Goldman Sachs re-enters power generation sector

Investment bank Goldman Sachs is re-entering the physical power market for the first time in two years with the purchase of a 940 megawatt natural gas plant from troubled energy company El Paso Merchant Energy.

Goldman Sachs today announced its intent to buy out El Paso’s interests in East Coast Power, which owns the Linden cogeneration facility in New Jersey, for $456 million in cash. The bank will also take on about $600 million of debt.

This will be the first time Goldman Sachs has owned power assets since closing its joint venture with Baltimore-based Constellation Energy in 2001.

“We are pleased to re-enter the power generation market, especially with assets of this quality,” said Richard Ruzika, co-head of global commodities at Goldman Sachs in New York. “As we found in our joint venture with Constellation Energy, owning generation assets enhances our power trading capabilities and opportunities.”

Banks have been tipped by many analysts to become leading players in the US electricity trading sector following the withdrawal of many merchant energy companies. So far, though, many have been reluctant to enter the physical markets. The only other bank to own generation assets in the US is Morgan Stanley, one of Goldman’s leading competitors in energy trading, which owns a small portfolio of power plants.

The sale of East Coast Power is the latest move in Houston-based El Paso’s ongoing asset divestiture programme. The company says it aims to sell a total of $3.4 billion worth of assets by the end of 2003, as it struggles to boost a financial position which has been devastated by the credit crunch in the energy sector. With this sale, El Paso says it has now sold about $2.2 billion in assets.

The Linden facility supplies about 80% of its production to New York City, with the remainder sold to the New Jersey market, according to Goldman Sachs. A large portion of the plant’s output is sold under long-term contracts to A-rated counterparties, it says.

The two companies say the sale is subject to regulatory approval and is expected to close within three months.