US merchant coal, nuclear plants benefit from high gas prices

New York (Platts)--6Oct2005

While record US natural gas prices have hit some power generators hard,
they have provided coal-fired and nuclear power plant operators with "rapidly
increasing power margins," Calyon Securities (USA) Inc equity analyst Craig
Shere said Thursday.
     In a report, "The Power of the 'Dark Spread noted the recent 14% jump in
NRG Energy's stock price after the company announced plans to acquire Texas
Genco for $5.8-bil in cash and stock. Texas Genco's power plant portfolio is
comprised of 5,200 MW of coal and nuclear generation, 4,561 MW of intermediate
gas-fired generation and 1,158 MW of peaking plants.
     If the NRG deal goes through, Shere said it will give Texas Genco's four
private equity owners a six-fold return on their original $900-mil investment,
a gain Shere attributed to the "power of the 'dark spread.'"
     Dark spread is a variation on the term spark spread, which refers to the
difference between the cost of a fuel, typically natural gas, and the selling
price of electricity. Dark spread, however, applies to the difference between
the cost of coal and the price of electricity. 
     Many electric utilities rely heavily on coal-fired power plants, but
Shere argued that energy merchants have a "higher proportional exposure" to
wholesale dark spreads because merchants lack the complicated political
exposure of utilities and have more leveraged balance sheets that can realize
a greater benefit from rising cash flows. 
     Shere highlighted Reliant Energy, Dynegy and NRG Energy as merchant firms
with exposure to further dark spread expansion. He has a "buy" rating on
Reliant and Dynegy. Calyon does not cover NRG. 
                                     ---Peter Maloney peter_maloney@platts.com

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