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Generation Roundtable: Power Flux

Generators struggle to plan for the future as they cope with an unstable present.
Fortnightly Magazine - December 2003

Group, which bought some Sithe projects from Exelon; and Pomifer Point LLC, which bought an interest from Calpine.

There is an influx of lookers. There is new money out there, but how many of these will actually turn into buyers remains to be seen. I expect most of them will just be lookers and will go away. Examples are George Soros, Applewood, Madison Dearborn, KKR, Promentory, and AIG.

Despite the fact that there are a few successful new entrants, I stand by my opinion that half of the new entrants will never buy anything, 25 percent will make purchases that they will later regret, and 25 percent will make good long-term buys

Fortnightly: What roles are the big banks and investment banks playing?

Bodington: Those that can bring a trading capability to the market during the next couple of years will make billions of dollars, and the way they'll do it is to take away merchant risk. They'll participate in merchant projects for low investment, but add tremendous value by taking away the merchant risk and capturing some of that value for themselves.

Who will it be? Possibly Goldman Sachs, Shell, and a few other trading companies that are still standing after the carnage of the last two years. They are high on the list of those that are likely to be successful. I know that some of those are taking careful looks at merchant power plants, but deals aren't getting done yet.

As for banks... the market for power is at or is just past its nadir. I see the owners and their lenders-the de-facto owners now-holding onto assets until market conditions improve. And because of that the bid/ask spread is still too great for deals to happen. We have been retained by one bank group to assist them in a solicitation for a tolling contract for a project, and this is something a number of lenders are looking at as a way to take away merchant risk for some period of time.

Zimmer: There are not enough buyers and plenty of sellers. The buy side has not filled out as much as people had hoped.

On the other hand, the debt overhang on the merchant industry has been greatly reduced. A year or 14 months ago it was $90 billion, and recent updates indicate that number has been cut in half. Now debt overhang may be more like $47 billion. Some of it has been extinguished through bankruptcies, some has been extended through 12 or 18 months and will come due in '04, and some companies have been successful at selling plants and moving the debt off the books.

We're not out of the woods yet, though. A 50 percent reduction in less than 18 months is pretty fair, but arguably that's the low-lying fruit, compared to the final $47 billion.

The other piece of the acquisition binge that was forecast was related to the removal of PUHCA barriers, a harbinger of incremental consolidation in the electric utility industry, with perhaps another round of strategic convergence plays and maybe cross-border