Bodington & Co.
Electric utilities divested more than 50,000 MW of generation during the last few years. Sellers include many major utilities, and buyers include utility subsidiaries and independent companies that grew large and strong on Public Utilities Regulatory Policies Act (PURPA) contracts. It is a seller`s market-auctions draw many bidders and valuations are high. As for the future, many more utility assets are going to be sold. The multi-billion dollar business of generation will continue to rapidly evolve.
Bodington & Co.`s (B&Co.) divestiture scorecard appears in the accompanying table. In sum, there have been 37 significant transactions through April 1999. These account for 267 generating projects with a total capacity of more than 50,000 MW. Disclosed book values totaled nearly $9 billion.
Sales have concentrated in the Northeast, California, Illinois and Montana- areas with advanced restructuring initiatives. New England Electric System (NEES), Boston Edison, Consolidated Edison, Commonwealth Edison, Pacific Gas & Electric, and Southern California Edison are examples of the larger sellers in the regions. Only Michigan and New Mexico have restructuring plans in place but no asset sales to date.
Elsewhere, generation divestitures are few. While there is substantial utility merger activity in most now-quiet regions, generation divestiture still appears several years away. Sales in many regions are likely to meet opposition from ratepayer and other groups. Some groups in low-cost regions take the position that competitive power markets will cause their costs to increase as they lose an exclusive right to cheap power.
Buyers are the largest players in the industry. Utility affiliates such as Duke, NRG, PP&L Global, Southern Electric, and U.S. Generating lead the pack. Independents such as AES, Calpine and Sithe have also been active. Absent are the many independents who do not have the balance sheets, access to capital markets, and expertise or alliances necessary to manage fuel and electricity related risks in evolving competitive markets.
Utilities have taken very different approaches to selling their assets. In some cases, all generation has been sold in one auction to one buyer. In others, discrete groups of projects have been sold in separate auctions to independent buyers. In the latter cases, buyers were specifically enjoined from ultimately buying more than one of the project groups. This approach has been pursued for several reasons. Foremost is the need to spread ownership and thereby mitigate the potential market power of any new owner. Defining, measuring, testing and regulating market power in nascent power markets is itself an evolving art. Although no sales have yet been stopped for market power reasons, this issue is receiving increasing attention at state utility commissions, FERC and the Department of Justice. Other reasons for selling grouped projects include the possibility of targeting potential buyers and the difficulties associated with selling some technology types. Hydroelectric portfolios have sold in Maine, Montana and New York. In contrast, they are the subject of unresolved controversy in California.
Several asset divestitures have also dealt with power purchase agreements (PPAs). NEES transferred some of its PPA-related obligations to U.S. Generating. San Diego Gas & Electric, now Sempra, has been exploring ways to auction its PPAs for several years. Some utilities are evaluating only the transfer of the PPA obligations, and a few others are considering the additional sale and spin-out of the business units that administer the contracts. In both cases, the above-market PPA prices mean that a utility will not be paid for its PPA and business unit. The transaction will be upside down; the winner of a PPA auction will be the party who requires a utility to pay the least. In effect, this is what happened to NEES. NEES is subsidizing the above-market portion of the contracts taken on by U.S. Generating.
Asset divestitures during the coming year have been announced by Central Hudson, Connecticut Light and Power, Denton Municipal Electric, Duquesne, General Public Utilities, Niagara Mohawk Power, Potomac Electric, Sempra, Tucson Electric and others.
Buyers and sellers have watched valuations during the first wave of divestitures. With so many MW coming to market, participants wondered if prices would fall and the market would shift to favor buyers. The numbers of bidders for assets and the high valuations that are disclosed imply that this change is not under way. While it remains a seller`s market, aggressive buyers forecast favorable returns when they are able to exploit a unique niche or strategy.
Jeff Bodington is president of Bodington & Co., an NASD broker/dealer that advises buyers and sellers of power projects.