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Enron Mail |
-----Original Message----- From: "ML Power & Gas Group"<Maria_Melone@ML.com<@ENRON Sent: Thursday, September 27, 2001 8:00 AM To: Gualy, Jaime Subject: Parrella-IPPs- Reiterating Ratings on CPN, NRG, MIR * Casualties of yesterday?s 49% decline in AES included Calpine (CPN; $21.40; C-1-1-9), NRG Energy (NRG; $13.72; C-1-1-9) and Mirant (MIR; $21.10; C-2-1-9); these stocks declined 9%-10%. At P/E multiples of barely above 8x our 2002 estimates, we regard this as an attractive opportunity. How are the AES issues different? * AES earnings shortfall mostly from outside U.S.: The two single-largest components of the shortfall were the weak Brazilian currency and weak U.K. power prices. Very little of the shortfall was attributable to U.S. businesses. CPN, NRG and MIR derive the vast majority of their income from the U.S. We do not see any negative implications for the global businesses of any of these companies; see specific comments below. * Market leader disappointment a more significant factor: The poor performance of companies like Enron and AES this year has been a major negative to psychology, even though many of the issues these companies have been challenged by (global, broadband) are not endemic to the sector. What continues to bother these stocks? * Investor concerns about potential oversupply have been accentuated by the events of September 11. That is because power demand growth is likely to slow, perhaps to 0%-1% from 2%, in a U.S. recession. If planned supply additions are unchanged, this could hasten the arrival of an ?overbuild.? * Weak equity valuations make equity issuance extremely unattractive and unlikely. Inability to raise equity calls into question the ability to complete capacity expansion plans, which have been the key driver of earnings growth. Stocks look cheap, but what are the potential catalysts? * Scaling back of capacity expansion plans: We expect to see project cancellations and/or deferrals, particularly those targeted for commercial operation in 2003-2005. The capital markets discipline currently being exerted makes this almost inevitable, in our view. We are aware that a number of companies are undertaking reviews at present of all projects that have not yet broken ground. Removing some of the more marginal projects would reduce the risk of overbuild in 2003. The 80,000 Mw proposed for that year could be scaled back to about 50,000 Mw. * Investor comfort with revised growth targets: As part of this process, managements are likely to begin talking lower growth rates for the 2003-2005 period. We expect these to remain solidly double-digit, and still well - IPPs092701.pdf
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