Calpine, NRG, Reliant, Pinnacle West, Entergy and other buyers made 2000 a record year for sales of generation in the United States. The restructuring of ownership of U.S. generating facilities continues to be a focus of activity for many participants.
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The graph shows the net ownership of both utility-owned and independent power projects sold each year for 1989 though 2000. Of course, transactions until 1994 reflect only independent power projects built following passage of the Public Utility Regulatory
Policies Act (PURPA) in 1978. Divestitures by regulated utilities began in 1994 and by 1997 dwarfed sales of PURPA projects. Last year, more than three times as many utility-owned projects as never-utility-owned projects were sold.
Table 1 shows a deal log for 2000. The data come from public sources and they reflect announcements during the calendar year. While the log shows most deals, it may not reflect every single deal. In some cases, the transactions began in 1999 and closed in 2000. In other cases, the transactions were announced during 2000 and have not yet closed.
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Change is underway
Divestitures totaled nearly 36,000 MW of net equity in 1999 and over 40,000 during 2000. While the numbers seem to imply that divestitures by U.S. utilities remain common, inspection of Table 2 shows that a dramatic change is underway. In fact, unlike activity during 1999, few of the utility-asset-related transactions during 2000 involved divestiture of utility-owned fossil and hydro facilities. Nuclear projects accounted for most of the sales. But for nuclear facilities, divestiture has slowed. Questions about the wisdom of divestiture have slowed and in some cases may stop sales that are underway. Some of the transactions that have been announced and thus appear in Table 2 may never close. The sales of North Valmy by Sierra Pacific Power and Mohave by Southern California Edison are examples of transactions that may be stopped by regulatory authorities.
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Consolidated Edison, New York Power Authority, Niagara Mohawk, Northeast Utilities, Vermont Public Service and others sold (or are in the process of selling) nuclear facility interests. In the mid-1990s, nuclear projects appeared uneconomic in nascent competitive markets. Rising power values and more efficient management appear to have overcome the risks associated with environmental, decommissioning and spent-fuel costs.
Soon resales of once divested facilities may outpace initial divestitures. During 2000, Sithe sold a portfolio of projects it initially purchased from GPU to Reliant. Sithe paid GPU $1.7 billion for 21 stations in Pennsylvania, Maryland and New Jersey. It then sold them to Reliant for $2.1 billion. While many resales of portfolios such as in the Sithe-Reliant transaction appear unlikely, many resales of individual stations are likely as buyers rationalize their holdings for the long term. They purchased portfolios because only the portfolios were for sale. Soon, they will refine their holdings with both sales and purchases of individual stations.
Market remains strong
Sales of projects never owned by a utility declined from 1998 to 1999. In contrast, last year the net equity sold actually tripled in comparison to 1999. And there were 178 sales of never-utility-owned projects compared to 76 projects that were once owned by utilities.
The primary reason for the rise in activity was the sale of several portfolios. CHI, Energy Management Inc., Indeck Capital, MCN Energy, Montana Power’s Continental Energy Services, and Waste Management were among the sellers. But for the foreign purchaser of CHI, the others were purchased by buyers who already own other projects and are building their own portfolios.
Competition among bidders for projects and portfolios remains strong. Offerings bring multiple proposals even in California where volatile prices, markets, and regulatory conditions make risks appear high. While several of the buyers in Tables 1 and 2 have decided to avoid California until conditions stabilize, others remain active and buy on the basis of fundamentals that include the inevitable need for more capacity. One measure of competition is the rates of return expected by buyers; bidding drives prices up and returns down to the lowest level that buyers are willing to accept considering the risks. For merchant projects already built and in operation, the after-tax market return is approximately 15 percent, and for a high-quality project with a power sales agreement that minimizes market risk, that rate is as low as the single digits.
Jeff Bodington is a contributing editor for EL&P and president of Bodington & Co., a NASD broker/dealer advising buyers and sellers of power projects. He can be contacted by phone at 415-391-3280 or e-mail at firstname.lastname@example.org.