Energy companies earnings take a bounce up

Ann de Rouffignac
OGJ Online

Energy companies are beginning to experience happier days. Emerging from a seemingly endless string of poor earnings reports and underperformance vs. the market, the sector is looking more attractive.

�The numbers look great and should get substantially better,� says Fred Schultz, analyst with Raymond James & Associates, Houston. �Even the 'dog' companies are going to have a great quarter.�

With a few exceptions, utilities are projecting they will beat analysts� expectations for second quarter earnings.

Pinnacle West Capital Corp., among the first large utilities to report quarterly results, beat expectations by a huge margin. Pinnacle West, the parent of Arizona Public Service Co., said earnings rose by 31% compared to last year�s comparable quarter. Net income was $89.9 million, or $1.06/share, on revenue of $756.5 million, compared with income of $68.7 million, or 81�/share, on revenue of $544.1 million last year.

Pinnacle, based in Phoenix, credits its good fortune with large increases in profitability on wholesale power marketing activities.

�During the second quarter, we successfully managed a volatile wholesale power market driven by unprecedented peak and off-peak prices in California and the Pacific Northwest,� said CEO Bill Post, in a statement.

Other major utilities are expected to follow suit.

Reliant Energy Inc., Houston, reported 2 weeks ago it expected earnings to be 15-20% above industry analysts� projections thanks to increased earnings from a growing multiregional generation portfolio and higher trading margins. Analysts expected earnings per share for the second quarter to be about 48�/share. In the second quarter of 1999, Reliant earned $123 million, or 43�/share.

Entergy Corp. said Thursday earnings will be 25-30% higher than Wall Street�s consensus of 75�/share. The New Orleans-based utility said its new UK Saltend power plant is finally on line after construction delays earlier this year. The lost earnings were made up through a special contract with the construction company.

On the down side, Sierra Pacific Resources, Reno, said last week unanticipated second quarter fuel and purchased-power costs for the company's two Nevada utility subsidiaries will likely exceed budgeted expenses by $70-80 million.

Mark Ruelle, senior vice-president, chief financial officer, and treasurer for Sierra Pacific Resources, said the company has paid significantly more for fuel and purchased power than budgeted, while above-normal temperatures increased demand for electricity. He predicted fuel and purchased-power expenses will have a negative impact on second quarter earnings and an ongoing negative earnings impact for the remainder of the year.

Generation a positive
Utility analysts say generation is driving improved results. Plants not subject to regulation are capturing high prices from intense demand for electricity and the tight supply in most markets. Right now investors' preference is for companies long in generation, says Paul Freemont, analyst with Jefferies & Co., New York.

�The group is poised to outperform,� he says. �The good performance will stick around for this summer and next.�

On a cautionary note, Freemont says, regulatory and political authorities may try to eliminate or change the ability of companies to pass through high commodity costs to their captive customers. Already, politicians are feeling the heat over high power prices in parts of California.

Earlier this month consumer groups and legislators lobbied the California Independent System Operator to lower the price cap on wholesale power sales. There are also ongoing discussion in New York and other states where end-use consumers have been hit with high bills, he says.

Energy companies' good fortune should continue for several years because of the continued growth in demand for electricity, says Schultz. Ten years ago, the internet consumed no US power. Today it consumes 8%, and in 2010 it will consume 25%, he projects.

�We are in the second or third inning of a long switch over to electric power,� says Schultz. �In the '80s and '90s it was all about oil. In the new economy of the next few decades it will be all about reliable electric power.