Merrill Lynch predicts good year for power industry

By the OGJ Online Staff

HOUSTON, Texas, June 1, 2001 — Despite this year’s roller coaster performance, earnings for energy merchants, power generation companies, and integrated electric utilities are expected to rise for the full year, said analysts with Merrill Lynch & Co.

Steve Fleishman, head of Merrill Lynch’s global power and research group, said energy merchants and power generation companies’ earnings could rise 30% in 2001 over last year. He projected earnings of integrated utility companies could be up 12% year over year.

After a “sparkling” year in 2000, this year has been a roller coaster for the independent power producers and utility sector, Fleishman said. But, he added, the ups have exceeded the downs.

Independent power producer (IPP) share prices through late May are up 10% while electric utilities are down 1.7%, or flat excluding California utilities. In either case, utility shares and IPPs outperformed the Standard & Poor’s 500 Index, which was down 5% over the same time period.

Fleishman said the energy crunch is driving higher prices and returns for the industry and creating attractive opportunities for new investment. Price volatility is fueling merchant profits and generating renewed interest in long-term contracts, he said.

“We expect a renewed focus on companies that are low-cost producers, have locked in margins through long-term contracts, and have the merchant capability to take advantage of the inherent volatility in the energy sector,” Fleishman said.

Despite various concerns, Merrill Lynch believes the competitive market is working, Fleishman added.

“The industry is drilling for gas and adding power plants at record levels,” he said. “Price spikes in these commodities have already shown an impact on softening demand. To that end, we are already beginning to see market prices start to fall, helping to solve the crisis.”

While California’s energy problems have created a political and legal overhang, they are not having as severe effect on the bond market as might be expected, said John Hallacy, the manager of Merrill Lynch’s municipal credit research group.

While California has joined a group of states that have experienced financial drains because of specific events over the past 25 years, he said, the current situation is different since fundamental economic dislocations were the cause in most of the other cases.

The California economy is essentially sound, and the energy sector, as a component of gross state product, is in the very low single-digit range versus the 20% range for Texas in the early 1980s, he said, just prior to that state’s’energy bust.

California revenue is not dependent on energy-related taxes or fees or receipts to any large degree, Hallacy said. However, he warned, if the utility crisis in California is allowed to continue unabated, the crisis will effect business decisions being made in the state at the margin.