Power plant team forms BGE is pairing with Goldman, Sachs on acquisitions trail

Orion Power Holdings

New company would invest in energy facilities


March 12, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Baltimore Gas and Electric Co. and Goldman, Sachs & Co. yesterday officially unveiled plans to form a new company to acquire power plants, a move that analysts praised as a "smart" way to take advantage of energy industry changes.

The decision by the Baltimore utility and the New York investment firm to form Orion Power Holdings comes as states are mandating that energy companies sell plants as part of a shift toward deregulation and competition. At the same time, utilities nationwide are shedding generating assets to devote themselves to energy distribution and transmission.

BGE Chairman and Chief Executive Officer Christian H. Poindexter said the pairing of the two companies would "uniquely position Orion to effectively identify and invest in power plants in the United States and Canada."

Industry analysts also said BGE's link with Goldman, Sachs should give the utility company an edge as more and more generating assets -- and competitors -- enter the market.

"It's a very good pairing," said Ronald S. Tanner, an industry analyst at Legg Mason Wood Walker Inc. "BGE knows a good plant when it sees one, and Goldman knows how to structure deals and obtain capital. And there aren't a lot of companies out there like Goldman to partner up with. I think they're heading in the right direction."

"Goldman, Sachs has good credentials, while BGE has a good operating record," said Edward Tirello, a BT Alex. Brown Inc. analyst. "So I think they'll work well together, and that this is a very smart move. They've taken the bull by the horns."

Orion marks the second time that BGE and Goldman, Sachs have bonded to form a new energy services company. In February 1997, the two companies committed $100 million to create Constellation Power Source, a power marketing group preparing to open a trading operation downtown in the Candler Building.

But competition is already heating up, as utilities attempt to take advantage of the industry's changing dynamics.

In addition to Orion, Florida Power & Light Co., Pacific Gas & Electric, Duke Energy Corp. and a number of other utilities have formed subsidiaries or new entities to buy power plants.

Pacific Gas & Electric's U.S. Generating Co. subsidiary recently committed to spend $1.6 billion to buy the New England Electric System's power plants.

Together, BGE and Goldman, Sachs will initially invest more than $300 million in Orion, but analysts said the investment house would have little difficulty arranging additional capital.

BGE, too, will likely be able to up the financial ante, if a bill in Annapolis permitting it to form a holding company becomes law, as expected. As a holding company, BGE would be unlimited in its ability to fund nonutility subsidiaries.

Analysts said power plant prices are likely to drop as more plants become available for sale. Of late, power plants have been selling at up to twice their book value.

"Prices have to fall at some point," Tirello said. "And BGE is in the game early, so they'll do well."

"The more product that becomes available, the less prices will be bid up," Tanner said. "The key for them will be what kind of plants they buy and for how much. I think they'll look for high-reliability, low-risk, non-nuclear plants."

Pub Date: 3/12/98

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