Reuters: Shell hard-pressed to emulate Edison: “A plan by Royal Dutch/Shell to sell its global electricity assets may be slowed by revenue risks that make it hard to match the success of the $5.4 billion (2.9 billion pounds) sale by U.S. utility Edison Mission, banking sources say.” (ShellNews.net)
By Charlie Zhu
Tue 26 October, 2004
SINGAPORE (Reuters) - A plan by Royal Dutch/Shell to sell its global electricity assets may be slowed by revenue risks that make it hard to match the success of the $5.4 billion (2.9 billion pounds) sale by U.S. utility Edison Mission, banking sources say.
Investors are concerned that many of the 12 Shell power plants up for sale, with an estimated price of at least $3 billion including debt, are not adequately protected by long-term deals to lure investors, six banking sources familiar with the situation told Reuters.
Two of the plants are still under construction.
Many of the 13 power plants sold by Edison Mission, a unit of Edison International EIX.N , are covered by such agreements, which make investment returns more predictable.
"There is a lot of more merchant risks in this portfolio than the Edison Mission portfolio, which is more contracted. People don't like merchant risks because of the volatility," said a source familiar with the situation.
Edison agreed in July to sell its offshore portfolio with a 5,400 megawatt capacity -- few of which are merchant plants that must vie to sell power in a spot market -- to a joint-venture between Britain's International Power IPR.L and Japanese trading house Mitsui & Co 8031.T .
The sale was seen as a feather in Edison's cap given the structure, pricing and speed of the deal despite the sheer size and geographic spread of the power stations, which are scattered across Europe, Asia, Australia and Puerto Rico.
Inspired by Edison, Shell SHEL.L asked investors this month to bid for plants it owns with U.S. construction firm Bechtel Corp.
It is part of a plan by Shell to divest non-core assets, including a petrochemical venture in Germany and a liquefied petroleum gas business, to raise $10-12 billion between 2004 and 2006 to focus on oil and gas production.
How soon Shell and Bechtel, who are being advised by Citigroup, could conclude the InterGen deal would depend on their price, but there were no reasons for them to rush and sell the assets cheaply, sources said.
"They are not a desperate seller," the first source said. "The uncertainties are whether they do actually get this done very soon. I think this thing could sell but the issue is if it is going to sell at a price that Shell would agree to."
HARD SELL?
Another uncertainty surrounding the sale of InterGen, set up in 1995 and 68 percent owned by Shell, was the cost of its power stations, sources said.
InterGen was created largely to allow Shell to supply fuel to the plants and for Bechtel to build them, they said.
There is little publicly known financial data on the costs of building the InterGen plants. Shell lumps the assets within a broader natural gas portfolio. Bechtel is privately owned.
Investors cannot have the financial details until they sign confidentiality agreements, sources said.
The sources, who spoke on condition of anonymity, said they believed the InterGen plants were more likely to be sold to a consortium of more than two entities to diversify the risks.
"I'm sure there are some people who are looking at putting together potential consortia. But you know anything that involves more than two or three will be very, very unwieldy," a second source said, pointing to the different valuation expectations different parties might have.
"Clearly I think it is going to be quite difficult to find one single buyer buying the entire thing in Europe, Asia, Australia plus Mexico."
Yet there is no shortage of power asset buyers. Australian firms and utilities in Japan, Hong Kong and Singapore, seeking to diversify from saturated markets at home, have snapped up billions of dollars worth of assets in the past few years -- mostly from U.S. utilities.
U.S. firm TXU Corp. TXU.N sold its Australian assets to Singapore Power this year for $3.7 billion and tycoon Li Ka-shing's Cheung Kong Infrastructure 1038.HK paid $2.5 billion to buy a natural gas transmission network from Britain's National Grid Transco NGT.L .
But most of those assets are regulated, rather than merchant plants subject to tariff fluctuations, and are mainly in Australia rather than spread across countries or continents.
The 10 existing InterGen plants span six countries from Britain to Mexico and from China to Australia. They have a combined capacity of 7,844 megawatts, of which 5,436 megawatts are wholly owned by InterGen, which runs a total of 20 projects with a 16,220-megawatt capacity.
Of the 10, two in Australia and one in Britain are merchant plants. A project planned in Singapore, Island Power, would also be a merchant power station, sources said.
Intergen's Meizhou Wan power plant in China held a power sale agreement with the local government but the contract had been violated several times, they said.
The other plants were covered by various contracts that are less lucrative than those sold by Edison, they said.
Investors, which could include Western private equity funds or cash-rich Asian utilities, had several weeks to express interest with final bids expected next year, sources said.
But the sources said many Asian companies they had contacted were showing interest only in individual plants.
"Nobody is looking at the whole lot. I know of companies expressing interest only in the individual parts of it," a third source said.