Deutsche Banc Picks Top 2001 Power Firms; Mergers to Continue
Citing a 34% average increase on year-to-date share prices
within the U.S. electric power industry, Deutsche Banc Alex. Brown
analyst James Dobson initiated a watch of 18 generation and 15
distribution companies in the firm's U.S Electric Power Industry
report last week. The analyst and his associates also released a
list of likely takeover candidates within the industry, and which
energy companies' subsidiaries are ripe for initial public
offerings (IPO) in 2001.
"The electric power sector has been a very strong performer year
to date in 2000 as a result of the recognition of the shortage of
generating capacity, improving fundamentals, rising electricity
prices and concerns about the broad market, which has bred a
defensive bias in the marketplace," the firm stated.
Of the 33 companies included in the coverage group, Dobson
recommended AES Corp., Calpine Corp., Exelon Corp. and Reliant
Energy as "strong buys," and Allegheny Energy, Constellation
Energy, CMS Energy and UtiliCorp United as "buys" among generators.
Dobson also tapped El Paso Electric and Niagara Mohawk as "buys"
among distributor companies.
Deutsche Banc divided the electric power industry into generator
and distributor sub-sectors because generators are currently
outperforming distributors in 2000. Dobson recommends "selective
exposure" to the industry because the infrastructure is still
developing as the fundamentals of the sector continue to evolve and
improve, particularly for generators. He expects that the positive
momentum in the group of selected companies will continue.
"In our view, the generators over the next few years stand to
realize significant earnings growth through the additions of new
generating capacity and the stability of electricity pricing," said
Dobson. "On the other hand, the distributors face the challenge of
the uncertainty of deregulation, the potential for market share
losses and the risk of spiking prices in the near to intermediate
term. However, the distributors should benefit in the long term
from the capacity additions, which will likely stabilize or reduce
With over 20 states passing electricity deregulation legislation
already, the analyst believes that deregulated marketplaces offers
great opportunities, but believes difficult deregulation
experiences such as the one California is coping with will slow
down electric choice development in 2001 by other states. Still,
positive electric deregulation in states like Pennsylvania and New
Jersey make back-pedaling into full regulation extremely remote,
the firm said.
Due to supply shortages witnessed by California this summer,
Deutsche Banc believes that to build and maintain a 15% reserve
margin nationally, the country has to add over 100,000 MW of new
generating capacity over the next five years. At $550 million per
gigawatt of capacity, the firm estimates that over $50 billion
dollars needs to be invested over the next five years which
analysts believe will lead to a strong return.
"In light of the earnings growth prospects of the generators, we
continue to argue that investors are well advised to overweight the
generators relative to the distributors," the firm said in its
report. "With generators trading at around 14 times our 2001
estimates and distributors trading at around 11 times, we believe
the absolute and relative valuation case continues to argue in
favor of the generators. However, we would either buy the highest
quality names with additional acceleration or upside surprise
potential or try to buy the names that represent better value in
the generation sector, but that possess the potential to create
additional value prospectively." Dobson expects earnings growth
over the next few years to average approximately 5% for
distributors, and 15% for generators.
The firm also expects merger activity to continue at current
speed. With 59 mergers taking place within the electric power
industry since 1995, Deutsche Banc believes further merger activity
in the electric industry is positive and inevitable. The firm
believes the following company's are likely takeover candidates: CH
Energy; Cinergy Corp.; Cleco Corp.; CMS Energy; Conectiv; DPL; El
Paso Electric; Energy East; Nstar; Pinnacle West; Potomac Electric;
SCANA Corp.; Sierra Pacific; UtiliCorp United and WPS Resources.
Deutsche Banc also predicts that the trend of IPOs by
unregulated generation subsidiaries will continue in 2001. After
Southern Co. issued stock in Southern Energy, and Xcel Energy
issued stock in NRG Energy, the firm believes others will attempt
to reap added value by issuing IPOs for their generation
subsidiaries. Constellation Energy and Reliant Energy have already
announced similar IPO plans for early 2001. Other candidates
include: Allegheny Energy; American Electric Power,; Duke Energy;
Edison International; Entergy Corp.; Exelon Corp.; FPL Corp.;
PG&E Corp.; PPL Corp.; Public Service Enterprise Group and