Infrastructure
Electricity Use Falling--So Are Share Prices (DUK, DYN, AEP)
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Just as with natural gas and crude oil, electricity use is off as the economy heads into its second year of recession. The lack of demand for electricity affects the bottom line for generators like Duke Energy (NYSE:DUK), Dynegy Inc. (NYSE:DYN), and American Electric Power (NYSE:AEP).
The delivery system for electric power in the US is old and needs to beupgraded or replaced. Electricity suppliers had been planning on replacing a lot of the aging infrastructure, suchas transmission and distribution lines, as well as building new generationfacilities to keep pace with expected demand. Suppliers were alsolooking at getting a start on using alternatives to burning coal andnatural gas to address climate change issues.
Electricity generation and distribution were down about 3% in the thirdquarter compared with the 2007 third quarter. Natural gas distributionwas down about 5%. Duke’s sales in the Midwest were off by nearly 6%,and AEP sales were off more than 3%. Dynegy has had two unexplainedshutdowns of two 512-MW combined cycle generators at its plant in MossLanding, California. That’s about 3% of Dynegy’s total generatingcapacity.
The good news is that electric companies can always go to regulatorsfor rate increases, and this provides the companies with excellentcredit ratings. The better news might be that a New Deal-style publicworks program could be coming with the Obama administration, and theelectricity grid is a perfect place to spend some money. After all,when the recession ends, demand for electricity will only increase(think of all those electric cars!).
In the short term, though, electricity generation is taking a beating.Dynegy closed at $2.05 yesterday, near the bottom of its 52-weektrading range of $1.50-$9.92. Duke closed at $14.74, again near thebottom of its range of $13.50-$20.78. AEP did a little better, closingat $30.42/share, further from the bottom of its trading range of$25.54-$49.49.
Paul Ausick
December 2, 2008
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