Higher Energy Prices Hurt Some Utilities, Help Others

The ongoing rise in energy commodity prices continues to have financial ramifications for electric and gas utilities, writes Sandy Cohen. In the last few days there have been a series of news stories, company 8-K and press releases, and brokerage firm research reports that highlight this issue. So here is a recap of just the last few days, of how rising energy commodity prices are resulting in changing the financial prospects for selected electric and gas utilities:

1. A.G. Edwards published a useful research report highlighting the earnings risk and exposure of certain electric utilities from a potential loss of tax credits from synfuel facilities due to rising oil prices. We wrote a piece on this the other day: the recap of A.G. Edwards' Synfuel Report.
2. On Tuesday, August 23rd, Progress Energy (one of the electric utilities highlighted in the A.G. Edwards report) filed its own 8-K on the synfuel issue, reviewing certain IRS audit issues, and other legal and accounting issues investors need to continue to track. Specifically, deep inside the 8-K, PGN reviews the oil price at which its tax credits for synfuel production begin to get phased out, and even are totally phased out. Specifically, PGN cites that should oil average more than $69/bbl from now until the end of the year, the 2005 tax credits would begin to be phased out. Oil prices broke $69/bbl on 8/24/05. PGN also implies that for 2006, should the price of oil average over $70/bbl, there is a risk to PGN that no tax credits would be available. And PGN specifically cites in the 8-K that at the CURRENT NYMEX futures price for 2006, 35%-40% of its expected tax credits would be phased out. The link to PGN's 8-K is here: PGN's 8-K on Synfuel Risks.
3. On Monday, August 22nd, Energen, a gas utility with substantial energy commodity businesses, raised its corporate earnings guidance for 2006 ... the 2nd time in the last month. The AP press release on that announcement is at this link: Yahoo Finance and AP Link to EGN's Earnings Guidance Increase. EGN was able to raise guidance because through hedges it was able to lock in additional profits from rising energy commodity prices.
4. On Wednesday, August 24th, Lehman Brothers issued a lengthy report updating its sparks spreads (the gross margin between the cost of gas used to generate gas-fired power, and the revenues generated from the sale of that power). As a result of the research done, Lehman raised its earnings forecasts for Constellation Holdings (CEG), Entergy (ETR), FPL Group (FPL), and Edison International (EIX). And Lehman raised its rating on EIX to a 1-Overweight, and raised its target price substantially. No link is available, but the report is worth reading, for perspective.

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