Financial players and load-serving utilities are looking for power asset deals.
The authors all work at Henwood Energy Services Inc., where David Haarmeyer is a director of strategic consulting; Mark Griffith is director of strategic risk analysis; and Grant Thain is director of strategic asset valuation.
Despite talk of wide bid-ask spreads in the past two tumultuous years, some 60 sales of generation assets have been announced. These sales cover more than 22 GW of capacity, valued on a cash-and-debt basis at approximately $11 billion. A wide variety of buyers and sellers have participated in the sales activity, with a pronounced entry by financial players (investment banks and private equity firms) and load-serving entities (LSEs) looking for capacity to serve their load. All plant types-gas-fired, combined-cycle gas turbines (CCGT), simple-cycle gas turbines (SC), cogeneration (cogen), coal, nuclear, hydro, and wind-have been bought and sold.1
The systemic capacity overbuild across North America has not led to the expected fire sales. Indeed, the average $/kW values for capacity in many cases are below new build costs, but not substantially. Two explanations stand out: Many of the plants sold have attractive power-supply contracts, and a large number of the merchant plants with little or no equity value are either not finding buyers or are being withheld from the market until prices recover. Hence, we are likely seeing the early stage of an asset-sales wave. In fact, recent sales reflect an uptick in activity.
Future transaction activity is likely to accelerate. The key drivers for asset sales remain robust: About 60 GW of capacity on the block, power prices in many regions that are unlikely to recover until 2010, and increased financial pressures on a number of merchant and diversified energy companies. Moreover, the ranks of potential buyers are growing as credit-risk-shy utilities show a preference for asset ownership over power purchase contracts, and financial players step into the vacuum.