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Feature Article

Utility Potpourri

By Roger S. Conrad on Apr. 5, 2015

When natural-gas prices hit the double-digits in mid-2008, elevated prices for wholesale electricity ensured that most operators could lock in hefty profits under term contracts. Meanwhile, lofty prices in the futures market reflected and reinforced the consensus view that the bull market for wholesale electricity would continue for years to come.

Fast-forward to today and a situation that’s the diametric opposite. Natural-gas prices have recovered from the record low hit during the no-show winter of 2011-12; however, with ample supply ready to come onstream in the event of a rally, gas prices will remain depressed for some time.

Cheap gas means low-priced wholesale power. This severe challenge has driven industry consolidation and spurred shutdowns of older, coal-fired plants.

Shares of wholesale power producers such as NRG Energy (NYSE: NRG) tend to track fluctuations in natural-gas prices.

However, Exelon Corp (NYSE: EXC) appears to have extricated itself from this situation, thanks to its pending acquisition of Pepco Holdings (NYSE: POM), a deal that will bolster the proportion of its cash flow that comes from regulated operations. Nevertheless, the stock still trades at an undemanding valuation that doesn’t reflect its potential to resume regular dividend growth.

(Click graph to enlarge.)EXC NRG NG1

NRG Energy also doesn’t get the respect it deserves. Although weak natural-gas prices weighed on wholesale-power prices last year, NRG Energy still grew its operating cash flow by 18.7 percent. The company’s fourth-quarter cash flow lagged year-ago results by only 6.3 percent, despite a much milder winter than the polar vortex of 2013.

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