Three Companies That Will Benefit From Cali's Nuke Closures

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

California is permanently losing two nuclear power plants. That's going to make electric supply dicey this summer and the state's reliance on natural gas go even higher over the long term. That's good news for Calpine (NYSE: CPN), AES (NYSE: AES), and, indirectly, Ultra Petroleum (NYSE: UPL).

Shutting Down

Edison International's decision to retire two nuclear plants in California will have both near-term and long-term implications for the state. This summer, the loss of the power from the plants will increase the chance of rolling blackouts. That should keep merchant power companies in the state running at full capacity.

Longer term, it will continue the trend toward natural gas use in the state. For example, Bloomberg reports that gas accounts for over 60% of California's power, up from 50% at the start of the century. And that number should continue to head higher, with at least half a dozen or so new gas-fired plants in the works. That will help keep gas prices and demand up across the country.

The Merchants of Energy

Calpine is one of the nation's largest independent power producers. It has over 20 plants in the California providing some 5,500 megawatts of power. It's on track to build two new gas-fired plants. Although the company has operations across the country, including in fast growing Texas (about 8,000 megawatts), California is a key market. In fact, the West Divisions, which includes the California plants and two others, accounts for 25% of the company's total capacity.

Calpine's past isn't pristine. After expanding rapidly, the company fell into bankruptcy when electric prices collapsed following the Enron scandal. Publicly traded again, however, it has a young and efficient power fleet. That puts it in a solid position to benefit as older plants close and regulations make it harder for coal to compete. Exactly the situation in California.

The company's top and bottom lines have been a little volatile in recent years; however, it looks well positioned for the country's changing electric landscape. Growth investors should take a look. The company also has started to invest more in transmission assets, which is an often overlooked, but increasingly in demand, aspect of the energy market.

A Global Company

AES is a more broadly diversified play in the merchant power space. Like Calpine, it struggled when power prices collapsed, but it didn't have to visit the bankruptcy courts. The company has operations in around 25 countries. Of late, AES has been repositioning its portfolio around core markets like North America and Latin America, selling off assets that don't make strategic sense.

The shift could be large, with asset sales potentially reaching $2 billion. Although that's made the bottom line a bit hazy in the near term, asset sale proceeds are being used to solidify its position in core markets, buy back stock, and support the recently initiated dividend. The top, line, meanwhile, has grown every year for a decade.

A large loss last year and the utility sell off have left the shares trading lower, so now could be a good time to look at AES. Income investors won't find the meager yield of 1.4% or so interesting, but increasing demand for gas-fired capacity in California should help keep the company's U.S. business growing solidly. The company has three gas plants in the state generating nearly 4,000 megawatts of power. It also has wind power plants in the state.

The biggest attraction, however, remains AES' diversification in foreign markets. The focus on faster growing nations increases risk, but improves long-term growth potential over domestically focused rivals. AES isn't for the feint of heart and remains in a state of transition. However, increasing demand in places like California will help it prosper globally over the long haul.

Getting it Out of the Ground

Another company that will benefit from the shift in California to natural gas powered generation is Ultra Petroleum. At the end of 2012, the company owned approximately 49,000 net acres of oil and natural gas lands in Wyoming and 261,000 net acres in Pennsylvania. It is one of the lowest cost producers of natural gas in the country, with costs in the $3 range.

The company's over $14-a-share loss last year looks ugly on the surface, but is related to non-cash asset write downs because of low gas prices. With natural gas trading in the $4 range and demand increasing in large states like California, the company is in a solid position to benefit over the longer term.

This is a pretty direct play on natural gas prices, so conservative investors should probably steer clear. However, while many of its peers struggle to turn a profit, Ultra made money in the first quarter and will become increasingly profitable if demand pushes gas prices higher.

Changing Market

California has a long history of pushing the envelope on environmental issues. That's been a mixed blessing for the state and has often influenced the country in unexpected ways. The continuing shift toward natural gas makes sense. In the near-term merchant power companies with gas assets, like Calpine and AES, will pick up the slack for the nuclear plant closures. Longer term, Ultra should benefit as gas demand increases the fuel's price.

Reuben Brewer has a position in AES. The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum and has the following options: Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, and Long Jan 2014 $50 Calls on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus