Neptune and the Northeast
Distressed Generation Assets: When Is the Price Right?
An overview of the buyer and seller, and a discussion of current values for distressed assets.
Three groups of sellers likely will market assets in 2003. First, the same companies that were desperate to sell merchant assets in 2002 will continue to market those same assets in 2003. NRG, Mirant, PG&E National Energy Group, and others will continue to market their operating, under-construction, and development assets in an effort to raise cash and reduce debt. With the fundamentals of the industry unchanged, the only reason to expect these assets to sell in 2003 is that many sellers have taken significant write-downs, which may sufficiently narrow the "bid-ask" spread on these assets to allow buyers and sellers to reach agreement.
The second and often overlapping group of sellers will be those with large debt maturities in 2003. This year Mirant has $1.6 billion in debt expiring, Williams has $2.25 billion, and Reliant Resources has an astounding $3.7 billion.
The third group of sellers will be those who never imagined they would be asset owners. Banks, insurance companies, and construction firms have already found themselves with direct or indirect ownership of generating assets. In 2002, NRG turned over its LSP-Pike facility to its EPC contractor, the Shaw Group; PG&E National Energy Group effectively "turned over the keys" to three unfinished plants and one operating facility to its lenders; and Xcel has offered NRG's lenders less than three cents for every dollar of its subsidiaries' outstanding debt. Because many of the assets securing project debt were already marketed to a disinterested market in 2002, lenders face the challenge of remarketing these assets in 2003 or completing and operating these facilities themselves.
Who Will Buy?
Several groups of buyers will be actively involved in buying distressed assets during the next year.
In numerous jurisdictions, state regulatory commissions and utilities have become concerned with the near- and long-term capacity adequacy for meeting native load, almost moving back to an integrated resource planning view of the world. As a result, several utilities are now looking to acquire distressed generation assets as a way to secure future regulated supply needs. Although the need may not be immediate, many of these companies rightfully recognize that the economics of buying at distressed prices this year (or next) can more than offset the carrying cost associated with fully growing into the capacity acquired. Alternatively, for those needs that are several years out, utilities may decide to buy distressed assets under construction, or partially developed sites. For these companies, the assets acquired will more than likely be within or near their control region.
Similar to the regulated utilities, generation and transmission cooperatives are also looking at certain distressed assets. Co-ops have seen steady growth in their service territories, and they need new supply to meet expected future needs. Like their investor-owned utility brethren, these organizations are looking to acquire generation because the prices are better than new builds and because it is increasingly difficult to find an investment-grade supplier with whom they could contract. The cooperatives will most likely be looking at individual