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Coatue, Lone Pine and Third Point are placing their AI bets on power producers

Hedge-fund firms such as Coatue Management that are known for investing in next-generation technology companies have lately been piling into a sleepier sector.

Old-school power companies such as Vistra VST 0.30%increase; green up pointing triangle, Constellation Energy CEG 0.10%increase; green up pointing triangle and Talen Energy TLN 0.85%increase; green up pointing triangle have become darlings among hedge-fund firms thanks to their starring role in the artificial-intelligence boom. Such companies command the scarcest resource in the generative-AI supply chain: the extra electricity that fuels the data centers needed to train large language models and answer prompts from users of AI chatbots such as ChatGPT.

The phenomenon has made power generators some of the best-performing stocks in the S&P 500 this year—shares of Vistra have more than tripled in price—and has boosted hedge funds’ returns.

Coatue, whose founder, Philippe Laffont, muses about the coming of humanoid AI robots, owned stakes in Vistra and Constellation worth about $2.3 billion at the end of September, according to a securities filing. Coatue’s flagship fund gained about 12% through the end of October, a person familiar with the matter said.

At Steve Mandel’s Lone Pine Capital, a $17 billion investment firm with a large tech and startup portfolio, gains on positions in Vistra, Constellation and Talen accounted for about one-fifth of its main hedge fund’s nearly 22% net return this year through the end of September, according to documents viewed by The Wall Street Journal.

Dan Loeb’s Third Point counts Amazon.com, Meta Platforms and chip maker Taiwan Semiconductor Manufacturing 2330 -0.92%decrease; red down pointing triangle among its top five stock positions as part of a bet on the transformational impact of AI. But the $12 billion firm’s best-performing publicly traded holding is Vistra, helping Third Point’s flagship fund generate a 27% return this year through the end of November.

The total return of the S&P 500 is about 28% through the end of November. Broad hedge-fund indexes are up about 10% in the same span.

Hedge funds that specialize in tech, media and telecommunications thrived in 2020 and much of 2021 when the Covid-19 pandemic supercharged demand for e-commerce and other digital services. They then suffered in 2022 when rising interest rates cooled valuations for tech companies.

It wasn’t long ago that the hedge funds interested in power producers were those that traded in distressed securities. Stagnant power demand, overbuilding and high levels of debt pushed many energy companies, including Vistra’s predecessor, into bankruptcy.

Now, after a decade of flat growth, U.S. power demand is set to soar in the coming years. Some funds started paying attention to power producers after noticing that trends such as the proliferation of electric vehicles and the reshoring of manufacturing would boost demand for energy faster than supply could keep up.

The AI frenzy took that to a whole new level: It takes around six to 10 times as much electricity to process a ChatGPT query compared with a google search, according to Goldman Sachs research. Starting earlier this year, cloud-computing providers such as Amazon.com and Microsoft cut special deals with power generators to secure enough juice for their AI and data-center ambitions at what are thought to be premium prices, making more investors take notice.

Only certain power companies stand to benefit. Those active in deregulated markets, such as Texas and parts of the mid-Atlantic region, can charge the market price for power. Those with so-called dispatchable power, mostly natural-gas and nuclear plants that can quickly and reliably produce electricity when needed, are particularly prized.

Interest in this trade has spread beyond tech-focused hedge funds. Vistra joined Goldman Sachs’s “Hedge Fund VIP” list, a basket of popular holdings among the bank’s clients, earlier this year. Macro hedge funds that bet on big-picture market moves are also large participants in the AI power trade: Rallies in Vistra and Constellation helped Rob Citrone’s Discovery Capital Management gain about 47% through November in its main fund and David Rogers’s Castle Hook Partners, which also has a stake in turbine maker GE Vernova, gain more than 60% in its main fund, people familiar with the matter said.

Recent and future hedge-fund launches are looking to get in on related themes, people familiar with the matter said. Valiant Capital Management, a stock-picking hedge-fund firm, pitched Constellation at the Sohn San Francisco investment conference in October and recently started a special-purpose vehicle focused on companies working on upgrading the U.S. electrical grid. A new BlackRock hedge fund, the Blackrock Power and Energy Navigator fund, is looking to debut early next year.

Meanwhile, some energy hedge funds are exiting positions in certain power companies after the newcomers bid up valuations. Electron Capital Partners, a $3 billion firm that bets on and against utility and renewables stocks, sold its Vistra shares in the third quarter, according to a securities filing. Its flagship fund is up 23% through November, according to an investor document viewed by the Journal.

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Commodities trading house hit by repeated failures of risk controls that have taken financial and reputational toll

Commodities trader Trafigura is coming under heightened scrutiny by some of its lenders after a series of scandals hit earnings and dented the company’s value.

