Calpine (NYSE:CPN), Ormat Technologies (NYSE:ORA) Would Benefit Most from California CO2 Rules, If They Last

Assuming the draconian rules implemented by the California Air Resources Board in December 2010 remain in effect in the years ahead, the companies that could get the most benefit from it would probably be Calpine (NYSE:CPN) and Ormat Technologies (NYSE:ORA).

Barclays says, "On December 16, 2010 the California Air Resources Board approved a CO2 cap-and-trade program to be implemented on January 1, 2012. Emitting electricity generating facilities and industrial facilities will be affected on January 1, 2012. In 2015, the entities that distribute or use natural gas in California would be affected. By 2020 the goal is to reduce CO2 emissions by 15%.

"We believe Calpine (CPN)(Equalweight) and Ormat Technologies (ORA)(Equalweight) could benefit the most from the rules. CPN's combined cycle units would benefit from a spark spread expansion. At a 7,100 btu/kwh heat rate, we estimate about 4,600 MW of CPN combined cycle capacity emits 0.42 tons/Mwhr, which is 0.13 tons/MWhr less than the market and a $40M benefit at a $13/ton CO2 price. To the extent that CPN's and ORA's geothermal capacity operate as merchant, it would benefit from higher power prices. Under contracts the benefits could be shared or retained by the customer.

"We are raising the target on CPN $2 to $16 and raising our 2012/2013 Adjusted EBITDA forecasts $40M to $1.92B/$2.08B. Our target reflects $16 for an asset valuation with $13.3B enterprise value less $5.6B of net debt ($7.1B), NOL NPV ($1.5B) and other items, and 486 million shares and $16 for 8x Open EBITDA of $1.34B and a renewable 9.4x multiple of $295M less debt and the same items as�well. Previously, our price target was $14, and the asset value was $15 at $6.1B of�net debt and Open EBITDA was $13 or $1.44B at 7.1x and $272M at 9.0x with $6.1B of net debt ($7.6B), NOL ($1.4B), and 486 million shares."

Calpine closed Tuesday at $14.71, up $0.06, or 0.41 percent. Ormat ended the trading day at $31.18, gaining $0.07, or 0.23 percent.