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Plants for Sale: Pricing the New Wave

Financial players and load-serving utilities are looking for power asset deals.
Fortnightly Magazine - February 2004

PG&E's National Energy Group subsidiary, which owns the NEES and other assets, is in Chapter 11 bankruptcy.

Significant overbuild conditions explain the dearth of sales in other regions. That is especially the case for uncontracted merchant plants in Electric Reliability Council of Texas, East Central Area Reliability Coordinating Agreement, and Southwest Power Pool. In each of these regions sellers received less than $400 per average kilowatt of capacity. The Florida Reliability Coordinating Council, with lower reserve margins, has few transactions, but the two that have occurred have netted high values, averaging $700/kW.

The Players

As expected, of the 30 sellers of generation capacity, almost 80 percent were either merchant energy companies or diversified energy companies with merchant businesses. Merchants and diversified energy companies tend to be either exiting merchant generation altogether (e.g., Aquila, El Paso, and Wisconsin Energy), or nominally refocusing on their core utility operations. The top five capacity-selling companies accounted for around 60 percent of the total megawatts sold-selling more than 13 GW of capacity in 11 deals valued at more than $6.5 billion (see Figure 3, p. 49).

Sellers include companies that have experienced severe financial distress during the past two years. But except for Mirant, companies that were unable to restructure voluntarily and were forced into Chapter 11 have sold little capacity. Two notable examples of this are NEG and NRG. Inability to execute asset sales has been in part a source of liquidity problems that are now falling on lenders' shoulders. Thus far, the announced sale of the McClain CCGT plant in Oklahoma by NRG's project lenders is the only transaction related to a bankruptcy proceeding.

On the buy side, more than 30 companies have been active. The top 5 buyers of capacity accounted for more than 60 percent of capacity bought in 10 deals valued at more than $7 billion (see Figure 4). Unlike sellers, buyers have a more evenly mixed profile. Nine buyers have been active in more than one purchase, with Dominion and Brascan Corp., the Canadian financial and real estate company, each involved in three deals.

As a business group, diversified energy companies were the most active buyers. Ten diversified energy companies, in 14 transactions, purchased about 55 percent of the capacity sold. While difficult to delineate clearly, it appears that the vast majority of the capacity purchased was not to serve load within their own utility territory.

Overall, two trends stand out:

  • Financial players have stepped in-10 buyers, in 16 transactions, purchased more than 30 percent of the total capacity and are the lead buyers in terms on a dollar value basis ($5 billion). 3 Goldman Sachs' two transactions-the Linden, N.J., cogen plant and the Cogentrix portfolio-account for almost 60 percent of the capacity purchased by financial players. As indicated in Figure 4, the company is the number-one buyer in terms of dollar value and number-two purchaser of capacity. Power purchase contracts, with credible counterparties, are the key criteria in both of Goldman's transactions. As Goldman's Managing Director Doug Kimmelman noted in reference to the Cogentrix deal, "The value is in the