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Generator asset sales key to investor sentiment, absent power price recovery


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Generator asset sales key to investor sentiment, absent power price recovery

For independent power producers, prolonged weakness in stock prices and power prices has put management on the spot to lower leverage using available means, including asset sales, barring any recovery in power prices led by positive volatility in the coming months.

Having collectively underperformed the S&P 500 by nearly 24% year-to-date as of close of trading Dec. 8, Calpine Corp., Dynegy Inc. and NRG Energy Inc. share prices have failed to experience any significant uplift heading into the end of 2016, despite the repeated overtures by management around a commitment to debt reduction, and a growing focus on retail platforms.

Speculating at possible value drivers around independent power producer, or IPP, stocks, analysts pointed to asset sales and possible seasonal volatility in power prices as two catalysts that could improve sentiment around merchant names.

"We believe the best way for IPP managements to enhance their equity value is by being more aggressive on their asset monetization plans," SunTrust Robinson Humphrey analyst Ali Agha said on Dec. 8. "There is an appetite among regulated utilities and private equity firms to purchase IPP assets."

Interest from regulated utilities would likely be limited to assets that could qualify for entry into a regulated rate base, Agha said separately, like Calpine's planned sale of the 586-MW, gas-fired South Point Energy Center to Berkshire Hathaway Energy utility NV Energy Inc.

As for private equity, the secular downward trend in power prices driven by weaker spark spreads in key markets like PJM Interconnection LLC, as well as abundant wind generation in Texas, are likely keep private equity outfits interested in merchant assets, which continue to fetch premiums.

"As long as there is an expectation that we are at the bottom or trough of the price cycle, I think private equity interest could continue," Agha noted, suggesting that stock prices of the three IPPs trade at a roughly 70% discount relative to their net asset value based on recent private transactions.

"If you start to see more M&A transactions take place on a more frequent basis, you could see some change in that discount," Agha added.

Another path outlined by analysts includes a more conventional market reflex driven by colder weather, heightened demand for natural gas on the East coast and the possibility for marginal increases in power demand and added volatility in Electric Reliability Council of Texas Inc.

"We are hopeful for a cold winter in the Midwest and MidAtlantic as it could introduce some volatility into forward power curves, at least for the winter seasons," Macquarie Capital (USA) Inc. analyst Angie Storozynski said on Dec. 7, suggesting that even under current conditions, new build projects in PJM could slow down and thus ease the downward pressure on existing merchant assets.

Citi Research held their 'buy' rating on Calpine shares, underpinned by a perceived aberration in power price volatility in ERCOT, which analysts calculated at $11/MWh in pricing volatility year-to-date in 2016, compared to recent years when volatility has eclipsed $20/MWh.

"We think low volatility in 2016 was more a one-time event driven partly by above normal wind generation in the summer,” Citi analyst Praful Mehta said on Dec. 7. “Moreover, with recovery of gas prices, gas will get back on the margin and increase volatility of power prices.”