7/7/2016

SNL:Privateequitylookstoscoremerchantportfoliosduringdownmarket|SNL

Thursday,July07,201610:01AMET

Privateequitylookstoscoremerchantportfoliosduringdownmarket
ByLucasBifera
Somecallitastrategicreview,otherscallitawaytomonetizeassets.Callitwhatyouwant,themarketplaceformerchantpowerplantstiedtoproposeddivestitureshasgivenprivateequityfirmsan
opportunitytoseizemerchantassetsatatimewhenpublicmarketsareshyingawayfromthesector.
Overthepastseveralmonths,companiesincludingAmericanElectricPowerCo.Inc.,DynegyInc.andTransCanadaCorp.havemadecleartheirintentiontoselloffsegmentsoftheirmerchant
portfolios,eithertolimitcompetitivemarketexposureorraisecashtofinanceaseparateacquisition,orboth.
Combined,theproposedsalesamongthethreecompaniescouldmeanmorethan8,000MWofpubliclyownedmerchantcapacityhittingtheauctionblockacrossthePJMInterconnectionLLC,
MidcontinentIndependentSystemOperatorInc.,NewYorkISO,ISONewEnglandInc.andElectricReliabilityCouncilofTexasInc.regions,givingprivatebuyersamenuofpossiblepositions,with
varyingdegreesofregionalupside.
Thatincludesabout8,000MWfromAEPvaluedat$3billion4,300MWfromTransCanadavaluedat$5.3billionandsegmentsofDynegy'sholdings,includingitsIndependenceplantinNewYork,
whichcouldfetchmorethan$400million.
AEPsaiditexpectsfinalbidsforitsportfoliotobesubmittedinJuly,whileTransCanadasaiditanticipatesthedealforitsassetstoclosebytheendofthisyear.Dynegydeclinedtocommentonthe
statusofitsproposedsale.
Alltold,merchantgenerationappearstobeapproachinganinflectionpointinthemiddleof2016,wherethecommoditiespriceenvironmenthassackedinvestorconfidence,ignitingaretreatbackto
regulatedearnings.Likewise,formerchantgeneratorssuchasNRGEnergyInc.,CalpineCorp.andDynegy,thetimehascometorightsizebalancesheetsbydeleveragingandtakinganagnostic
viewoncoalfiredcapacity,signsthatcouldbolsterinvestorconfidenceamidthedowncycle.

"Youcouldsayitisabuyer'smarketinthesensethatvaluationsaredown,"Moody'sSeniorCreditOfficerandVicePresidentSwamiVenkataramansaid."Thebiggestmerchantnamesarenot
buyerstomebecausetheyareconstrainedintheirabilitytobuythroughtheirbalancesheet."
"Ithinkitisabuyer'smarketforweakerassets,andforcoalassetsithasbeenforayears,butforgasfiredassets,therewillbemeaningfulcompetition,enoughtopushpricesup,"Citigroupanalyst
PrafulMehtasaidseparately.
Whereausterityandpatiencehavebecomekeytotheincumbentthesis,theoppositemaybetrueforbluechipnamesinprivateequitylookingtoexpandmerchantsportfolios,includingBlackstone
GroupLPthroughKindleEnergyLLC,RiverstoneHoldingsLLCthroughExtolEnergyLLC,FirstReserveCorp.,EnergyCapitalPartnersLLC,LSPowerGroup,ArcLightCapitalPartnersLLCand
CarlyleGroupLP.Nonerespondedtorequestsforcommentforthisarticle.
"Itdependsonwhatyourportfoliotodaylookslikeandifyouhaveafootprintinacertainmarket,"TimSchutt,PwC'sUSPowerandUtilitiesadvisorygroupleader,said."Thatgeographicfocusis
goingtosupportgrowth,morethangoingsomewherewhereyoudonothaveaprofile."
Ofthemotivationsthatcouldleadprivateequitytobidafteroneportfoliooveranother,extractingregionalsynergiesappearsparamounttoensuringthatreturnscanbemaximized,especiallywhen
purchasedatapremium.
"Theselargerbluechipprivateequityplayers,whentheytakeonassetsandputtheminalargerportfolio,theycangaineconomiesofscaleandextractalotofsynergies,includingfueldispatch,
O&Mandcorporateoverheadsynergies,"ShahriarPourreza,directorofNorthAmericanpowerandutilitiesatGuggenheimSecurities,said.
Dialingintothesesynergiescantakeonanumberofforms,notablytheproximityofgasfiredassetstoreliableandlowcostnaturalgashubs,anodtoassetsinMISOandwesternPJMasattractive
targetsforneartermbuyouts.
"Weareseeingahealthyamountofinterestforthese[AEP]Ohioassets,andallfromfinancials,anditismoresothebluechipguys,"Pourrezaadded.
Articleamendedat1:44p.m.ETonJuly7,2016,toclarifythevalueoftheassetsAmericanElectricPowerhasputupforsale.
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