By Junior Isles, Managing Editor
They say one man’s meat is another man’s poison. One man’s trash, another man’s treasure. To some extent, it’s what keeps the world of business turning. Two power stations recently sold in the UK were described by the seller as an investment which “was a major disappointment”. Yet for the buyer, the “acquisition was consistent with its strategic objectives”.
Edison Mission Energy (EME) announced it was selling two UK coal fired stations, Fiddler’s Ferry and Ferrybridge, to AEP for £650m ($910m) – just half the price it paid for them in 1999.
Paying too high a price for anything is always a bad move but in today’s rapidly changing and complex markets, how much is too much? And how do you know whether what seemed to be a good deal will not turn out to be a good deal of trouble? These are questions which are becoming increasingly important as markets on both sides of the Atlantic and parts of Asia continue to deregulate.
As new trading arrangements are introduced, the economics of an investor’s original investment are invariably altered. Commenting on the sale, Jonathan Green, an EME spokesperson said: “Wholesale electricity prices have fallen more than expected over the last two years. We can work within a deregulated market such as the UK but the new trading arrangements have been less attractive than we thought they would be. There is a question mark over how attractive it is to build new capacity under these circumstances. The two coal fired plants faced the problem of having to sell into the short term market.”
There has been a fair amount of asset selling in the UK in the run-up to the new market, and although it may be a slightly different scenario this time, it begs the question: will we see a another mass exodus from the UK as market conditions change? Throughout the mid-90s a number of US companies flocked to buy predominantly UK regional electricity companies. Just a couple of years later, many were beating a hasty retreat prompted by a change in market conditions and government policy.
Ironically, AEP was one of those companies. But this time, the company is in Europe with a different strategy in mind. Pat Hemlepp, an AEP spokesperson explained: “Our strategy has evolved since 1996. Back then we were a wires company looking at the retail market and the wires business. Having studied what we’ve done in the US [in the wholesale business], we are now looking to bring that to Europe.”
In addition to being the largest generator in the US, AEP has also become a leading wholesale energy marketer and trader. It now ranks second in the US in electricity volume and has a growing presence in natural gas.
AEP has had an office in the UK for 18 months but has been waiting for the right assets to back its trading approach. It was more than happy to snap up EME’s ‘cast-offs’. “When we first set up, we wanted assets but felt we would be paying too much based on the market conditions,” said Hemlepp.
At $910m for 4000 MW, AEP is paying about $200/kW, which according to the company is an attractive price based on current market conditions in the UK. Hemlepp explained: “Electricity prices have bottomed out. The forward price curve shows no escalation but prices won’t go much lower. This means we can be profitable at the price we paid.”
What makes this an interesting transaction is that it will demonstrate that the key to being successful in a fully deregulated market is first to have a full understanding of the market and secondly, know how to best utilise your assets by taking an integrated approach right across the energy supply chain. Hemlepp said: “The first thing we did was hire an analyst to set up a knowledge-base about the market. We are constantly analysing the market and purchases are based on what the projections show us. Most significantly, these two assets are the first step in our asset-backed approach to electricity trading. The plants will be used differently to how they were used before. They will work closely with the trading office”
It will be interesting to see how power companies like AEP, Duke Energy, Enron and TXU Energy make their money in the future. Certainly in the right hands, a ‘worthless’ asset could turn out to be a priceless antique.