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Generating Plant Sales and Acquisitions: Who's Doing What, and Why

Fortnightly Magazine - February 15 1999

but establishing the company's overall strategy is the starting point for any asset acquisition.

Once strategy is determined, there are four key steps to successful asset acquisition:

1. Develop market assumptions;

2. Determine types of assets to acquire;

3. Determine value of target assets; and

4. Determine selling strategy.

Develop Market Assumptions. These assumptions will help in deciding which regions of the country on which to focus. Considerations include regional value drivers, capacity forecasts for the regions, demand and price forecasts and issues related to transmission and independent system operators.

Obviously, all things being equal, an asset owner would like to play in the markets where projected prices are highest, and that depends largely on projected supply and demand. If there are indications that a certain NERC region is going to experience capacity shortfalls, e.g., the Midwest, then asset ownership in that region may be more valuable. But to understand projected capacity fully, the company must look at upgrades, expansions, projected building, deferred retirements, mothballed plants, etc.

Determine Types of Assets to Acquire. Some key factors to consider are whether to build, rent or buy; the location of the asset; industrial customer cogeneration facilities vs. merchant plants; and specific fuel type. The company also must determine the appropriate amount of assets needed given its financial and risk profiles and the anticipated impact on the asset portfolio. These issues will depend on whether the company's strategy is scale-driven, market-driven or involves providing generation services.

Determine Value of Target Assets. Value is in the eye of the beholder. Deals that have appeared on the surface to be overpriced may turn out to be bargains because they fit into the company's asset strategy and core competencies. There are six components related to the value of a generation asset:

Discounted cash flow (present value of projected cash flows from energy, capacity, ancillary services);

Operation and maintenance improvements;

Trading portfolio enhancement;

Site expansion value (ability to expand, repower);

Retail market support; and

Network value (ability to achieve synergies from combining disparate geographic assets).

It is important to evaluate the additional "hidden" value beyond discounted cash flow that the asset is expected to bring. *

Determine Selling Strategy. Selling strategy relies on an understanding of the factors driving sellers. In a deal with multiple parties (e.g., asset control or cogeneration deal), the solution must be customized to fit the needs of all parties. As in any business decision, in order to successfully close a deal, it is crucial to analyze the competition and determine the optimal selling strategy.

* For a more complete exposition on this topic, please see, for example, Donoghue, Dan, Haarmeyer, David and Parker, Seth, "Power Divestiture-The First Wave," Independent Energy, June 1998, pp. 36-40. Please also see Haarmeyer, David, McWhinney, Robert T. Jr. and Moe, Ronald, "The New England Auction: Regional Strategy for Competitive Generation," Public Utilities Fortnightly, Feb. 15, 1998, pp. 34-39.

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