The privately held group uncovered a “massive problem” at its Mongolian oil division this year, which cost it $1.1bn and contributed to a steep decline in profits and dividend payouts. It is the second such issue to hit Trafigura in two years after it said in 2023 that it had been the victim of a $600mn nickel fraud.

The trouble in Mongolia was significant enough to trigger questions from the risk committees at some of Trafigura’s lenders, according to bankers, although it did not result in any suspensions of credit lines.

In a sign of the business impact, banks have asked Trafigura to include an explanation of events in Mongolia and its remediation plan in the presentation for its upcoming European revolving credit facility to be launched next month.

“We don’t expect Trafigura to have any form of liquidity distress, but that shouldn’t serve as an excuse to be complacent,” said one banker.

As Trafigura prepares to shake up its top management, its annual results released on Friday underscored the financial toll of the repeated failures of controls. The Mongolia scandal as well as hefty fines from regulatory authorities cost the group more than $500mn this year, paring down net profits to $2.8bn for the period.

Incoming chief executive Richard Holtum, who currently runs the gas and power division, will take up his new role on January 1, while chief executive Jeremy Weir will become chair.

Weir’s tenure draws to a close at the end of a difficult year, dealing not only with the Mongolia scandal but also with a high-profile corruption trial that has running for the past two weeks in Switzerland and a series of settlements with US regulators.

A person close to Trafigura said it had been tackling issues that were “hanging over” the company to give Holtum a clearer playing field when he takes over.

Trafigura reached a $127mn settlement with the US justice department in March, pleading guilty to a scheme to pay bribes in Brazil between 2003 and 2014. Two months later it agreed a $55mn settlement with US regulators over charges of fraud and market manipulation. Trafigura neither admits nor denies those charges.

The company, the largest independent metals trader alongside rivals such as Vitol and Mercuria, has also embarked on a hiring spree to bulk out its risk department under Ignacio Moyano, who was appointed chief risk officer last year.

Trafigura blamed “gross misconduct” for the problems in Mongolia, saying employees colluded with its trading partner to perpetrate the deceit over five years. It said it spotted the problem because of tighter risk controls in the wake of the nickel fraud.

The incident forced Trafigura to book a $358mn loss this year, restate earnings in two prior years and restate the value of its equity at the end of 2023 to $15.8bn, down from $16.5bn originally.

The repeated scandals have raised questions among its bankers about why risk controls failed.

“From a bank perspective, the key question is, ‘Is it a one-off, or not?’,” said Jean-François Lambert, a former commodity trade finance banker who now runs a consultancy. 

“The banks didn’t like it, nobody likes it. But what matters is that it’s a one-off, and this is not harming the financial strength of the company.”

Bankers are often the toughest masters for independent commodity trading houses, because they rely on credit lines to finance the trades that move raw materials around the world.  

Trafigura has lines of credit worth $77bn with about 150 different banks. That is up slightly from $75bn last year.

Banks’ risk committees are often more conservative than the trading houses themselves. As the nickel scandal began to spiral, Citi was among the earliest to spot the crisis, cutting off the credit facility that Trafigura used for the trades.

Trafigura says it was tricked into buying more than 1,000 containers of purported nickel, which did not actually contain the material, and is suing its counterparty Prateek Gupta and his affiliated companies in London courts. Gupta’s lawyers accuse Trafigura of being complicit in the fraudulent scheme.

The company says the compliance overhaul it undertook as a result of the nickel fraud led to the discovery of the problems in its Mongolia oil division.

The $1.1bn writedown booked by Trafigura is vast in comparison to the size of the Mongolian oil market, which is one of the smallest in the world, trading about $1bn of oil and oil products a year.

“We are confident that these issues are isolated to a self-contained operation in Mongolia,” Weir, the outgoing chief executive, said in the company’s annual report.

He added that Trafigura was responding to the challenges by urgently extending its work “to review, test and improve our end-to-end control framework, systems, risk and governance structures”. An external audit of the Mongolia incident is under way.

As new leadership takes the helm, Trafigura will seek to ensure that the compliance measures put in place will be enough to prevent similar losses in future.

“They [Trafigura] seem to have taken the right steps,” said Lambert. “The only pain for them, of course, is their reputation.”

“The first Christian find north of the Alps comes from our city,” added Josef. “We can be proud of that, especially now, so close to Christmas.”

Sweden open to power cable project if Germany reforms, minister says

Swedish energy minister Ebba Busch prepared to move on Hansa PowerBridge project if Berlin overhauls electricity market

Sweden has said it is prepared to approve a power cable connecting Germany to southern Sweden if Berlin reorganises its electricity market to stop drawing as much lower-cost power from overseas.

Ebba Busch, Sweden’s energy minister, told the Financial Times that the Hansa PowerBridge project, a 700 megawatt connector planned to link the German and Swedish electricity markets, would be postponed “until Germany gets its system in order”.

