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Mirant, RRI Energy Shares Climb On Higher Capacity Prices

NEW YORK (Dow Jones)--Shares of RRI Energy Inc. (RRI) and Mirant Corp. (MIR) climbed Monday as prices paid to keep power plants available rebounded in parts of the eastern U.S.

Capacity prices rose throughout the PJM Interconnection, a 13-state power market in the Mid-Atlantic region and parts of the Southeast and Midwest, for a period three years from now. The increases were made public Friday evening when PJM released results of its annual capacity auction.

Analysts said Mirant and RRI Energy--which last month announced plans to merge--appear to be the biggest beneficiaries of the higher capacity prices. Shares of Mirant climbed to their highest intraday level since mid-February, recently trading 4.6% higher at $13.09, while RRI Energy traded up 4.1% to $4.55. The two companies are independent power producers selling their energy and capacity at market prices rather than at regulated rates.

Utilities and retail suppliers are required to buy capacity, which provides an incentive to help ensure sufficient operational generation to meet demand in coming years. The money compensates power plants for being operational, not for the electricity they produce.

After the market closed Friday, PJM said capacity prices across the western half of the market for June 1, 2013 to May 31, 2014 rose 68% to $27.73 a megawatt day from the auction a year ago. A plant is compensated for each megawatt of generating capacity available on a daily basis.

Yet eastern sections of PJM saw larger increases and far stronger pricing of more than $240 a megawatt day, as limited high-voltage transmission lines prevent power from flowing from western areas.

For a combined Mirant and RRI, the higher prices should increase capacity revenue by more than 70%, adding $300 million in earnings before interest, taxes, depreciation and amortization three years from now, said Tudor, Pickering, Holt & Co. in a note to clients.

Mirant and RRI Energy agreed to merge in a deal that would create one of the biggest independent power companies in the U.S. The deal is expected to close before the end of the year.

The higher capacity prices in PJM come as the power industry struggles with back-to-back years of declining demand and weak energy prices. While the results were positive for eastern generators, analysts at Barclays Capital warned against putting too much emphasis on the results, particularly since they're for three years from now.

"We don't believe it is time to get overly enthusiastic and broadly buy power companies," they wrote in a note to clients Monday.

http://online.wsj.com/article/BT-CO-20100517-710844.html?mod=WSJ_Deals_LEFTLatestHeadlines