Reflecting what he says is a flight to quality, an investment banker last Thursday said that competition for the purchase of contracted power assets in the United States remains intense as 2003 comes to a close, while market interest in merchant power assets remains tepid, although renewable projects remain a “bright spot” in an otherwise lackluster merchant sector.

“When things get tough, those that remain capable buyers tend to go to the higher quality deals and the lower quality deals drop a lot in price and volume,” said Jeff Bodington of Bodington & Co. in a conference call sponsored by Energy Central (www.energycentral.com). “Well, that’s exactly what’s happening in power,” the banker noted. The conference call addressed the 2004 market outlook for the buying and selling of power assets.

According to Bodington, almost all of the deals done in 2002 and almost all of the deals done so far in 2003 are not merchant-related transactions. He said that only four of the more than 40 deals done so far this year involve some merchant risk. “All the others had contracted revenues or they were utility or muni acquisitions such that no private entity was taking market risk, that market risk was being passed through to ratepayers.”

Bodington, an adviser on sales and restructuring in the power industry, said that “competition for these [contracted] assets remains intense. It was a competitive business before things became troublesome in 2000. It’s remained competitive,” he added.

“We’ve had some buyers tell us that they think that the competition for contracted assets has actually gotten more intense as there has been this flight to quality,” Bodington said. “In two solicitations that we’ve run this year so far involving contracted assets, we got six aggressive offers for one, four aggressive offers for the other. Those are just indicators of how much interest there is in contracted revenue assets.”

In “sharp contrast” to that picture is the current market for merchant projects. “We all know there are lots of those for sale,” Bodington said. “There are six portfolios and about 30 projects. Aggregate capacity is at least 20,000 MW. Some assert that it’s a lot more than that. Very few of these sales have closed so far.”

At the same time, the banker said that a “bright spot” in the merchant arena right now involves renewable projects and, wind projects, in particular. “The competition for wind projects, the interest in wind projects — even development stage wind projects — appears to be pretty active. There’s a lot of interest in renewables. Part of that is driven by renewable portfolio standard legislation that’s been enacted in many states.”

Noting the dozens of new entrants that have appeared on the power asset buying field, Bodington said that “it’s not really surprising — at least so far — that very few of them have actually purchased anything.” The banker’s long-term forecast is that “about half of them will not purchase anything, 25% will make acquisitions that at some time they’re not happy about…and 25% will make good acquisitions.”

Bodington said that some of the relatively new players that have already made acquisitions and are “coming on very strong” include Goldman Sachs, which recently agreed to acquire 100% of the stock of Cogentrix Energy Inc., a privately-held independent power producer based in Charlotte, NC. The Cogentrix transaction, valued at $2.4 billion, adds 26 plants and 3,300 MW to the Goldman Sachs power portfolio.

On the surface, it looks like there’s been some recovery this year in terms of the level of power asset deal flow, Bodington noted. “Well, not quite so fast. Be a little cautious.” While statistics for 2003 show that deal flow is up a bit, that evaluation is only based on total number of megawatts.

When measured on the actual number of deals, deal flow is actually still below what it was in 2002. Last year, “we had 62 deals get done, with about 13,000 MW in total. Year to date, for 2003 through early November, we have more megawatts — a total of around 18,000 — but the number of deals is only 47 so far.”

He pointed out that in 2003, there are “a few big deals” that have accounted for most of the rise in volume so far this year. “Cogentrix’s sale of its portfolio in three different pieces to GE, Goldman Sachs and Green Power accounts for about 25% of the megawatts sold so far this year.”

During 2002, “many thought that 2003 would be the huge year, when a lot of big portfolios got sold and a lot of merchant plants got sold. That hasn’t happened. It hasn’t happened yet. I think we’ll see volume rise again during 2004.”

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