NRG Energy, Dynegy Drop as UBS Sees Risk of Weaker PJM Market

NRG Energy Inc. and Dynegy Inc. slid after UBS Group AG lowered its rating on the two independent power producers, saying the market was overlooking a drop in payouts as well as the potential for “continued weakness” from the biggest U.S. grid.

NRG, based in Princeton, New Jersey, dropped as much as 9.7 percent, the steepest one-day decline since Feb. 11. The stock was down 7.2 percent at $16.50 at 11:09 a.m. in New York. Dynegy retreated 4.2 percent to $20.35. Before Thursday, NRG had surged 51 percent and Dynegy 59 percent this year.

While gas futures have rebounded about 11 percent this year, that hasn’t been accompanied by a pickup in power prices. Payments for securing most of the electricity needed to meet future demand in the PJM Interconnection LLC market slid 39 percent in an auction last month, dealing a blow to suppliers already being squeezed by record-low electricity prices.

“The equities are tracking gas but their fundamentals are tied to power,”  Julien Dumoulin-Smith, an analyst at UBS, said in a phone interview on Thursday. “Capacity payments for power are down, power is down but the stocks are up. The street is also missing the point that capacity isn’t going to significantly recover next year.”

UBS cut its recommendation for NRG to sell from buy with a 12-month price target of $16. Dynegy’s rating was lowered to neutral from buy with a 12-month target of $22.

Dynegy didn’t immediately return a call seeking comment. Marijke Shugrue, a spokeswoman for NRG, said the company had no comment.

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