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What Is Your Power Portfolio Really Worth?

Change is the only certainty in today’s market.

Fortnightly Magazine - October 2005

the total value of the capacity purchased. Figure 3 shows that while unregulated energy companies have been trying to clean their portfolios of non-performing assets, private equity companies and other financial players—such as hedge funds—are opportunistically grabbing the undervalued assets and portfolios.

For a number of diversified energy companies on the sell side, such as Aquila, El Paso, TECO Energy, and Allegheny Energy, their assets represent a strategic shift away from the unregulated power business. In many cases this was a "back-to-basics" tactical move.

Changes in Asset Transactions

The other trend in the recent asset transactions is that most asset transactions were in the form of larger portfolios instead of single assets. Figure 4 shows that 56 percent of the total capacity transacted was in larger portfolios. In some cases sellers found it more efficient to bundle the assets because some of the assets have very low values, and it is difficult to find buyers for them.

On the buyer side, bundled portfolios have better values because one can get some discounting due to bundling. In the KGen acquisition of Duke Southeast assets, the peakers in the portfolio were credited practically no value. KGen has considered dismantling and selling the peaking equipment to Middle Eastern and Korean markets.

The vast majority of the financial players are private equity groups including ArcLight Capital Partners, Kohlberg Kravis Roberts, MatlinPatterson, AIG, and Complete Energy. In the largest transaction, four private-equity firms—KKR, Texas Pacific Group, Blackstone, and Hellman & Friedman—joined to purchase Texas Genco's 16,400 MW of assets. In another deal, the private equity firm, Carlyle/Riverstone, teamed with Sempra Energy to buy a collection of AEP's plants in Texas.

Diversified energy companies—those entities with both regulated and unregulated subsidiaries—and regulated utilities (including munis and co-ops) were distant second and third buyers by megawatt capacity and total dollar value.

Another fundamental change in the industry is the entry of hedge funds particularly on the secondary debt market. Although not shown in the asset buyer's column yet, hedge funds likely will make an appearance soon. Seventy-five to 330 hedge funds are estimated to be active in the energy commodities market, and that number is expected to rise. Hedge funds in general are said to have under-performed last year, with average returns of 8 percent; on the other hand, the funds focusing on energy investments have been enjoying returns of 40 to 60 percent. Even if the returns drop to more modest levels ( e.g., 15 percent), the energy market will still be more attractive than other areas.

 

Endnotes:

  1. All $/kW and $/kW-year figures presented in this report are based on net revenues after fixed operations and management.
  2. In 2005 dollars, with 15 percent real discount rate.
  3. In some regions, actual CC plant values may differ considerably from generic CC plant values. This is due mainly to some unusual actual plant characteristics or unaccounted cogeneration revenues.
  4. This article was prepared prior to Hurricane Katrina. The destruction of both demand and generation resources may have a long-term impact on the value of assets in that region.

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