Jim Any thoughts on how the Cogentrix fire sale reflects on RRI and other IPP's?
UPDATE: Goldman Buys Cogentrix For Contracts, Not Plants
DOW JONES NEWSWIRES
(Updates an item that published at 5:10 p.m. EDT (2110 GMT) to add comments from ratings agencies.)
By Mark Golden
Of DOW JONES NEWSWIRES
NEW YORK -- Goldman Sachs Group (GS) has moved deeper into the electricity business with its purchase of privately held electricity generating company Cogentrix. But the acquisition isn't necessarily a sign that the U.S. merchant power business is finally coming out of its trough.
A significant share of Cogentrix' value, according to a Goldman executive responsible for the deal, is in its contracts to supply power at regulated margins to various utilities. Most of Cogentrix' plants fall under a federal law passed in 1978, under which utilities have to buy power from "qualifying facilities" under long-term contracts at prices based on costs plus virtually assured profits.
"The value is in the long-dated offtake contracts, not in the steel," said Doug Kimmelman, managing director in Goldman's commodities group. "We're locking in a very nice return."
The $2.4 billion acquisition, almost all of which is assumption of non-recourse debt, is a straightforward valuation of those contractual cash flows. Goldman assigned little or no value to Cogentrix' several contracts with struggling energy trading companies.
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Late Monday, Standard & Poor's said it is keeping Cogentrix on CreditWatch with negative implications despite the purchase by Goldman. S&P downgraded Cogentrix' credit rating in January, citing declining cash flows and the company's contracts with Dynegy Inc. (DYN) and PG&E Corp. (PCG) merchant power division National Energy Group, which is in Chapter 11.
"The downturn in the power markets and credit deterioration of Cogentrix' offtakers have significantly weakened the company's credit profile over the past year," S&P said Monday. At the parent level, Cogentrix' cash flow has fallen below 2.5 times interest costs from more than 3.0 times a year ago, S&P said.
As a potential indication that Congentrix continues to struggle despite its QF contracts, Goldman is only paying the company's owners $115 million for their equity, versus $2.3 billion in assumed debt.
Moody's Investors Service, however, placed Cogentrix' senior unsecured bonds under review Monday for possible upgrade, noting "the prospects for asset optimization under a new ownership structure.
The acquisition is subject to regulatory approval and is expected to close early next year.
End Of An Era
The era of QF contracts, in fact, may not survive the passage of an energy bill, as Congress is widely expected to end the arrangement spawned by the oil embargo 30 years ago. Kimmelman said his group assigned little to no value to the Cogentrix plants after the expiration of the contracts tied to these facilities.
"Maybe there's upside in the future," he added, "but we're assigning very little value to that."
Just three years ago, owners of such qualifying facilities watched with envy as owners of merchant power plants reaped billions by selling output at market prices. Since market prices collapsed in the summer of 2001, though, qualifying facilities' steady earnings look great next to the bankruptcy-strewn field of merchant power.
Few uncontracted merchant plants have been sold, because bids are coming in around $200 per kilowatt of capacity compared with offering prices of about $400/kW for new plants that cost around $600/kW to build.
Goldman is paying about $730/kW of capacity for Cogentrix, due almost completely to the QF contracts. That almost all of the acquisition price is assumption of debt reflects the fact that QF plants were typically built with high leverage, because banks viewed their contracts to sell power to utilities as very reliable.
Second Entry
Cogentrix might have fetched more equity value than the $115 million announced Monday, but it also made some investments in merchant plants that aren't economic.
Goldman Sachs made a huge profit on merchant energy's boom time via the company's joint venture with Constellation Energy Group (CEG), which Goldman sold out of near the top of the market. Now, the bank is getting back into the field by trading electricity and acquiring assets with QF contracts. The bank has acquired a similar power plant in northern New Jersey from El Paso Corp. (EP).
Liquidity in electricity markets has improved, Kimmelman said, as other financial institutions have moved to fill the gap left by Enron Corp. (ENRNQ) and other merchants like Aquila Inc. (ILA).
In addition to Goldman and Morgan Stanley (MWD), which never left the field, Merrill Lynch (ML), Bear Stearns (BSC), American International Group (AIG), Bank of America Corp. (BAC) and UBS AG (UBS) are trading electricity more actively. Plus, Kimmelman said, the credit quality of some energy merchants like AES Corp. (AES), El Paso and Williams Cos. (WMB) has improved a little, allowing those companies to trade more actively.
Some of the banks are in the electricity business because they assumed ownership of merchant plants after owners defaulted on loan payments. Rather than sell those generating stations at the bottom of the market, they are operating the plants and trying to maximize cash flow by participating in the wholesale market.
There's no shortage of talent available for hire from Houston, Kimmelman said, because so many big power-trading operations shut or shrank dramatically.
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
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