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Generation Roundtable: Power Flux
Most of the outright sales that are occurring, however, aren't strictly "distressed." In October, for example, the Goldman Sachs Group announced it would buy 100 percent of Cogentrix Energy Inc.'s stock in early 2004. Most of Cogentrix's plants sell power under long-term, off-take agreements, which helped the company fetch about $2.4 billion from Goldman Sachs. The investment bank agreed to acquire Cogentrix after Aquila Inc.'s attempted acquisition of the company collapsed at the end of July. (In a sad coincidence, Cogentrix founder George T. Lewis died of an extended illness just a few days before announcement of the Goldman Sachs deal.)
In the wake of such sales, we talked with two well-placed experts on secondary market activity: Jeff Bodington, principal of Bodington & Co., a San Francisco-based financial advisory boutique; and Michael Zimmer, a partner with Baker & McKenzie in Washington, D.C.
Fortnightly: What are you seeing in secondary market activity? Are plant sales picking up?
Bodington: The number of announcements and closings is clearly accelerating. The very slow market has turned into a moderately slow market, and I will take that as good news considering all that is going on in the industry.
In the big picture, there have been approximately 40 deals so far this year. Last year there were 62 in total, so at the end of 2003 the total volume might be about the same as last year. At least 90 percent of the deals getting done involve projects that have power-sales contracts or tolling agreements. The market for merchant plants remains very difficult. We have more merchant projects changing hands this year than we did last year, but so far those tend to be transfers to banks, and equity sales to new owners for substantial sums.
Zimmer: The level of interest in selling is definitely starting to pick up, but actual deal flow is still slow. It will take several months for it to pick up into 2004. Next year, people will be reorienting the pieces of their portfolios and actually moving forward in selling out of those portfolios.
There has been a lot of exploration as to price and market clearing, and people are now starting to get a fuller appreciation of where the challenges might lie. Many of those properties coming to market were originally merchant plants, reliant on natural gas as their fuel, which creates ongoing operational challenges.
A major share of the activity involves projects or facilities sold out of bankruptcy. NRG, Exxon, National Energy Group, and ultimately Mirant will appear in the market.
Fortnightly: Who are the buyers today, and who are they likely to be next year?
Bodington: I see some new entrants and some regulated utilities buying assets. (See next page). There appears to be some movement back toward a traditional utility model, where assets are owned inside a rate base.
While a few new entrants are in the market, out of the 30 to 40 new companies looking to buy, only a couple have closed deals. A few include Competitive Power Ventures, which bought four development-stage projects; Reservoir Capital