For the past several months, analysts and pundits have been using the term “the new normal” to describe post-recession economic conditions. The phrase describes a variety of changes, from stock-...
Forecasters seem at odds over timing for recovery of power prices and earnings.
Like the rise in the Dow and Nasdaq this summer, optimism in the energy sector is on the increase as utility earnings improve. But as there is disagreement over the strength of the U.S. economic recovery, there is considerable discord in predictions of the utility industry recovery. Much of the unease comes from conflicting and disparate forecasts. Depending on whose report you read, the recovery in power prices is expected within 4 months, 12 months, 3 years, or 6 years (some even say 10 years). Certainly, the variation in forecasts must be attributed to the different assumptions about the effect a broad economic recovery would have on power demand and supply.
For example, in a report issued July 8 by UBS Warburg, equities analyst Lawson Steele said average U.S. peak electricity prices were expected to rise 48 percent in 2003 from the previous year, owing in part to higher prices for natural gas. Thus, Steele predicts power price hikes ranging from 21 percent in the Mid-Atlantic states to 27 percent in the Midwest, 58 percent in the Western states, and 74 percent in gas-dependent Texas. Yet others see this vision as "all wet," to borrow some jargon from investment bankers. Those critics say it's overly optimistic from a generator's view because UBS fails to take into account the current power demand and supply fundamentals. Notwithstanding that UBS based its report on forecast power costs from the nation's 50,909 generating stations.
Moreover, consultants Wood Mackenzie, in their , say the summer of 2003 will be marked by weak electricity sales and peak-demand declines. Furthermore, weak electricity demand will provide some relief for the natural gas markets, as year-over-year consumption declines, Wood Mackenzie says. Not to mention, the DOE's Energy Information Administration, in its July 8 , says most of the 1.3 percent jump in electricity demand came from the first quarter, driven largely by weather factors (heating demand). "If normal temperatures prevail for the remainder of the year, little or no additional net weather-related demand growth is expected," the EIA concludes. Naturally, a drop in demand does not necessarily mean that prices can't be high, but with the current power glut, I interpret these prices to be low. In respect to the power supply situation, even UBS's Steele does not predict a return to a normal supply-demand balance in power, which he says is 15 to 20 percent, before 2008. While Fitch Ratings, in its , says power supply comes into balance with demand beginning approximately in 2006 or 2007, depending on the region, through 2010 and 2012.
Growth in Earnings, Earnings, Earnings
In much the same way the supply and demand forecast are at odds, so are recovery projections of the power industry's earnings. Merrill Lynch equity research analyst Steven Fleishman, in a report, expects second quarter earnings for utilities to be down 18.5 percent quarter-to-quarter, with the "key drivers being mild weather, continued drag from pension and benefits expenses, share dilution from the balance sheet restructuring over the