FW: Electric Utilities: Weekly Report

-----Original Message-----
From: "Russo, Brian" <Brian.Russo@ubsw.com<@ENRON On Behalf Of "Abramson, Barry" <Barry.Abramson@ubsw.com<
Sent: Monday, October 15, 2001 6:45 AM
To: undisclosed-recipients:;@ENRON
Subject: Electric Utilities: Weekly Report

KEY POINTS
* It is like being in the eye of a hurricane as we wait to have quarterly earnings reports come pouring in. So
far only one company, NRG Energy (NRG-$19.05, rated Strong Buy), a pure play IPP, has reported earnings, and the quarter
was slightly better than expected. NRG also reaffirmed its full year 2001 and 2002 EPS guidance.
* Based upon the number of favorable preannouncements that greatly outnumbered the number of negative
preannouncements, we remain confident that the third quarter reports should be relatively strong for most electric
utilities and IPPs.
* We continue to recommend an overweighting in the electric stocks. In an environment of economic slowdown and
falling interest rates, utility stocks should perform relatively well.
* In addition, utility stocks still appear undervalued based upon historic valuation measures. Utility stocks are
now trading at an average P/E ratio of 10.5x estimated 2002 EPS compared with a 2002 P/E ratio of 22.7x for the S&P 500.
The relative P/E ratio of 0.46x is well below the 25-year historic normal range of 0.60x-0.80x.
* American Electric Power (AEP-$44.08, rated Buy)[2] agreed to acquire two huge coal-fired power plants in the
U.K. from Edison International (EIX-$15.34, rated Buy)[2]. EIX's subsidiary, Edison Mission Energy, sold the Fiddler's
Ferry and Ferrybridge power plants, each one 2,000 MW in size, for a big loss. Since the time when EIX bought the two
power plants in 1999, power prices in the U.K. have fallen sharply and the country is now oversupplied with electric
power. Power prices are expected to remain low in the U.K. for quite a while. AEP agreed to pay $960 million for the
power plants and certain fuel supplies. For AEP, the purchase price for the power plants is about $200 per kilowatt.
Edison International paid about twice as much when it purchased the plants in 1999. EIX said that it intends to take an
after-tax write-off of about $1.18 billion to reflect the loss on the asset sale and related currency adjustments.
* Niagara Mohawk Power (NMK-$17.75, rated Buy)[2], National Grid Group, the Staff of the New York Public Service
Commission and several other parties, announced a settlement that includes a rate plan for ten years following the
proposed merger of NMK and National Grid. Under the agreement, Niagara Mohawk would reduce rates for electricity
delivery by $160 million, or 8%, upon closing of the merger. Following this one-time rate cut, delivery charges would
remain stable for the next ten years. The settlement is based upon a 10.6% return on equity with an earnings sharing
plan. The plan allows NMK to retain 100% of earnings up to an 11.75% ROE with sharing for earnings above an 11.75% ROE.
The plan also allows NMK to retain 50% of merger-related savings and the ROE sharing plan does not include the retained
savings. The agreement also requires NMK to give up recovery of $850 million of nuclear-related stranded costs. The
Public Service Commission is expected to vote on the settlement by late 2001. We would expect the state regulators to
approve the settlement and to approve the merger at the same time. The merger is expected to be completed in the first
quarter of 2002.
* Now it appears that Public Service of New Mexico (PNM-$26.71, rated Hold) has decided to go to court to
terminate its pending acquisition of Western Resources' utility business (WR-$17.12, rated Hold)[2]. On Friday, PNM
issued a press release saying that PNM had asked a court in New York to resolve the disagreement between PNM and WR
regarding the merger. PNM is asking the court "to find that it is impossible to complete the proposed transaction under
the original terms." PNM also wants the court to rule that the electric rate reduction imposed by regulators in Kansas
provides sufficient cause to terminate the merger agreement. The CEO of PNM also said that PNM believes that the
current agreement must be restructured if there is any chance of the merger going ahead. However, WR has demanded that
the original transaction be pursued even though certain rulings by state regulators in Kansas appear to make this nearly
impossible. PNM and Western had agreed previously that WR had to complete its corporate separation plan, separating its
utility operations from its nonutility businesses, before the merger could be completed. However, the regulators in
Kansas refused to approve the terms of WR's corporate separation plan and they have ordered a halt to the implementation
of the separation plan. Kansas regulators want changes to be made to the corporate separation plan in order to provide
a stronger balance sheet for the utility post separation.
* The Federal Energy Regulatory Commission (FERC) approved the acquisition of PowerGen of the U.K. by German
utility E.On last week. Also last week, regulators in the state of Virginia approved the acquisition. Previously, the
state of Kentucky also approved the deal. The approvals from FERC, Virginia and Kentucky were needed because PowerGen
owns LG&E Energy, the U.S. electric utility that serves most of Kentucky and a portion of Virginia. The SEC still needs
to approve the merger, which is expected to be completed in the spring of 2002. We expect E.On to use this deal as a
springboard toward making several other acquisitions of U.S. utilities. Right next door to LG&E Energy is one of our
top takeover candidates, Cinergy Corp. (CIN-$31.90, rated Strong Buy).
* Utility stocks lagged the overall market last week. For the five trading days last week, electric utility
stocks went down in value by 3.9% compared with a gain of 1.9% for the S&P 500. IPP stocks had a strong week, with an
average stock appreciation of 8.2%
<<WKLY11015.doc<<

- WKLY11015.doc

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