ELECTRICITY

Sour year not ending quietly for NRG, other independent producers

A year to forget for U.S. independent power producers is almost over, but 2015 isn't going out on a quiet note for the IPP sector.

Four companies in that realm -- Calpine Corp., NRG Energy Inc., Dynegy Inc. and Talen Energy Corp. -- have seen their share prices take continued hits in recent weeks.

A stock plunge at NRG is viewed as a major reason David Crane -- a high-profile figure in the energy world -- stepped down abruptly as the company's CEO last week (EnergyWire, Dec. 4). And, amid a variety of shaky market signals, observers are left to wonder just when IPP stocks might hop on a road to recovery.

Last Friday was particularly brutal as NRG and Dynegy Inc. both tumbled about 18 percent, according to Yahoo Finance. That followed significant drops for both last Wednesday -- the day before Crane's departure was announced.

Even with gains last Thursday and early this week, NRG shares after regular trading yesterday still were down about 63 percent compared with the end of 2014. Dynegy plunged 62 percent in that time. Calpine dropped 42 percent. Talen tumbled about 59 percent from the end of July through yesterday after beginning trading earlier this year.

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The four companies saw their combined market capitalization fall to less than $10 billion, Greg Gordon of Evercore ISI noted this week in a video update.

"They're courting irrelevance," Gordon said.

Questions about independent producers fester at a pivotal time in the power sector, as states and companies contemplate looming regulations such as U.S. EPA's Clean Power Plan. That plan seeks to reduce carbon dioxide emissions from power plants, and is being challenged by more than two dozen states.

Some companies, such as Calpine and NRG, have expressed support for cutting carbon emissions. Calpine made a point of noting the role its natural gas-fired power plants could play. Yet the electric industry continues to have questions about the carbon rule's future effects on fossil fuel-based generation, especially coal.

A 'litany' of factors

The four IPPs have different generation mixes and rely on a variety of fuels, but significant coal-fired holdings are in place at Dynegy, NRG and Talen.

Independent producers also must cope with and plan for market swings outside of state regulatory processes that can support traditional utilities.

UBS Securities LLC, in a report last week, said a "litany" of factors has put pressure on the IPP set, such as updates from the Electric Reliability Council of Texas (ERCOT) and PJM Interconnection LLC.

ERCOT issued an outlook last week showing sufficient reserve margins over a 10-year period, though environmental regulations could alter projected numbers. And UBS said a draft load forecast released recently for the PJM region was "particularly weak."

UBS also mentioned Ohio, where Dynegy has said a deal between regulatory staff and FirstEnergy Corp. could distort the power market. Other issues for IPPs include a discussion of extending renewable subsidies, weak prices on assets, and a downward slide for power and gas prices, according to UBS.

The firm said it perceived "limited confidence in the sector from investors keen to avoid" near-term pressure on commodities. UBS also described rising perceptions of structural issues tied to potential renewable projects, as well as the effects of possible re-regulation of certain power assets.

"The reality is managements need to work through the commodity cycle," Julien Dumoulin-Smith, an analyst with UBS, said in an interview. "This is ... a particularly steep downward cycle on natural gas expectations."

Dumoulin-Smith said companies need to be conservative in making sure they get through the cycle, noting talk of paying down debt. It will be interesting, he said, to see to what extent companies may need to follow through on share buybacks.

Looking ahead, Dumoulin-Smith said a back-to-basics focus may be used at power companies. The choice of Mauricio Gutierrez, who had been chief operating officer at NRG, as that company's new CEO would seem in keeping with that view.

Evercore, in its own report this week on merchant power, said: "The fundamental question is whether or not depressed power market conditions are cyclical or secular."

Hoping for better conditions

The firm went on to say near-term catalysts look to be in short supply.

"We have to wait until 2016 for decisions regarding capital allocation (debt reduction, share repurchases) which could be a source of differentiation, regulatory outcomes, a re-assessment of power market fundamentals, and the next round of capacity auctions," Evercore said, adding that further consolidation could happen.

The IPPs declined to comment or didn't provide a statement when asked this week about their stock prices and outlooks. But they're familiar with outlining strengths to investors as well as reasons market conditions could improve.

Calpine, during an earnings call in October, suggested some generators in ERCOT's region might face retirements, and the company talked of potential upside in the future despite a lower stock price.

"When the dust settles and the market returns to a more considered approach of valuing a company based on market fundamentals and that company's position within the market, we expect these factors will distinguish the Calpine value proposition," Calpine CEO Thad Hill said.

Talen CEO Paul Farr, in a November release, said third-quarter results excluding certain impairment charges showed "superior execution in our operations and business strategy." Also last month, Dynegy CEO Robert Flexon said in prepared remarks that his company has worked to boost efficiency, and another executive noted that certain U.S. generating facilities were expected to retire.

At NRG, Crane sought to diversify the company through investments in renewables, retail electricity and emerging businesses. Questions lingered about the focus as NRG's stock fell.

In September, NRG announced a "reset" that included plans for a "GreenCo" to house operations such as distributed solar for homes and businesses. NRG may sell a significant stake in GreenCo.

Fast forward to last week, which Travis Miller, director of utilities research at Morningstar Inc., called "wild" for NRG as the market sought to digest a management change and recently updated projections for ERCOT and PJM.

"When you look at the changing outlook for power markets" in two important regions, Miller said, "that in itself is a key fundamental driver. And on top of that, you have the CEO resigning, effective immediately."

For some IPP investors, turning the page to 2016 probably can't come soon enough.

Twitter: @edward_klumpEmail: eklump@eenews.net

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