June 1 , 2002
Plants for Sale: Pricing the New Wave
Financial players and load-serving utilities are looking for power asset deals.
Despite talk of wide bid-ask spreads in the past two tumultuous years, some 60 sales of generation assets have been announced. These sales cover more than 22 GW of capacity, valued on a cash-and-debt basis at approximately $11 billion. A wide variety of buyers and sellers have participated in the sales activity, with a pronounced entry by financial players (investment banks and private equity firms) and load-serving entities (LSEs) looking for capacity to serve their load. All plant types-gas-fired, combined-cycle gas turbines (CCGT), simple-cycle gas turbines (SC), cogeneration (cogen), coal, nuclear, hydro, and wind-have been bought and sold. 1
The systemic capacity overbuild across North America has not led to the expected fire sales. Indeed, the average $/kW values for capacity in many cases are below new build costs, but not substantially. Two explanations stand out: Many of the plants sold have attractive power-supply contracts, and a large number of the merchant plants with little or no equity value are either not finding buyers or are being withheld from the market until prices recover. Hence, we are likely seeing the early stage of an asset-sales wave. In fact, recent sales reflect an uptick in activity.
Future transaction activity is likely to accelerate. The key drivers for asset sales remain robust: About 60 GW of capacity on the block, power prices in many regions that are unlikely to recover until 2010, and increased financial pressures on a number of merchant and diversified energy companies. Moreover, the ranks of potential buyers are growing as credit-risk-shy utilities show a preference for asset ownership over power purchase contracts, and financial players step into the vacuum.
Generation asset sales during the past two years have covered every type of power plant. As indicated in Figure 1, CCGT assets have been the predominant leader with seven separate transactions representing more than a third of total megawatt capacity sold and total dollar value. 2 The average dollar value for CCGT capacity is $495/kW. This high value is related to the profile of asset buyers, which are generally either LSEs or have long-term purchase agreements with creditworthy power purchasers.
Five separate nuclear plant transactions have occurred during this time, two representing British Energy's exit from the North American market after experiencing severe distress in its home market in the United Kingdom. Though difficult to precisely value given complex terms and conditions (e.g., transfer of decommissioning funds), the average value of nuclear capacity is $485/kW. Picking up an efficient plant (95 percent capacity factor), with attractive power purchase contracts and room for synergies with a neighboring plant, Constellation Power's purchase of RG&E's Ginna station for around $800/kW helped to bring up the average (see Figure 1 on p. 48).
Cogen plants account for the greatest number of the transactions and have gained favor because of strong contract positions and favorable regulatory status under the Public Utility Regulatory Policies Act (PURPA). While accounting for more than 15 percent of total capacity sold, cogen plants accounted for almost 30 percent