Energy CEC Longs and Shorts

Usually, when I mention “unintended consequences” in this space it is in reference to some ham fisted attempt by government to legislate human nature or more correctly attempt to change human nature via legislation. We have seen multiple of examples of abject failure but still no lessons learned.

There is, however, an unintended consequence that might provide a benefit or two and just in case you thought I might be wavering here, no, it is not the antecedent of any legislation.

As a consequence of the downturn in the economy and the resulting plant closures it appears the summer forecast for electricity demand is lower this year. Texas, where everything is twice as big, is expecting only 63,491 megawatts of peak summer demand this year down 1,731 megawatts from what the cowboys thought they would need earlier this year. To put that in perspective for you it is the equivalent production of three or four power plants.

For the U.S. as a whole demand for electricity is expected to be about 1.8% lower according to NERC or the North American Electric Reliability Corp which is the nations grid operator and who it also seems will be going to school soon to become a “smart” grid. Does that mean it will then be called SNERC?

The beneficial side of this is that the power that is needed should get delivered more reliably and there could be, in some places, lower prices. A summer without blackouts would make life more convenient, even if there are a few less tall tales to tell come fall and lower prices, if and when they do appear, can only help the beleaguered U.S. consumer. It is completely recognized that this is a small benefit when compared to increases in non-farm payrolls that continue to top the 600K mark but if we can’t chase the clouds away at least we can look for silver linings.

Names within the vast “Energy” sector of the CEC universe cover everything from drillers and explorers to refiners and the utilities or “Electric-Integrated” as they are sometimes affectionately called.

There are about 27 names in this area of the CEC portfolio of which longs exist in AES, CEG, D, PEG, POM and WEC. There are two shorts: DUK and ED. As you know from reading this column every day the longs are a result of narrowing CDS spreads while the shorts are a result of widening ones.

It is important to note here that the shorts are older positions, put on in mid-May while the longs are a result of the more recent belief in “green shoots”. Not necessarily by me, mind you, but by investors that have pushed down CDS spreads and pushed up prices. The P/L on the DUK and ED positions nets to a number they wouldn’t recognize in TX because they just don’t see things that small so some time will have to pass in order to see whether the green shoots continue to grow or the two lone cowboys on the short side ride into the sunset winners.