Perhaps the only political prediction bound to come true this year is that the words ôelectric restructuringö will reverberate in nearly every stateÆs legislative chamber.
funding commitments. The lender group foreclosed during January 2003 and, following much evaluation and a restructuring of their interests, funded the completion of construction during mid-2003. An extensive marketing effort and several false starts ultimately led to Calpine's purchase of the 570-MW project.
Duke Energy North America (DENA) developed numerous merchant projects and had a portfolio of eight projects in four states in the Southeastern Electric Reliability Council (SERC). All eight are natural-gas-fired, five are peakers, three are combined-cycle facilities, and most of their 5,280-MW combined capacity went into service during 2002. As DENA's heavy investment in merchant generation failed to yield current earnings, asset sales began. Lackluster bids forced DENA to write down the value of the plants three times and the portfolio ultimately was sold to KGen Partners (KGgen). In addition, as part of the deal, one of the projects is supported by a power-purchase agreement with Georgia Power. KGen is owned by MatlinPatterson, a distressed-debt-focused fund that also invested in NRG Energy and has a representative on NRG's board of directors.
Standing back, the transactions dicussed here show that sellers are primarily the developers and lenders who invested heavily in merchant generation. Buyers are diverse-utilities, independents and private equity firms. Utilities of various types actually account for most of the transactions. Investor-owned utilities, munis and other entities whose ratepayers will be at risk account for approximately 70 percent of the transactions, 45 percent of the generating capacity and 50 percent of the value exchanged. Among independents, Calpine has been both a buyer and seller. Private-equity firms have spent much time looking for a merchant acquisition; however, few have become buyers. KGen was noted above. Brascan and Centrica have other power interests and experience.
Private equity buyers actually have been more active in pursing generation that involves less risk than merchant operations-either regulated utilities or non-merchant independent power. Texas Pacific Group formed Oregon Electric Utility Co. to pursue acquiring Portland General Electric from Enron. KKR, Blackstone Group, Texas Pacific Group and Hellman & Friedman have joined to purchase the former Reliant unit Texas Genco. AIG, Algonquin, Arclight, Goldman Sachs, Harbert and many others have, and continue to, pursue projects whose revenues are secured by long-term contracts.
Buyer's Market: Finding Value
Merchant sales have been painful experiences for sellers. Continuing with the examples of Frederickson, Brazos Valley and Duke, those interests sold for approximately 79 percent, 68 percent and 20 percent of original cost, respectively. While the range is broad, on average, operational natural-gas-fired merchant projects have sold for approximately 55 percent of the actual total cost to develop and construct. Such discounts are not isolated to completed projects. Some combustion turbines still under warranty and in factory wrap are worth only 50 percent of their actual cost of three years ago. Economic recovery, regulatory changes and new needs for capacity are starting to reverse the slide in some markets.
The $/kW is an often employed and potentially reckless guide to value. Subject to that qualification, prices varied between approximately $90/kW to $790/kW and averaged $225/kW for operating gas-fired plants. Low-value