10 / ton CO2
20
Short-Term Inflation Reprieve May Lead to Better Regulatory Outcomes
Note: Figures reflect Barclays Capital utility coverage scaled up by a factor of 1.08x to reflect companies not in the Barclays Capital coverage universe. Units are in millionsSource: FactSet and Barclays Capital estimates.
Capital requirements should increase the number of rate cases, causing greater lag.
Longer term, outcomes still likely impacted by less rosy inflation scenario
ROE Spread vs. Pre-Dividend FCF
($20,000)
($15,000)
($10,000)
($5,000)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
E
2011
E
2013
E
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Pre-Div FCFin 2008 $'s
Actual less Allowed ROE
zero spread
21
…While the Market Will Likely Demand Higher Returns
Note: Figures reflect Barclays Capital utility coverage scaled up by a factor of 1.08x to reflect companies not in the Barclays Capital coverage universe and units are in millionsSource: FactSet and Barclays Capital estimates
Due to the myriad risks resulting from a capital cycle, a higher risk premium should apply.
Free Cash versus Equity Risk Premium
($20,000)
($15,000)
($10,000)
($5,000)
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
E
2011
E
2013
E
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Pre-Div FCF in 2008 $'s
Implied Equity Risk Premium
XEL Equity: 487 bps risk prem. to 10-Yr. (9/9/08)
POM Equity: 921 bps risk prem. to 10-Yr. (11/6/08) PGN Equity: 736 bps risk prem. to 10-Yr. (1/7/09)
POR Equity: 947 bps risk prem. to 10-Yr. (3/5/09)
NU Equity: 620 bps risk prem. to 10-Yr. (3/16/09)
AEP Equity: 921 bps risk prem. to 10-Yr. (4/1/09)
22
Quality of Regulation a Likely Differentiator
Below are the results of our quantitative and qualitative ranking of state and federal regulators:
Tier 1 Tier 2 Tier 3 Tier 4 Tier 5Lowest Cost Highest Cost
Of Capital of Capital
ArkansasFERC Delaware
District of ColumbiaHawaiiIllinois
Alabama Indiana LouisianaCalifornia Kansas MaineColorado Massachusetts MississippiGeorgia Oregon Missouri Arizona
Florida Michigan South Carolina Nevada ConnecticutIdaho Minnesota Utah New Hampshire MarylandIowa North Dakota Virginia New Jersey Montana
Kentucky Ohio Washington Pennsylvania New MexicoNorth Carolina Oklahoma West Virginia South Dakota New York
Wyoming Texas Wisconsin Vermont Rhode IslandSource: Barclays Capital, Regulatory Research Associates.
23
The Virtuous Circle
Money should flow to the best locations – we believe companies with highest customer satisfaction results also generally enjoy the best relative values versus the group.
Relative Price-Book Valuation of Electric Utilities by Region(1986-Current, weekly)
Price/Book RelativeRegion Ratio P/B ValueSoutheast 1.67x 12.0%Mid-Atlantic 1.68x 11.6%Midwest 1.67x 11.4%Plains 1.52x 3.1%West 1.50x 1.3%New England 1.33x -10.6%Southwest 1.07x -28.8%Source: FactSet, Barclays Capital.
Customer Satisfaction by QuintileState Ranking Avg. JD Power Ranking
Quintiles (out of 1,000)1st Quintile 7042nd Quintile 6843rd Quintile 6664th Quintile 6615th Quintile 655
Source: JD Power & Associates, Barclays Capital
24
Power
Longer Term Power Conditions
25
Pause and Effect – Is it Too Early for Power?
Three of five drivers to Power bull market taking a breather
Three drivers in hibernation or in decline: Marginal fuel rates for coal Supply/demand balance Direction of new entry costs
Two showing signs of recovery: Marginal fuel rates for natural gas Government policy on pollutants/CO2
26
The Fundamental Forecast
Forecast shows heat rate declines in 2008-2010, before rising through end of forecast Weak US economy prime driver to forecast change Higher than previously anticipated wind additions exacerbate situation New reserve margin and fuels outlook skew leaders and laggards
New power plants needed beyond 2015 versus 2010/12 previously Spark spread negatively impacted Midwest region looks challenging for some time
Relative strong outlook for natural gas versus coal price through 2011 Expands dark spread
Quark spread holds up well in our outlook
27
US Economy in Recession Electrically
Source: Edison Electric Institute.
Demand weakened in most regions through May 09 – soft economy, cost inflation combine to curb growth.
Weather Adj. Output Changes - Quarterly by Region
-6.5%
-4.5%
-2.5%
-0.5%
1.5%
3.5%
5.5%
7.5%
9.5%
US
Tot
al
Sou
th C
entr
al
Roc
ky M
tn
Sou
th E
ast
New
Eng
land
Mid
-Atla
ntic
Cen
tral
Ind
Wes
t C
entr
al
Pac
ific
N'W
est
Pac
ific
S'W
est
Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 (2 mo.)
28
Natural Gas Outlook
Natural Gas Forward Estimates
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
2009 2010 2011 2012 2013
NYMEX Strip Barcap Power & Utilities Research Market Implied (Spark Spread Quarterly)
2009 2010 2011 2012 2013NYMEX Strip $4.29 $6.15 $7.07 $7.35 $7.44Barcap Power & Utilities Research $4.10 $6.50 $7.00 $7.50 $8.00Market Implied (Spark Spread Quarterly) $6.91 $6.91 $6.91 $6.91 $6.91Source: Bloomberg, Barclays Capital estimates.
