Travis Miller: The hottest topic right now in the utilities sector is the creation of the zero emissions credits, subsidies that apply to nuclear plants in Illinois and New York. These plants are plants that operators have said would close if they didn't get the subsidies from the state governments. We think there could be as many as 11 of these nuclear plants in the mid-Atlantic region that might close if they don't get subsidies from states such as Illinois, New York, Pennsylvania, and others around that region. However, we think the ZECs represent market-distorting subsidies.
(Other subsidies like these) already have been declared illegal by the federal courts all the way up to the Supreme Court and by federal regulators. We include no ZECs in our fair value estimates or earnings projections for any of the utilities that are located in the mid-Atlantic region or New York.
The independent power producers we cover--Calpine, NRG Energy, and Dynegy--have sued to have the ZECs ruled illegal. For Calpine, we think there's significant upside if the ZECs are declared illegal. Power prices in their primary regions in the mid-Atlantic would likely grow up to 50%, and that would be a huge bottom-line boost for Calpine. We think it is 33% undervalued right now with a $19 fair value estimate. This is even after a 20% run recently when a private equity takeout rumor surfaced.