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-----Original Message----- From: *SSSB Utilities Team [mailto:sssbutilteam@imceu.sbi.com] Sent: Tuesday, January 15, 2002 9:16 AM Subject: US Utility Market - Weekly Update SCHRODER SALOMON SMITH BARNEY Our weekly US e-mail product is designed to provide clients with a useful overview of news, valuations, and key energy price data from the US market. This week: * Initiation of coverage on Reliant Resources. * Chart in Section 2. shows US forward spark spreads remain weak. 1. Valuation Multiples Open this pdf to see a comprehensive schedule of valuation multiples for US utility, power trader, merchant generator, and power technology companies. <<USUtils1.pdf<< <<IPR Valuations Table Output.xls<< We provide a summary of US consensus P/E ratios by electric utility strategy below: 2001E P/E 2002E P/E Distribution 12.7x 11.4x Integrated Utilities 13.0x 11.5x Electric Generators 10.6x 8.7x Energy Merchants 13.1x 11.6x Source: I/B/E/S, Schroder Salomon Smith Barney estimates 2. Prices Open this attachment to see current and forward price and spark spreads in the key US power regions where European companies are active. Covered in the charts is the Western US region (COB, Palo Verde, Mid Columbia), the North East (Neepool), and Texas (ERCOT B). <<US Power Prices 14 Jan 02.pdf<< 3. News Highlights * PJM Study Says Single Northeast RTO Too Costly - Tuesday, 15 January The PJM Interconnection has released a preliminary cost/benefit analysis suggesting the costs of joining a single Northeast RTO would outweigh the benefits. In particular, PJM believes it would lose over $690m of generator revenues, production costs and load payments a year. The reports suggests the ISO New England would lose $324m per annum, while ISO New York could save up to $2bn. PJM is expetced to pursue an agreement it has reached with the Midwest ISO to create a single market. As a result, the New England and New York ISOs are expected to pursue an RTO of their own. Source: Platts. * UBS Wins Enron Trading - Friday, 11 January UBS has emerged as the winning bidder for control of Enron's electronic commodity and derivatives trading operations, beating Citigroup and BP. The sale was limited to a 51% stake in a new company called Netco holding the hardward, software and employment conracts. The $13-billion contract book was not included. There is no cash invloved, instead the offer will give Enron one-thirs of any profits from a revived trading operation over the next five years. EnronOnline is expected to be up and running again within weeks. Source: Platts. * Vermont Yankee Sale Under Threat - Friday, 11 January The sale of the 540MW Vermont Yankee plant to Entergy ran into new problems as teh Vermont Department of Public Service recommended new conditions for the sale. In particular, the DPS would want the nuclear plant to continue to sell power to local utilities at negotiated prices after 2012 if its operating license is renewed. Under the existing sales terms Entergy would be free to sell on a merchant basis from 2012. A final decision is expected mid-2002. Source: Platts. Vermont Yankee is part-owned (22.5%) by National Grid USA, the US business of National Grid (NGG.L, 1M, 459p). Until the plant is sold, National Grid USA will continue to share 80% of the revenues and costs with customers through CTCs. The remaining 20% accounts for under 1% of National Grid's total operating profit. * Retail Choice Popular in Texas - Friday, 11 January ERCOT has stated that it has received requests to switch over 34,000 retail electricity customers to new suppliers since it started accepting requests on 17 December 2001, ahead of full retail competition on 1 January 2002. Source: Platts Centrica (CNA.L, 2M, 233p) filed an application in September 2001 with the Public Utility Commission of Texas to be licensed as a retail electric provider (REP) in the state. It sought authority to begin marketing electric service to residential and small commercial customers, and it plans to provide service under the brand names of Republic Power and Energy America. Centrica has held preliminary discussions with potential wholesale power suppliers. Its primary focus will be on key metropolitan areas such as Dallas-Fort Worth, Houston and Corpus Christi. * California AG Sues PG&E - Friday, 11 January California Attorney General has filed a lawsuit seeking $600m-$4bn damages from PG&E Corp. for allegedly violating legal agreements designed to protect utility ratepayers. Source: Platts * New York State Sues Niagara Mohawk/NRG - Thursday, 10 January New York State has filed a lawsuit accusing Niagara Mohawk (NiMo) and NRG of violating the Clean Air Act. The lawsuit refers to two coal-fired plants that NiMo sold to NRG in 1998, Huntley and Dunkirk. It alleges that improvements were made to the plant without upgrading air pollution controls. NRG and NiMo themselves are fighting over who has responsibility for the pollution controls, which could cost $350m. NiMo is suing NRG, saying the responsibility for the controls lies with NRG and was specified in the