Wednesday, April 15, 2009

Allegheny Energy (NYSE:AYE): Upgraded to Overweight at Barclays

Barclays is out upgrading Allegheny Energy (NYSE:AYE) to Overweight from Equal-Weight and adjusting their tgt to $40 from $35.

The firm believes the catalyst for AYE is an auction to price power in Pennsylvania beginning in 2011 with the first tranche results due 4/17.

- AYE is a lateral to the recent PPL 2010 Pennsylvania auction that priced power at $87/MWhr. The implication for AYE is a $68/Mwhr price including $7-$10/MWhr of basis which would confirm the consensus range of $4.12-$4.70. Barclays' new 2011E is $0.21/share higher at $4.45.

- They believe the key positives for AYE are: 1) PA going to market rates in 2011; 2) Free cash flow before growth cap-ex and after dividend of $321M in 2010 and $548M in 2011; and 3) Under-earning regulated utilities with upside.

- The PA auction this week is the first of 8 auctions to set post 2010 prices. This 250 MW bid has 17 and 29 month tranches. Adjustments to the AYE price are taxes, basis, gas price and capacity.

The main catalyst for the AYE upgrade is the outcome of a similar PPL auction already in April, but also performance as the stock is down 28% this year versus 12% for Power and 5% for the S&P 500. This market signal for AYE helps to mitigate the impact lower gas prices could have on pricing power in 2011, in firm's view. Despite low gas prices, the cost to contract power is also being impacted by increased costs of ancillary services and higher credit carrying costs. In addition, the outlook for CO2 legislation this year has transformed to either an unlikelihood or a compromise bill, which helps mitigate AYE’s risk as a substantially coal-fired generator.

Notablecalls: So here you have a beaten down stock with a catalyst. Utility play with a close to 100% upside tgt should attract at least some attention.

Water pistol to the head I'd say 4-6% upside today.

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