Asset sales: Decade-long sellers’ market may be nearing end

By Jeff Bodington, Contributing Editor

Data on power project sales during 2001 show a major shift in market activity. Utility divestitures have slowed. Many power projects auctioned by utilities in the last few years have sold again, and early data on sales to date during 2002 indicate that this will also be a busy year for selling and buying domestic U.S. generating assets.

The graph shows generating asset sales by year since 1989. In the late 1980s-and until 1994-the market for U.S. generating assets was composed of qualifying facilities (QFs). Divestitures of regulated, utility-owned assets began in 1994 and dramatically accelerated through 2000, peaking at over 43,000 MW. Non-divestiture transaction volume also increased due to continuing sales of QFs and then the resales of power projects divested by utilities. Non-utility divestiture volume during year 2000 was approximately 13,000 MW.

Scorecard for 2001

Utility divestiture volume plummeted during year 2001 to less than 5,000 MW; non-divestiture value increased to over 18,000 MW (see table). (The log data is from public sources and while they do reflect most transactions they do not include every transaction. In addition, some of the sales began during 2000 and closed last year while others may still be in process.)

Nuclear units changing hands dominated utility divestitures last year. Entergy purchased interests in Vermont Yankee and Indian Point, and PSE&G purchased interests in three nuclear units. Both Conectiv and FirstEnergy sold interests in four non-nuclear projects with a combined capacity over 1,000 MW to NRG.

The decline in divestiture activity since year 2000 is due primarily to the completion of sales that were planned in states with deregulation initiatives. Events in California slowed deregulation efforts in many states and this, in turn, slowed or stopped potential sales. For example, Nevada Power auctioned several stations to AES and NRG and the Nevada Public Service Commission intervened before the sales could close, stopped the sales, and is now reconsidering the wisdom of regulated asset sales.

Among sales that were not regulated utility divestitures, the largest was Orion’s $4.7 billion sale to Reliant. These assets were primarily the generating stations auctioned by Duquesne and Consolidated Edison during 1999. Other large sellers included Edison Mission Energy, Indeck, LG&E Energy, LS Power and Thermo Ecotek. On the buy side, NRG was involved in three transactions, Boralex in three, Ormat in two, and many other firms in just one.

Several active buyers scaled back during 2001. Calpine-buy side in seven transactions during 2000-purchased the Pine Bluff and Hog Bayou projects from InterGen during 2001. Delta Power purchased three projects during 2000 and the 50 percent interest it did not already own in Pedricktown Cogeneration during 2001.

2002 to date

While financial pressures have been one of many reasons for sales in the past, such pressures appear to dominate the 2002 market to date. Low spark spreads, apparently adequate capacity in many regions, and eroding debt equity ratios and debt ratings are pushing many owners to become sellers. AES, Calpine, Duke, El Paso, Mirant, and Williams are examples. Covanta filed for bankruptcy court protection from creditors and asset sales may follow.

Will a flood of projects for sale actually occur? If it does, will it change the decade-long sellers’ market into one with lower prices and, thus, higher returns to buyers? It is too soon to tell. Several well-capitalized and active developers have scaled back greenfield development so that capital can be focused on purchasing lower risk existing or advanced-development-stage projects. Several foreign power companies are prospecting in the United States. Competition among such buyers may keep prices high. A hot summer and recovering economy could also cause some potential sellers to decide to stay owners.

Click here to view pdf: Publicly announced U.S. market transactions, 2001 operating power projects.

Bodington, an EL&P contributing editor, is president of Bodington & Co., a NASD broker/dealer who advises buyers and sellers of power projects. He can be reached at jcb@bodingtonandcompany.com or at 415-391-3280.

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