Old power plant values soar in supply squeeze

By Lisa Lee

NEW YORK (Reuters) - The North Lake power station, its stacks merely landscape for the Texas vista as it sat idle for a number of years, now churns natural gas to power for homes in Dallas County.

The TXU TXU.N power plant is one of many across the country that has been restarted as America's growing appetite for electricity and increasing opposition to new plants are producing favorable economics for these power plants.

Add interest from private equity firms looking to spend their mountains of cash in the power sector and you have a sellers' market.

"We are really in the forefront of a market where the value of incumbent assets is rising very dramatically," Bruce Williamson said this week at the Reuters Energy Summit.

The North Lake power plant was revived last year and brought an additional 531 megawatts online last month to meet growing power demand, after being shuttered in 2004.

"There's been capacity that has been shuttered, plants mothballed, construction halted mid-way," said Angela Uttaro, analyst at OppenheimerFund which has $258 billion in assets under management. As power prices rise, she added, it makes sense to restart those plants.

The rapidly accelerating drive to tackle global warming combined with soaring construction costs are making power plants, especially coal-fired ones, more difficult to build. Coal-fired power plants are the largest emitters of carbon dioxide, the greenhouse gas widely blamed for global warming.

Even as plans for new coal-fired power plants stall and the prospect of new nuclear generation nearly a decade away, demand continues to grow as Americans hunger for such items as iPods, personal computers and plasma televisions.

"There's more and more of a need for generation in the industry," said Alan Feibelman, utility consultant at Oliver Wyman, "So generation has become attractive for potential buyers."

Just last week, Dynegy sold its Texas natural gas-fired power plant for $470 million to a joint venture of PNM Resources Inc. (PNM.N) and Cascade Investment LLC. That's 12 times earnings before interest, taxes, depreciation and amortization (EBITDA), according to Williamson.

And PNM Resources in April set the market value for one of its Texas power plants at about $554 million, a 15.4 percent increase from the $480 million purchase price a year earlier.

The growing presence of private equity money has also pumped up prices for power plants. With its steady cash flow, power plants are ideal candidates for a private equity leveraged buyout.

Edison International (EIX.N) Chief Executive John Bryson said at the Reuters Energy Summit that at current valuations, building new plants makes more sense for Edison than buying.

But a new gas-fired plant, which may face less environmental resistance than its coal-fired sibling, would still take at least four years to build.

The trend toward building and adding capacity to natural gas-fired plant will mean continued robust demand for natural gas and high prices. Natural gas prices have soared in recent years and power prices have tracked that surge since natural gas sets the price of power.