Can consolidation create sustainable long-term value, or will it prove seductive but, ultimately, disappointing to shareholders, employees, customers, and management alike?
Going to the Bank
Financial buyers are snapping up power plants faster than at any time in history. The asset shift represents an interim step in a wholesale-market transformation.
independent power companies, with few exceptions, were able to refinance and buy time."
In other words, sellers left the table because prices were too low; buyers swarmed to the table in hopes of finding bargains; and the supply/demand relationship tipped enough to make many deals worthwhile, particularly for bundles of large base-load plants.
"We have moved through that group of assets quickly," says Jim McGinnis, managing director in the global power and utilities group at Morgan Stanley in New York. "The available base-load assets were priced in healthy auctions, and we still see a healthy appetite from a variety of sources."
This has proved true for both contracted and merchant plants. "Last year merchant plants started to move," Martin says. "That still isn't well understood by the market; many people think the merchants are dogs."
Indeed, before 2004, they were. Very few merchant plants changed hands in 2003. But last year, merchant assets accounted for well over half (57 percent) of the capacity sold.
By far the biggest deals of the year were merchant-plant portfolios. The Texas Genco sale was the big enchilada, with 14.5 GW of generating capacity at 13 plants going to GC Power Acquisition, a group of private-equity firms. Other big deals included KGen/Maitlin Patterson's buyout of Duke Energy North America's 5,000 MW of merchant capacity in the Southeast; and the acquisition of AEP's Texas Central merchant plants totaling 3,800 MW by a partnership of Sempra Energy and private-equity firms Carlyle Group and Riverstone.
On a dollar-per-kilowatt basis, merchant plants have been bargain priced. On average, merchant assets in 2004 fetched $220/kW, compared with more than $480/kW for contracted facilities. Duke's liquidation was the market's loss leader, with KGen buying the assets for just $93/kW.
The three big deals mentioned above illustrate at least one obvious trend: Private equity and other financial players indisputably led the buy-side of the market in 2004. Understanding their roles and motivations, however, is a little more complicated.
In some cases financial buyers might hang on to the power assets they've acquired, which generally contradicts their modus operandi . Large investment banks like Goldman Sachs, Bear Stearns, Morgan Stanley, and even Merrill Lynch appear to be buying assets with longer-term intentions.
"They recognize that energy is a huge commodity, and with Enron and other traders out of the market there is a vacuum," says Stephen G. Moyer, a director with Imperial Capital in Beverly Hills, Calif., a broker dealing in distressed power-plant debt. "I don't see them as near-term flippers. In addition to trading power, in the future these guys could get involved with trading emissions credits. They see an opportunity, and they are stepping in."
Moreover, such financial investors perceive the value in owning hard assets, largely to hedge their positions in the market. Also they are avoiding the inherent weaknesses of the asset-light strategies that allowed Enron and other pure-paper traders to collapse so quickly and catastrophically when the market turned against them in 2002.
These long-term financial players, however, might prove to be the exceptions rather than the rule.