Dynegy update

Dynegy, PSEG reached a settlement for $117.5 mm regarding the rejection of the Roseton-Danskammer leases. As per the terms of the settlement, Dynegy will provide an unsecured claim of $110 million and cash of $7.5 mm to a special entity designated by PSEG, Resources Capital Management Corporation, to satisfy certain tax liabilities. In return, PSEG has agreed to a number of stipulations, including support for the bankruptcy plan. Please see the link below for the actual court document. Please email me if you are interested in discussing how this settlement impacts recovery values.
DYN lease rejection bk court 227


Great Plains Energy, a regulated utility with upside

Great Plains Energy is a 100% regulated utility in Missouri and Kansas.  The combined ratebase of the regulated operating utilities is approximately $6 billion and the equity ratio  and allowed ROE are approximately 47.5% and 10%, respectively.  Moreover, the company plans to add approximately $1.6 billion to ratebase through 2015 due to environmental retrofits, transmission upgrades and RPS mandates.  This results in an earnings potential of $1.83 in 2012 and $2.32 in 2015.  However, the company is not expected to achieve its earnings potential in the near-term, for example, the consensus 2012 estimate is $1.49, or 81% of allowed ROE.

My price target is $26, which is predicated on the following assumptions: a) the company achieves 95% of its 2015 earnings potential; b) a 13.0x multiple; and c) discounted to 2013.  This implies a total return potential of 30%.

Cons: The company expects to file ratecases in 1q2012, and regulated utility stocks typically under-perform during the early stages of the ratecase filing; Historical discount due to regulatory lag and inability to earn allowed ROE of 10%, however the company has an action plan to address this issue; moderate equity financing needs of $100 mm to 150 mm over the next four years.

Catalysts: filing of ratecases in early 2012 should bring investor interest in the story.

Disclaimer: I am long GXP stock but do not intend to trade over the next 48 hours.

Perhaps inaction in Durban is not such a bad thing? and the declining price of carbon credits

The FT recently reported that 2011 is set to be the 10th hottest year on record (going back 160 years) and in fact, it is the hottest year in which there is a cooling La Nina weather pattern. This is based on the latest report by the Intergovernmental Panel on Climate Change, The UN body for reviewing research on climate change.

The Intergovernmental Panel on Climate Change has published a series of reports on the eve of the UN climate conference in Durban, showing that the human actions and green house gasses are responsible for rising temperatures.  However, there are many skeptics,  including the Global Warming Policy Foundation and the writers of freakonomics.

In the meantime, the price of carbon credits continues to fall, down from approximately 10 Euros in August 2011 to less than 7 Euros in November 2011.  By way of comparison, most analysts estimate the price of carbon needs to be>$40 by 2020 to result in a meaningful decline in carbon emissions.   Are these low prices for carbon a sign of a dis-functional market?

Perhaps once the science regarding GHG and global warming is sorted out, we need to make some structural changes to cap and trade or use another mechanism, like a carbon tax.

Some useful links: