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What Is Your Power Portfolio Really Worth?

Change is the only certainty in today’s market.

Fortnightly Magazine - October 2005

Asset values, and the value of their associated debt instruments, are being driven in the short term by an extreme fuel market and in the long term by a back-to-basics mindset among electric utilities. Still, asset valuations in most markets are not yet at replacement costs, leaving current investors with a residual level of risk. A perception that power markets are recovering more quickly than expected may be fueling high expectations, but volatile gas and oil prices are creating excitement and anxiety throughout the industry. For some time to come, the only certainty in this market will be change.

The Pulse of Changing Asset Values

The past year has allowed the North American power sector to continue its recovery, but it has been a treacherous time for investing. After sifting through all the recent market developments, the following issues stand out:

  • We clearly are in a new world of oil and gas prices. OPEC has abandoned (at least for 2005) any pretense of $25/barrel crude prices. Gas prices on the NYMEX for winter 2005-2006 long ago broke the $10/MMBtu barrier and continue to set records with every news event.
  • As Global Energy forecasted, the generation supply overbuild has started to level off in most areas, and spark spreads have started a modest recovery. But the market picture is much more complicated than that.
  • In spite of the uncertainty felt by market participants, generation supply in the Western Electricity Coordinating Council (WECC) continues to grow faster than load, and we now forecast that spark spreads there will bottom out in 2006.
  • The modest spark spread rebound in many markets led to a surge in value in the spring and summer of 2006 of many IPP non-recourse debt instruments traded on secondary markets. Was the debt "too cheap" last year or is it "too expensive" now? No one knows yet, but what we do know is that the thirst for yield among debt traders has changed the dynamics of many investors.
  • Speaking of investors, private equity has become a major force in asset transactions, accounting for more than half of the transactions in the past year.
  • The Wall Street investment banks do not want to be left out of the game. Several are now pursuing a combined banking and trading strategy, with the goal of being the next Morgan Stanley or Goldman Sachs. This trend should increase power market liquidity and possibly impact prices.

The Need for a Consistent Approach

For the past three years, Global Energy has produced the Power Generation BlueBook to track changes in power plant asset valuation across the markets. We update this analysis every six months following the release of our Power Market Advisory Service regional forecast. In our recent analysis, we found that over the last six months, natural gas-fired combined-cycle (CC) asset values are up

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