NRG NRG Energy Inc

By Cassandra Sweet 

Low electricity prices are sapping the profits of power-plant operators.

Companies that sell electricity to utilities, such as Dynegy Corp., Calpine Corp and NRG Energy Inc., reported slim profits or losses in the third quarter, as they contend with wholesale power prices that have fallen in recent years along with the price of natural gas.

Average wholesale electricity prices have dropped 15% this year to $29.70 a megawatt-hour, according to a Wall Street Journal analysis of power market data from the Energy Department. That is 43% below the 2014 average.

On Friday, NRG reported a quarterly profit of $393 million, compared to $67 million a year earlier. However, excluding a gain from asset sales in the latest period and a write-down a year earlier, earnings fell sharply due to squeezed energy margins and costs to pay off debt. Revenue dropped to $3.95 billion from $4.43 billion a year earlier.

The company's quarterly results beat analysts' expectations, and NRG shares rose 9% to $11.03 in Friday trading. However, the stock remains down 6% on the year.

"Our generation business performed well during some very challenging market conditions," NRG Chief Executive Mauricio Gutierrez said during a conference call Friday with analysts.

Dynegy on Tuesday posted a quarterly loss of $249 million on $1.18 billion of revenue, compared to a $24 million loss on $1.23 billion in revenue a year earlier. Calpine last week reported a profit of $295 million, up 8% from the year-earlier quarter, on revenue of $2.36 billion; but its profit for the first nine months of the year was just $68 million, down 76%.

"It's an adverse environment because of the low gas prices, and it's aggravated by the growth of renewables," said Hugh Wynne, an analyst at investment research firm SSR LLC in Stamford, Conn.

Natural gas is becoming a dominant fuel for U.S. power plants, and with its price at historic lows, operators of commercial nuclear and coal plants are taking a hit. Also, power demand across much of the U.S. is flat, which weighs on electricity prices and power-plant margins.

U.S. electricity sales this year through August totaled 2.5 billion megawatt-hours, down nearly 1% compared to the same period a year ago, according to data from the Department of Energy.

Dynegy, which owns about three dozen coal and natural gas-fueled plants across the U.S., is responding to the low prices by improving efficiency through both streamlining operations and buying plants to capitalize on scale.

It is also ramping up lobbying efforts with state and federal regulators -- and lawsuits -- to maintain a level playing field in the power markets, Chief Executive Bob Flexon said.

Those efforts include opposing a plan New York officials approved last August to subsidize money-losing nuclear power plants to keep them operating, a measure that Mr. Flexon contends gives plant owner Exelon Corp. an unfair advantage.

"You've undermined wholesale price formation because out-of-the money assets are given billions of dollars to stick around," he said of the subsidies. Shares of the Houston-based company, which rose 6% to $8.31 on Friday, are off about 38% for the year.

Chicago-based Exelon has been faring better than some rivals since it also owns regulated utilities. They have more stable profits because utilities can pass on their costs to customers in the form of higher rates and typically enjoy a guaranteed rate of return on their investments. Shares of Exelon closed significant lower Friday at about $32.69, but are up about 18% this year.

The company last week posted a third-quarter profit of $490 million, down 22%, but its adjusted earnings and revenue rose. Net income for its ExGen commercial-power generation unit fell 37% from a year earlier to $236 million.

"We're not happy with the outlook that we see at ExGen," Exelon Chief Executive Christopher Crane said last week during a conference call with analysts.

Power plant owners that don't own utilities, such as Dynegy and Calpine Corp., have had a tougher time. "The wholesale power markets have disappointed in 2016," Calpine Chief Executive Thad Hill said during a conference call with analysts last week.

Calpine, which owns several dozen gas-fired power plants, so-called peaker plants and geothermal power generators, narrowed its full-year outlook for adjusted earnings before interest, taxes and other items to between $1.8 billion and $1.85 billion, from $1.8 billion to $1.95 billion. Calpine's shares are down about 21% this year at about $11.43 Friday.

He added that he expects wholesale prices to start rising as early as next year in some areas, as more companies shut unprofitable power plants and electricity supplies get tighter. "There is a reason to believe in recovery."

Write to Cassandra Sweet at cassandra.sweet@wsj.com

(END) Dow Jones Newswires

November 05, 2016 02:48 ET (06:48 GMT)

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