With power producers continuing to reel from depressed stock prices and, in many cases, overleveraged balance sheets, several companies are looking to shed hard assets in an effort to shore up their financial moorings. But the reality is that this is a “buyer’s market” for such assets, Raymond Niles, an analyst with Salomon Smith Barney, recently said. The pricing environment for sellers of generation-related assets is likely to get worse before it improves, he believes.

He made his comments last Thursday in an appearance before a power industry conference in Washington, DC, sponsored by the Association for Investment Management and Research.

Faced with deteriorating investor confidence in the wake of lower energy prices and reduced demand, power producers have taken matters into their own hands by putting some of their assets up for sale in an effort resuscitate their stock prices and slash debt from their balance sheets.

Mirant, for example, in December of last year said that it was chopping its 2002 capital budget by 40% — $1.5 billion — and selling another $1.6 billion worth of assets (see Power Market Today, Dec. 21, 2001). More recently, AES Corp. this month unveiled dramatic restructuring plans that include plans to sell Cilcorp, an integrated utility in Illinois, a minority stake in the Indiana-based utility Ipalco, a Dominican Republic power plant and “certain other AES plants” (see Power Market Today, Feb. 20). The power company overall plans to sell $1 billion to $1.5 billion in assets, including assets in Venezuela, Argentina and Colombia to reduce its exposure in the volatile region.

From the vantage point of Niles, the stock price performance of power producers are completely tied to commodity prices. In his presentation, he outlined what the industry has experienced thus far in its current down cycle and detailed what investors should be looking for in terms of signs of an upturn in the commodities cycle.

“We need capacity to get withdrawn from the market and we need to see demand catch up with supply,” the analyst said. There also needs to be a decline in new project announcements. “Well, we’ve gone beyond that, there are no more new project announcements, or essentially it’s gone to zero.”

In addition, Niles noted the cancellation of equipment and turbine deliveries. “Calpine has announced that already [as have] plenty of other companies,” he said. “We’ve even seen some cancellations of projects already under construction,” the analyst went on to say.

Niles believes the sector is about to enter the next phase of its current cycle, which will involve asset sales. “It’s a huge, huge buyer’s market, but we have not seen anything yet,” Niles said, noting that asset prices are continuing to decline. The downward tilt of asset sale prices is not likely to hit bottom until the end of the year, Niles said, but he also acknowledged that this is a tough call to make.

“But my sense is that we still are going to see asset values sink and then at that point, when things look worse, is when you’ll start to see the spark spread start to rise again,” Niles said.

Niles also said that many power producers have been hit by what he called the “twin leverages.” Power producers “were leveraged to the commodity prices, but they were also financially leveraged,” he added. “This industry is massively overleveraged,” Niles said. “So that’s accentuating their problems.”

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