29
Regional Differences in Spread Forecasts
ERCOT Spreads
$-
$10.00
$20.00
$30.00
$40.00
$50.00
2009 2010 2011
($/M
Wh
)
Spark Dark Quark
PJM Spreads
$(15.00)
$-
$15.00
$30.00
$45.00
$60.00
2009 2010 2011
($/M
Wh
)
Spark Dark Quark
NI Hub Spreads
$(15.00)
$-
$15.00
$30.00
2009 2010 2011
($/M
Wh
)
Spark Dark Quark
NEPOOL Spreads
$-
$15.00
$30.00
$45.00
$60.00
2009 2010 2011
($/M
Wh
)
Spark Dark Quark
Source: Bloomberg, Barclays Capital estimates.
30
Power Worth Less
Open EBITDA at 7.9x, above mid-cycle 7.1x Open EBITDA below hedged EBITDA Coal generators have exposure to Dark Spread compression and environmental
policy shift
DCF of plant margins shows 17.6% decline in values from September 2008 update Peaker values down most (31% on average) Coal values not far behind (down 27% on average) Nuclear and renewables down 11-12%
31
Asset Value Summary
Source: Barclays Capital estimates.
Per KW of Capacity Valuations at 2/2009
% ChangeFuel 1st 2nd 3rd 4th Average Since 9/08Nuclear $3,205 $2,769 $2,383 $2,079 $2,609 -11.3%Coal $1,119 $1,013 $611 $115 $715 -27.4%Load Following $613 $452 $352 $159 $394 -16.1%Peaker $546 $396 $245 $50 $309 -30.7%
Hydro $3,299 $2,154 $1,946 $242 $1,910 -3.0%Geothermal $3,293 $2,027 $1,054 $551 $1,731 -18.5%Wind $1,751 $1,431 $1,157 $770 $1,277 -15.9%
Per KW of Capacity Valuations at 9/2008
Fuel 1st 2nd 3rd 4th AverageNuclear $3,591 $3,109 $2,740 $2,323 $2,941Coal $2,044 $1,212 $620 $61 $984Load Following $880 $410 $385 $205 $470Peaker $734 $588 $346 $118 $447
Hydro $3,182 $2,300 $1,857 $539 $1,969Geothermal $3,848 $2,410 $1,426 $809 $2,123Wind $2,134 $1,584 $1,396 $962 $1,519
Quartile
Quartile
32
New Build Costs vs. Forward Prices
Source: Barclays Capital estimates, Moody’s, SNL Financial.
Excluding PTC / ITC / REC Including PTC / ITC / REC
Plant TypeBarclays Price
Forecast ($/MWh)Required Market
Price ($/MWh)% Premium to BCS Forecast
Required Market Price ($/MWh)
% Premium to BCS Forecast
Geothermal $68.66 $111.54 62% $65.54 -5%Wind $63.16 $120.07 90% $74.07 17%Nuclear $64.55 $180.81 180% $105.34 63%CCGT $68.66 $110.70 61% $110.70 61%Coal $68.66 $139.06 103% $139.06 103%Solar $86.38 $327.58 279% $185.40 115%
Market prices do not appear high enough to give new build incentives, in our view; weak heat rate forecasts suggest this condition will likely persist in the medium term.
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Solar & Wind Resource Potential
Source: U.S. Department of Energy, AWEA, Barclays Capital
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New Transmission Lines Required
Source: U.S. Department of Energy, AWEA, Barclays Capital
2
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Analyst Certification and Important Disclosures
Analyst Certification:I, Daniel Ford, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. Important DisclosuresBarclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Customers of Barclays Capital in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-253-4626 to request a copy of this research.
Investors should consider this communication as only a single factor in making their investment decision.
The analysts responsible for preparing this report have received compensation based upon various factors including the Firm's total revenues, a portion of which is generated by investment banking activities.
For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to the firm's disclosure website at www.lehman.com/disclosures. On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. We have endeavored to provide conflicts of interest disclosures on a combined basis. All ratings and price targets prior to the acquisition date relate to coverage under Lehman Brothers Inc.
Other Material Conflicts:Dynegy: Barclays Capital is acting as financial advisor to Dynegy on the potential sale of two non-core power plants.Exelon: Barclays Capital is acting as financial advisor to Exelon Corporation (EXC) in its offer to acquire NRG Energy Inc (NRG).
Guide to Barclays Capital Fundamental Equity Research Rating SystemOur coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies that comprise a particular sector coverage universe, please go to www.lehman.com/disclosures.In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
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Important Disclosures (Cont’d)Stock Rating1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company.Sector View1-Positive - sector coverage universe fundamentals are improving. 2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals are deteriorating.Distribution of Ratings:Barclays Capital Equity Research has 1217 companies under coverage.
36% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 39% of companies with this rating are investment banking clients of the Firm.
48% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures,is classified as a Hold rating, 32% of companies with this rating are investment banking clients of the Firm.
14% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 23% of companies with this rating are investment banking clients of the Firm.
Barclays Capital offices involved in the production of Equity Research:
LondonBarclays Capital, the investment banking division of Barclays Bank Plc (Barclays Capital, London)
New YorkBarclays Capital Inc. (BCI, New York)
TokyoBarclays Capital Japan Limited (BCJL, Tokyo)
São Paulo Banco Barclays S.A. (BBSA, São Paulo)
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Important Disclosures (Cont’d)This publication has been prepared by Barclays Capital; the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. This publication is provided to you for information purposes only. Prices shown in this publication are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. 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