Calpine acquires 1,050-MW combined-cycle plant in Texas; Allete buys AES wind farms; NextEra acquires Silver State solar project from First Solar; plus equity and debt deals involving EdF, Emera,...
Asset Ownership Takes New Shape
The North American electric-power sector remains highly fragmented, with much consolidation potential.
fuel mix has been dominated by natural-gas and mixed portfolios, which are responsible for 48 percent and 36 percent, respectively, of the sold assets (see Figure 4) . During the down cycle, gas-fired merchant assets particularly were troubled. In some overbuilt markets, peaking facilities had little value left. As the owners of these troubled assets have brought them to market they also have bundled them with more valuable base-load or contracted assets. Most of these mixed portfolios also have been diversified geographically to attract more buyers.
The annual average transaction values have varied significantly by portfolio type and year. In many regions the market recovery, driven by high natural gas prices and robust load growth, came faster than expected. Recent transactions have valued mixed portfolio and base load capacity more favorably as shown in Figure 5. The average prices for coal and mixed portfolio transactions have almost doubled since 2003. As we look at the figures closely, we see an emerging upward trend in the transaction values. Across all portfolio types, the average transaction value has increased from $340/kW in 2004 to $580/kW in 2006.
Last year was a major step toward a more stable long-term asset-ownership structure in the industry. We see several companies such as NRG, Dynegy/ LSPower, FPL Energy, and BG stepping in for a longer-term asset ownership. The newcomers to the asset owners are building their asset-trading operations and gearing toward a structure where they make money by not buying and selling, but effectively operating these assets and collecting the cash flows. However, the impact of financial players has not subsided yet. Energy Capital Partners, Carlyle/Riverstone, Wayzata Investment, GSO Capital, and Rockland Capital are a few of the players who were on the buyer side in 2006.
Traditional market participants, including utilities and IPPs, have become reluctant to own merchant facilities in deregulated markets where the overbuild of new entrants has weakened market prices. As a result, distressed assets continue to change hands while market prices strengthen and the next wave of new entrants is being developed.
As we update the valuation of generation units every six months, we look at emerging trends. Figure 6 shows the merchant valuation of generic combined-cycle plants across North America markets. The NPV calculations are based on 20-year merchant unleveraged cash flows.
With support of structured installed capacity (ICAP) markets, the Northeast plants show highest valuation. On the other hand, the Western Electricity Coordinating Council (WECC) merchant valuations have been depressed significantly. Despite some opposite views in the market, WECC has been significantly overbuilt and the merchant generators in these markets may observe depressed cash flows in coming years.
Northeast and ERCOT markets have seen signs of recovery with healthier spark spreads and new development activity. On the other hand, some overbuilt regions such as the Southeast is yet to recover fully from high reserve margins. As the markets recover we expect to see more activity in these regions.
Industry Consolidation and M&A Activity
In December 2005, FERC issued its final rule in compliance with the electric company merger and acquisition (M&A)