Sithe deal marks shift in power play

The latest incarnation of Sithe Global Power, a Blackstone investment, represents a shift in the electric energy opportunity, as distressed deals dry up and equity sponsors clamour for greenfield strategies.

The recent investment by The Blackstone Group in Sithe Global Power marks a shift in the opportunity investors are finding in the electric energy space. Distressed activity in the sector has now given way to groups actually building new energy facilities.

The first wave [for Reservoir] was buying distressed assets and selling them back. The next opportunity is to go out and build power plants…That’s a capital intensive initiative.

Industry source

When Reservoir Capital Partners first acquired a 50 percent stake in Sithe Energies in 2003, the investment model was centered on buying distressed assets. The New York-based firm partnered with Exelon to buy the company, and in the ensuing years went on its own to buy certain energy facilities out of the 50 percent Sithe partnership, and either resold the assets or floated them in a public offering. The remaining assets that Reservoir didn’t buy out of Sithe Energies were then sold back to Exelon, which ultimately unloaded the company in a sale to Dynegy.

Reservoir then took the Sithe name and management team, led by Bruce Wrobel, and essentially launched a new company, Sithe Global Power. The new outfit still focuses on electric power generation, but the strategy has changed completely.

In its first incarnation, Sithe exclusively bought distressed energy assets. Now, the company’s focus, which has changed alongside the market, is to build new facilities around the world. To do this, Sithe needs capital, which made The Blackstone Group a logical partner. Blackstone is in the midst of fundraising, gathering capital for a new fund that once complete, will likely sit as the largest ever private equity fund at around $12 billion (€9.9 billion).

Blackstone also has experience in the energy market, another factor that wasn’t overlooked, as investors in the new Sithe will need a stomach to endure the increased risk involved with building new facilities. Blackstone acquired an 80 percent stake in Sithe, and has committed to invest, along with Reservoir and the management team, as much as $500 million. That figure is also expected to rise, and based on the current projects Sithe has already begun, one source estimated that the company could consume around $1.5 billion to complete the facilities it is already developing.

“The first wave [for Reservoir] was buying distressed assets and selling them back. The next opportunity is to go out and build power plants,” a source said, adding, “That’s a capital intensive initiative.”

According to the source, the new Sithe strategy is a response to certain areas not having the capacity to meet energy needs. The company already has a number of development projects in the works, including coal-fired projects in New Mexico, Nevada and Pennsylvania, a natural gas-fired facility that is being built in Toronto, and Sithe also has plans to start new projects in Italy, Uganda, and Yemen.