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Enron Mail |
-----Original Message----- From: "Russo, Brian" <Brian.Russo@ubsw.com<@ENRON On Behalf Of "Abramson, Barry" <Barry.Abramson@ubsw.com< Sent: Monday, November 26, 2001 7:37 AM To: undisclosed-recipients:;@ENRON Subject: Electric Utilities: Weekly Update KEY POINTS * On the basis of the group's extremely low relative valuation, we continue to recommend the electric utility group. The electric group's P/E based upon 2002 estimated EPS is now only 10.8x, compared with a 2002 P/E for the S&P 500 of 24.5x. The relative P/E ratio has dropped to just 0.44x, near its all-time low of 0.40x and well below the 25-year historic normal relative P/E range of 0.60x to 0.80x. * The high relative yield of 5.0% on the average electric utility stock also should provide good support against any major downward move, in our opinion. The relative yield on utility stocks is more than double the yields available to small investors in cash equivalents such as money market funds. * The fully-regulated transmission and distribution utilities (T&D) appear to have stopped outperforming the utilities that have a large merchant energy exposure. The lower-risk, higher-yielding T&D stocks had been going up for most of the past few months while the utilities with merchant energy had been falling. Now it appears that the rotation into the T&D stocks has ended, at least for now. * Last week, we added PPL Corp. (PPL-$35.80, rated Strong Buy)[2] to our Global Top 10 List of utility stocks. The major reasons for adding PPL to the Global Top 10 List were the stock's very low relative P/E ratio, its fleet of low-cost unregulated generating plants and its above-average earnings growth potential. We also believe it is likely that PPL might take actions to improve its very low stock price, such as a dividend hike and a common share buyback. In addition, at PPL's current low relative valuation, we believe it is an attractive takeover target. There are four other U.S. utility stocks on our Global Top 10 List-Dominion Resources (D-$59.96, rated Strong Buy)[2], Duke Energy (DUK-$37.64, rated Strong Buy)[2], TXU Corp. (TXU-$45.87, rated Strong Buy)[2] and American Electric Power (AEP-$42.39, rated Buy)[2]. The rest of our Global Top 10 List includes El Paso Energy (EPG-$49.73)[14] of the U.S., Suez-Lyonnaise and Lattice Group of Europe, and Tokyo Electric Power and Chubu Electric of Asia. * The Federal Energy Regulatory Commission (FERC) issued an order last week that changes the basis upon which FERC will allow large utilities to sell wholesale power at market-based rates. FERC's order is designed to reduce the possibility that a large company could exert market power in a particular region. FERC stated that if power sellers are found to be "pivotal to their region" and if the sellers are not participating in a FERC approved regional transmission organization (RTO), then the sellers could lose their right to charge market-based rates. Sellers that are "pivotal to their region" have generating units that must run to meet the region's electric load. FERC applied these new rules immediately to three large utilities-American Electric Power, Entergy Corp. (ETR-$36.95, rated Hold) and Southern Company (SO-$23.50, rated Hold)[2]. FERC stated that all three of these large utilities are not now currently members of a FERC approved RTO. AEP, ETR and SO have lost the authority to make sales at market-based rates except for sales that take place in regions where the grid is controlled by a FERC-approved RTO. The three companies have been given 15 days to respond by FERC. Under the new rules, FERC can order refunds and can order these companies to revert back to cost-based rates. * It is possible that FERC is using this directive to strongly influence the rapid formation of FERC-approved RTOs. Some of the larger U.S utilities have been reluctant to join large RTOs and have tried to form their own RTOs in which they would be the dominant member. In the long run, we expect FERC to prevail and we expect all U.S. utilities, large and small, to form RTOs that have FERC approval. We think that the loss of the ability to sell wholesale power at market-based rates, even if only for a short period of time until the company achieves compliance with FERC's RTO goals, is a strong enough incentive for large utilities to move faster to join large RTOs. * We lowered our EPS estimates for Edison International (EIX-$14.20, rated Buy)[2,10] after the company held a conference call last week at which time it gave new earnings guidance for 2001 and 2002. We lowered our 2001 EPS estimate from $1.75 to $1.30 and reduced our 2002 EPS estimate from $2.00 to $1.60. It appears that EIX's major emphasis over the next 1 to 2 years will be to improve its balance sheet and regain its financial health, and therefore, earnings growth does not appear to be a major objective. * We reduced our 2002 EPS estimate on Cinergy Corp. (CIN-$30.87, rated Strong Buy) from $2.95 to $2.85. Lower forward power prices for 2002 and the weakness in the local economy are likely to hurt 2002 earnings. * TXU announced two major asset divestitures in the United Kingdom last week. TXU plans to sell its U.K. electric distribution business and its 50% interest in 24seven to London Electricity for $1.87 billion. TXU also announced an agreement to sell its 2,000 MW West Burton power station to London Electricity for $523 million. We think that both of these moves are positive steps for TXU. (Additional details can be found in the following section of this report.) * Utility stocks lagged the overall market last week. For the four trading days last week, electric utility stocks were virtually unchanged, with an average gain of only 0.1%, compared with an increase of 1.0% for the S&P 500. IPP stocks had a bad week, with an average decline of 3.1%. <<WKLY11126.doc<< - WKLY11126.doc Visit our website at http://www.ubswarburg.com This message contains confidential information and is intended only for the individual named. If you are not the named addressee you should not disseminate, distribute or copy this e-mail. Please notify the sender immediately by e-mail if you have received this e-mail by mistake and delete this e-mail from your system. E-mail transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this message which arise as a result of e-mail transmission. If verification is required please request a hard-copy version. This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments.
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