Houston-based private equity firm Quantum Energy Partners has formed Quantum Utility Generation LLC (QUG) to focus on the acquisition, operation and development of North American conventional and alternative energy projects. On the conventional side, gas-fired generation -- both new-build and acquisitions -- is particularly attractive, QUG's CEO told NGI.

The abundance of natural gas being produced from North American shale plays is helping to make gas-fired generators more competitive with nuclear and coal-fired units. While gas-fired plants have always benefited from a low capital cost, pricing of their fuel supplies has been volatile in the past, sometimes with balance sheet-wrecking spikes. That's changing, QUG CEO Larry Kellerman said.

"I definitely do believe that the view associated with domestic gas supplies is both robust and attractive and suggests, as one can see in the long-dated forward curve for natural gas...a very, very modest amount of escalation or contango...we view that as having a significant knock-on effect in the power world," Kellerman said.

On the power generation acquisition front, one area Kellerman said is attractive is distressed gas-fired merchant units. QUG is looking all over North America, but the southeastern United States is particularly attractive, as well as the eastern Midwest-western PJM Interconnection region.

In the Southeast there is much greater gas availability than there was in the past. Gas for power generation can be had at a fixed price on a long-term basis.

"All of a sudden I really can compete with nuclear and coal on a long-term resource-acquisition basis...because I can now offer utilities a long-term price; not just a long-term price for capacity but a long-term price for the energy...because I have the ability to lock in long-dated fuel supplies at predictable prices. And that's something that's very, very new," Kellerman said.

"You've got lower capital costs. You've got greater flexibility of dispatch [with gas] and on top of that you can add attractive long-dated pricing for the underlying fuel. That's a trifecta that's hard to beat."

Existing coal-fired generation could be attractive for acquisition, too, he said. QUG will be looking for "environmentally imperfect" fixer-uppers in need of capital and expertise to bring them in line with tighter emissions targets.

For new-build generation, Kellerman said gas-fired combined-cycle units and solar photovoltaic generation are the most exciting. But will there be a gas-fired overbuild frenzy like the industry saw during the latter half of the 1990s?

"I hope to God no," he said. "First and foremost, I think while lenders tend to make similar mistakes, they don't often make the exact same mistakes over and over again. The 'build it and they will come' mentality, I think, has been substantially purged from the project finance community...I think this go-around the finance community will not allow them and will not facilitate that buildout simply because extending credit to merchant generation without a long-term, secure revenue stream is simply not going to be viable or allowed by lenders anymore."

QUG will be capitalized with $1 billion of equity, $500 million of which has been committed by Quantum. An additional $500 million of equity will be provided by other co-investing financial and strategic partners, Quantum said. Besides Kellerman, QUG management will include CFO Sean O'Donnell and Chief Commercial Officer Tim Sullivan.

Kellerman has developed, acquired and managed power generation assets and held senior management positions at Goldman Sachs, El Paso Corp., Citizens Power and Portland General Electric after beginning his industry career at Southern California Edison.

O'Donnell spent the past 10 years at J.P. Morgan where he was a managing director and the head of North American generation for the power and utilities group. He advised utilities and independent power producers on strategic, financing and restructuring transactions involving dozens of conventional and renewable generation assets.

Sullivan has been responsible for the operational, contractual and commercial activities on a variety of generation assets. He has also worked with utilities to restructure long-term electricity offtake and fuel supply agreements. He started his career at Niagara Mohawk, a utility in upstate New York, and subsequently partnered with Kellerman during their time together at Citizens Power and El Paso. Sullivan was most recently a managing director in Deutsche Bank's commodities group.

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