sales contract. NRG dispute this claim. Both lawsuits are pending. Source: Dow Jones National Grid (NGG.L, 1M, 459p) are currently in the process of acquiring NiMo in a deal expected to close early this year. NiMo has exited from generation over the last few years and is a wires-focused business. * Mirant Triples Cash Reserves - Thursday, 10 January A recent credit rating downgrade to "junk" status by Moody's has forced Mirant to triple the amount of cash it uses to support its trading operations to upto $1bn. Mirant also said that its ability to do long-term structured deals has been affected. However, the company believes it is well positioned to benefit from the demise of Enron. Source: Platts * Peoples to Build 1,200MW Oregon Plant - Tuesday, 8 January Peoples Energy plans to file applications in Oregon to build a 1,200MW merchant CCGT plant. Source: Platts 4. US Research We summarise below relevant research from SSB's US Utilities Team. The full reports can be found on SSSB's GEO (Global Equity Online) service. RELIANT RESOURCES (3H, Current: $15.59, Target: $17.00) - We initiate coverage on Reliant Resources (RRI) with a 3H (Neutral, High Risk) rating and a $17 price target. Reliant Resources is a diversified deregulated energy provider, with businesses including power generation, wholesale trading & marketing, and retail energy. In May of 2001, 20% of Reliant Resources was offered to the public by parent REI-- a full spin is expected during 1Q 2002. Our Neutral rating reflects (1) Reliant Resources' inconsistent track record in their Merchant business & (2) their significant leverage to commodity prices though their fast-growing generation portfolio. Our analysis continues to show depressed forward power prices & spark spreads across the U.S. in 2002/3. We used sum-of-the-parts and adjusted present value analyses to derive our $17 price target for RRI. <<RRI.pdf<< Peter Bisztyga Associate European Utilities Equity Research Schroder Salomon Smith Barney Tel: +44 20 7986 3932 Fax: +44 20 7986 4342 E-mail: peter.bisztyga@ssmb.com Should you experience any problems opening this file, or if you wish to receive SSSB Utilities e-mails on a sector-only, UK-only, European-only, or named stock basis - or be removed from our list - please contact natalie.knapp@ssmb.com. If you wish to be added/removed from our hard copy research list, please contact natalie.knapp@ssmb.com. You can view this note and other Schroder Salomon Smith Barney Utility research by using our equities website. If you do not have access to SSSB's GEO (Global Equity Online) service, please contact natalie.knapp@ssmb.com. or your salesperson who will arrange personal login and password details. Additional information is available upon request. Schroder Salomon Smith Barney ("SSSB"), and the companies within Citigroup, including the Salomon Smith Barney group of companies ("the Firm"), may make a market in the securities discussed in this text and may sell to or buy from customers, as principal, securities recommended in this text. The Firm or employees preparing this text may have a position in securities or options of any company recommended in this text. An employee of the Firm may be a director of a company recommended in this text. The Firm may perform or solicit investment banking or other services from any company recommended in this text. Within the past three years Schroder Salomon Smith Barney, including its parent and/or affiliates, may have acted as manager or co-manager of a public offering of any company mentioned in this text. Although information has been obtained from and is based upon sources the Firm believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the Firm's judgment as of the date of the text and are subject to change without notice. This text is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. This text has been approved for distribution in the United Kingdom by Salomon Brothers International Limited, which is regulated by the Securities and Futures Authority. The investments and services contained herein are not available to private customers in the UK. This text does not take into account the investment objectives or financial situation of any particular person. Investors should obtain advice based on their own individual circumstances before making an investment decision. ? Salomon Smith Barney Inc., 2001. All rights reserved. Any unauthorized use, duplication or disclosure is prohibited by law and may result in prosecution. Please see our full disclaimer on any current research document for further restrictions/limitations. ****************************************************************** This email and any files transmitted with it from the ElPaso Corporation are confidential and intended solely for the use of the individual or entity to whom they are addressed. If you have received this email in error please notify the sender. ****************************************************************** - USUtils1.pdf - IPR Valuations Table Output.xls - US Power Prices 14 Jan 02.pdf - RRI.pdf
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