NRG Strategy Wins, Southern Co. Loses in Order 1000 Decision

NEW YORK (TheStreet) -- A more integrated national electricity market, with more renewable energy, can be expected thanks to the U.S. Court of Appeals' ruling on an obscure federal rule called Order 1000.

The decision will, in time, benefit companies such as NRG Energy (NRG) that seek to sell renewable power across state lines, and disadvantage those such as Southern Co. (SO) , which is seeking to tie consumers to coal and nuclear sources it produces.

The Coalition for Fair Transmission Policy (CFTP), of which Southern Co. is a member, was hopping mad over the decision, which involves rules about how new electric transmission lines are planned and paid for. So was the Institute for Energy Research, which is partly funded by Koch Industries and other fossil fuel interests.

Environmental and renewable energy groups such as Earthjustice and the American Wind Energy Association, on the other hand, were pleased by the decision.

The Federal Energy Regulatory Commission had ruled in 2011, with its Order 1000, that state planning for new electric transmission lines must consider the renewable energy targets and supplies of neighboring states. States whose utilities control regulators and resist renewables still have to pay to accept the power.

Over the last five years shares of utilities that depend on coal, nuclear fuel and compliant state regulators (utilities such as DTE Energy (DTE) , and CMS Energy (CMS) ) have outperformed other utility stocks, especially those like Pacific Gas & Electric (PCG)   that have been accepting lots of new solar and wind power.

Such sources put new strains on the electric grid because they are variable and intermittent. At top output wind power has delivered more than one-third of the power requirements for states like Texas and Kansas, and more than half the requirements in the Rocky Mountain states, but just 7% of the power in Ohio, Pennsylvania and West Virginia, which depend heavily on coal. 

When the wind is light, however, the output of wind turbines becomes negligible.

FERC Order 1000 states that interconnections between state grids, and even regional grids, should accommodate this power, which could accelerate the closing of coal-fired plants and hurt the marketing of power from new nuclear plants, such as those being built by Southern and SCANA Energy (SCG) , whose regulators lost the latest suit.

New interstate power lines will also benefit companies such as NRG Energy that seek to separate the production of energy from its delivery and have invested heavily in wind and solar production, buying coal plants cheap as a standby for periods of peak demand. The decision also informed Dynegy's (DYN) agreement to buy 11 power plants from Duke Energy (DUK) . Again, the delivery of power is becoming separate from its creation.

It will take time for the impact of this decision to filter down to investors, which is one reason why environmental and energy industry publications have been focused on the story this week, while investment sites have mostly ignored it. But the decision sets a green energy trend that is becoming increasingly difficult to stop, and those companies supporting the trend just had a major roadblock removed from their growth. Those opposing it, on the other hand, face new headwinds.

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Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates SOUTHERN CO as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate SOUTHERN CO (SO) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, notable return on equity, impressive record of earnings per share growth and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Electric Utilities industry. The net income increased by 100.6% when compared to the same quarter one year prior, rising from $313.00 million to $628.00 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 5.4%. Since the same quarter one year prior, revenues slightly increased by 5.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • SOUTHERN CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SOUTHERN CO reported lower earnings of $1.87 versus $2.67 in the prior year. This year, the market expects an improvement in earnings ($2.79 versus $1.87).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Electric Utilities industry and the overall market on the basis of return on equity, SOUTHERN CO has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • 35.97% is the gross profit margin for SOUTHERN CO which we consider to be strong. Regardless of SO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, SO's net profit margin of 14.05% compares favorably to the industry average.

TheStreet Ratings team rates NRG ENERGY INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate NRG ENERGY INC (NRG) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth and increase in stock price during the past year. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • NRG's revenue growth has slightly outpaced the industry average of 14.0%. Since the same quarter one year prior, revenues rose by 23.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • NRG ENERGY INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, NRG ENERGY INC swung to a loss, reporting -$1.26 versus $2.21 in the prior year. This year, the market expects an improvement in earnings ($1.79 versus -$1.26).
  • The gross profit margin for NRG ENERGY INC is currently extremely low, coming in at 14.22%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -2.67% trails that of the industry average.
  • Net operating cash flow has significantly decreased to -$21.00 million or 145.65% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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