Posted on 08/08/2004 6:20:36 AM PDT by MeneMeneTekelUpharsin
NEW YORK (Reuters) - Private equity funds are snapping up power plants and pipelines once sought by aggressive buyers like El Paso Corp. (NYSE:EP - News), Dynegy Inc. (NYSE:DYN - News) and Mirant Corp. (Other OTC:MIRKQ.PK - News) as these former industry heavyweights focus on repairing their businesses.CenterPoint Energy's (NYSE:CNP - News) sale of its Texas Genco Holdings Inc. (NYSE:TGN - News) electricity generator, announced last month, was the industry's largest deal this year. Like the more than $5 billion in other power deals this year, the buyers were financial groups that typically buy, fix up and sell assets in three to seven years.
The collapse of Enron and the merchant energy trading business that supported this and other companies -- along with last year's blackout in the Northeast and the California energy crisis - have led to asset sales and created broad interest in energy investing, said Dan Revers, managing partner of ArcLight Capital Partners, which specializes in power-producing assets. That was not the case four years ago when the merchant companies were buying, not selling, assets. Even though venture capital investing was hot, ArcLight had a difficult time finding investors for its first energy fund. "There really wasn't a lot of interest then," Revers said.
Besides Texas Genco, big deals this year include the $2.3 billion purchase of Enron's pipeline and other assets in May by NuCoastal LLC, a group including Citigroup (NYSE:C - News), Kelso & Co. and ArcLight. And in January, AIG Global Investment agreed to buy 25 power plants from El Paso. Indeed, investment in the energy sector by private equity funds is up three times from last year, according to market research firm Dealogic. Meanwhile, merchant companies and utilities generally are only making acquisitions to fill power commitments due to concerns about debt ratios, credit ratings and pleasing still-skittish investors.
"If utilities are short power, then they will buy a power plant to fill that need," said George Brokaw, a managing director at Lazard LLC. "But companies that make merchant acquisitions without a compelling and understandable strategic logic will be punished by the market." Those circumstances, such as the need to shore up balance sheets, may change in the future, Brokaw said, but for the moment, financial buyers are able to compete effectively in the market for merchant assets.
Boosting the case for many bids by private equity players is their increased knowledge of the industry and their use of hedging devices. Indeed, ArcLight is betting on increasing demand for electricity -- a market Revers says is growing at 1.5 percent to 3 percent a year -- as well as the cyclical nature of commodity pricing and regulation. Private equity shops are also well funded. Many of the new energy funds, including ArcLight, Lime Rock Partners and Yorktown Energy Partners, could have raised more money than they sought, said Dale Meyer, a partner in New York-based Probitas Partners, which raises money for buyout funds.
Pension fund investors are flocking to energy funds because of potentially lucrative opportunities and because they are already well invested in other kinds of private equity funds, he said. The energy funds have also bolstered their presence by hiring executives from the industry. For instance, Jack Fusco, former chief executive of Orion Power Holdings, has moved to investor consortium GC Power Acquisition, which is buying Texas Genco. "There's a higher level of sophistication today among financial acquirers than there was three years ago," said Morgan Stanley Managing Director James McGinnis. At the same time, he said, credit rating companies are putting integrated utilities and energy merchants under pressure regarding their unregulated power plants, prompting them to consider selling them.
That means more asset sales in the coming months. "We continue to see a steady pace of asset transactions," McGinnis said, "although Texas Genco was of such a magnitude that frankly, we don't see another transaction of that size in the near future." Eventually, the traditional players are likely to be interested in buying assets again, and the private equity firms may start to sell the assets they are currently acquiring. Some plants that do not have firm contracts for their power and are now being sold may be for sale again in a few years at a higher price, said Rob Jones, co-head of the energy and power investment banking group at Merrill Lynch & Co. But those higher prices will reflect a change in the market's fundamentals, and the private equity funds will collect their reward for betting on the uncertain energy market. "They are willing to take the risk that the market for power improves," Jones said, " ... whereas some of the strategic guys are prevented either through their investor base or other stakeholders, rating agencies, or creditors."
You can NOT tell me this is not all planned, legal robbery. This is NOT going to happen with the Mirant case. Hide and watch, wait and see. We have a shareholder's committee and the lawyers are astute. Message board here:
The looting of public utilities has become an outrage. Only Nebraska has had the right approach.
And, what approach did Nebraska take?
Bob,
Might want to read this one too.
Where have YOU gone? This case is still rocking and rolling.
Well, friend, don't want to leave you out. Here's an FYI. Just want some of you to remember.
Total recall, my friend. You're always in my thoughts when I think of Mirant. :-D
ping
This is not "Public Utilities", this is merchant power, private power producers. I like wire companies with a guaranteed return myself.
Then those same intrests stepped in and bought Enron's assets at pennies on the dollar.
Bank of America is one who did that. I'm sure there are others.
Nebraska Public Power District & Omaha Public Power District. Lower costs, owned by residents of Nebraska. Only one like it.
Thanks, hmmm!
Looks like Citibank and others might be involved in some of this as well.
Many thanks, friend.
Sorry, I mostly lurk nowadays, and don't participate more actively (work). Thanks for keeping me updated.
Best wishes and regards,
TQ
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