Barclays Capital has launched a new family of "investable" power indexes tied to the price of electricity nationwide. The main index tracks the price of electricity in at six major regional hubs based on peak power forward contracts with a range of maturities. Subindexes covering the different regions and maturities are also available. The indexes are weighted by region based on historical annual peak electricity demand.

Longer Than 1 Year

I first came across the deal while going through my routinely check on pending mergers from Merger Investing and I started to get interested after going through some initial filings and reports.

To meet U.S. electricity needs, alternative fuels will likely play a greater role in the years to come, either through mandates or increasingly competitive pricing, S &P says. “Nevertheless, more often than not, it is substantial federal financial support that makes these changes happen.”

The calendar this week is relatively light with only a few deals pricing, but there appears to be one name that will do exceptionally well.  The company is Energy Recovery, Inc. (ERII) and the firm operates in two of the best performing areas of the market.  The first, obviously is energy and the second is the water treatment area.  As populations across the nation and across the globe continue to increase their use of treated water, the demand is beginning to outpace supply levels.  New water treatment plants are being built and Energy Recovery sells equipment for many of these projects.

With respect to the economics behind the plants they sell to, they are popping up all over the world, so the numbers must work.  It’s obvious the customer base will likely continue to grow.  I didn’t quite finish my research in time for the IPO but I was curious as to what fraction of the bills of a new plant are likely spent on the types of technology Energy Recovery sells, to try and estimate the size of the market. 

I know, electricity prices are already high for many of you, along with just about everything else. I am not talking about those high prices, I am talking about the really high ones that are just around the corner. The ones that will result from higher commodity prices, which only seem to keep going higher. The ones that will continue to result from the lack of a coherent energy policy. The ones that result from environmental legislation, which if not carefully considered (no matter how good intentions), may have the ability along with higher commodity prices to bring the power system to its knees. The ones that unlike higher gasoline prices, which are high but still can be paid to purchase the commodity, may not even give us the opportunity to pay higher prices to receive services during a blackout. Yes, those are the ones I am talking about.

Law of the Jungle: For the Powerful Trader [you] reading this---Be the Predator

Q1 2008 Earnings Call

This is, of course, a fairly common occurrence in recent utility mergers and should in no way be considered a surprising development in this case. This deal is, to say the least, a very high-profile event in Washington state and the AG's office would be remiss if it did not take advantage of the growing negativity to the deal, regardless of motives. The AG's Public Counsel testimony is available by following this link.

The investment thesis on ABB is relatively straightforward. ABB has smartly positioned itself as an “energy efficiency” solution provider. Its products & services can be found at every node of the energy value spectrum, resource production, transportation, por generation, por transmission & distribution, and even consumption. Here is a sampling of the types of solutions that ABB offers:

F3Q08 Earnings Call

Capital expenditure budgets are ratcheting upward, buffeted by double-digit increases in construction material costs and a tight labor market, S&P says in its latest Industry Report Card. “Additional cost pressure from rising fuel costs is a growing credit concern. To date, regulatory decisions have been supportive of the commodity pass-through via adjustments mechanisms. Still, the potential for regulatory fatigue is heightened as costs show no signs of abating in the near term and longer-term environmental compliance recovery will likely pressure customer rates.

Credit quality for the regulated U.S. electric utility industry is well positioned for the remainder of 2008, given supportive regulatory environments, strong liquidity positions, and market access and appetite for debt securities for the sector as a whole.

To begin, a bit of history on the company is in order. In 2003, a German utility company, RWE, purchased American Water Works as it attempted to break into the US water utility market. The plan was to implement cost controls and thereby reduce expenses in order to recognize greater profits. What ended up happening was a mismanagement of the firm resulting in tense relationships with regulators across the country, and a company with significant needs for capital expenditures in order to strengthen the utility’s infrastructure.

“If governments around the world continue with policies in place to date – the underlying premise in the ETP Baseline scenario to 2050 – CO2 emissions will rise by 130% and oil demand will rise by 70%. This expansion in oil equals five times today’s production of Saudi Arabia,” the report notes.

iShares Dow Jones U.S. Utilities ETF (IDU) boasts a five-year annualized return of 16.9% (through May 29), nearly seven percentage points better than the S&P 500.

NSTAR (NST)

F1Q08 Earnings Call

Have you opened your electric utility bill lately? Chances are you have noticed the insert sent to you by the utility company that declares their power mix or multiple generating sources that the company utilitizes to bring power to your home or business.

Commonly termed as a portfolio of electrical generating assets (not necessarily all owned by the same utility company), for most investor and publicly owned utilities [IOU/POU] the power mix includes energy generating resources such as natural gas, coal, hydroelectric, nuclear, and of late interest, renewable energy resources such as solar, wind, biomass, and geothermal. For example, in 2007, the power mix disclosed for SMUD, a utility company serving the Sacramento metropolitan area, was found to be 60% natural gas resources, 20% large hydroelectric, and 16% eligible renewable resources.

IDACORP, Inc. (IDA)

Q1 2008 Earnings Call