But, she added, “the Swedish government would be prepared to move” on the project if Germany split its internal electricity market into bidding zones that would increase the efficiency of its networks and lower prices.

Such reforms would prevent Germany from attracting as much of Sweden’s cheaper electricity, generated largely by hydropower, and avoid costs being pushed up for Swedish consumers. Electricity flows on the networks to wherever the highest price demand is.

Sweden’s grid is already connected to Germany through one interconnector, which runs under the Baltic Sea.

The debate over European electricity prices has become increasingly heated this year as EU member states rush to add weather-driven renewable power to the system in order to move away from Russian gas and fossil fuels.

This has prompted periods of significant overproduction when the sun shines and wind blows but also stints of very low generation when there is no sun or wind.

Several countries have recorded highly volatile prices as a result.

Busch said prices were jumping from “minus prices” to around €1 per kilowatt hour in southern Sweden last Wednesday and Thursday. “That makes for a very difficult business case” for investment, she added.

In the summer Greek Prime Minister Kyriakos Mitsotakis also voiced concerns over inexplicably high bills in Greece, describing the bloc’s energy system as a “black box” that should be better scrutinised.

“If we want to have an energy market that functions well and that really takes advantage of renewables, we should think about some sort of European regulator that looks at these issues and has the capacity to intervene,” Mitsotakis said.

The EU’s energy regulator Acer warned on Monday that electricity network costs could double by 2050 “endangering the overall affordability of electricity bills” as more strain is placed on existing grids.

Norwegian politicians said last week, as electricity prices there reached the highest level since 2009, that they wanted to review interconnectors between Norway and Denmark, Germany and the UK.

Prices have since dropped back to record lows for December.

Referring to Oslo’s concerns, Busch said it was “a sad moment for Europe when an open, progressive country that likes being part of the rest of the world is signalling that we might not want to be part of this interconnected energy system . . . it’s a strong signal to be taken seriously”.

Busch laid the blame for Germany’s high prices on its decision to close down its nuclear power plants and oppose support for nuclear at EU-level after the Fukushima incident in 2011.

Sweden took a similar decision under its previous government but has reversed its policy, becoming one of the strongest advocates for nuclear power at the European level — a debate that has caused deep division between Germany and strongly pro-nuclear France.

Sweden’s own energy system often suffers from huge regional price discrepancies as there are poor transmission links from the north where most of Sweden’s hydropower plants are located. Last week consumers in Gothenburg — home to Volvo Cars, Volvo Trucks and SKF — paid 190 times more for electricity than those in the northern city of Luleå.

“Our energy policy has been hopeless. If we don’t sort things out soon, big parts of industry could be in trouble,” said a leading Swedish business executive.

Busch said Europe had to stop engaging in “political struggles” over nuclear power and encourage more investment into the technology to stabilise the system.

In a dig at German energy minister Robert Habeck, a member of the anti-nuclear Green party, Busch said: “No political willpower can override the basic rules of physics, not even Dr Robert Habeck.”

Elon Musk’s taxing pay options

Elon Musk has fought hard for a historic pay package at Tesla that would hand him $129bn at its current share price. If he doesn’t win, there could be an unexpected victim left holding the bag: Tesla.

Earlier this month, Delaware judge Kathaleen McCormick denied the company’s second attempt to give Musk the pay deal, putting the enormous windfall in further limbo.

It’s the biggest package of stock options in history — worth $56bn at the time of the original ruling, and $129bn today.

Shareholders’ overwhelming vote to reapprove the grant didn’t convince McCormick to override her previous rejection of the deal as unfair.

Now the board’s faced with a tough choice. It can either pursue a lengthy and uncertain appeal with a higher court, or award Musk with a new options package, DD’s Stephen Morris reports. 

Critically, either option could have accounting and tax caveats with multibillion-dollar implications.

A new pay deal could trigger a $50bn-plus corporate accounting charge and separately impose a punitive tax rate of up to 57 per cent on Musk’s shares.

Tesla warned shareholders of this before. In April, it said that reissuing a new set of stock options to allow Musk to buy the same 304mn shares would result in a compensation-related accounting charge of more than $25bn. 

And that was when Tesla’s stock was at $175 — it has since more than doubled.

Then there are the potential tax implications for the world’s richest man himself, which aren’t as clear. 

If the company loses an appeal, the options would be awarded already “in the money”, since the ambitious financial targets the deal was pegged to have been achieved. 

“It is very simple. If you grant options that are ‘in the money’, which they clearly are now, all kinds of bad things happen,” Schuyler Moore, a tax partner at law firm Greenberg Glusker, told the FT. 

If the company tries to award a new deal with the same terms, it could trigger a nearly $70bn tax bill. “That is why they are trying so hard to ratify the original deal,” Moore added. “If they re-award it now, there will be hell to pay on taxes.”