Mystery Company Buys Up Power Plants

A private investment group reaches out under the radar to purchase a set of unprofitable facilitiesEast Brunswick

From its offices in East Brunswick, a secretive investment group called LS Power has quietly gained control of an energy empire. The private equity group last month paid more than $1.5 billion for eight money-losing power plants owned by Duke Energy of Charlotte, N.C.

The natural gas-fired plants include four in California, two in Arizona and one each in Maine and Connecticut. Taken together, they generate a total of 6,200 megawatts of electric power. Dan Riedinger, a spokesperson for the Edison Electric Institute, a trade group in Washington, D.C., says that can provide enough energy for 6 million homes.

Tyson Slocum, director of the energy program at Public Citizen, a Washington, D.C.-based watchdog group, says the LS Power purchase follows a trend of investment firms becoming increasingly active in the energy market, and he criticizes such purchases by short-term investors. “They’re looking to buy [power plants] on the cheap and turn around and sell them in a short period of time,” Slocum says. “LS is not going to hold onto these things. I don’t see a dedication to long-term investment for reliability, which is bad because this is a long-term industry.”

Darpan Karpadia, managing director of LS Power, calls the deal an excellent investment. “We see significant financial potential in the DENA [Duke Energy North American] facilities,” Karpadia says. The transaction, which requires the approval of the Federal Energy Regulatory Commission, is expected to close in the second quarter.

While he would not discuss the details of the deal or his company’s plans for the electric generating facilities, Karpadia did provide a brief history of LS Power. It started in 1990 and is the owner-operator of some 10 U.S. natural gas and coal-fired power plants.

Karpadia offered no other details, saying only that LS Power has “managed thousands of megawatts of power generation throughout the country.”

Documents provided by Hoovers, an Austin, Texas-based business research company, show that LS Power has 28 employees and more than $4 million in revenue.

The sale takes a load off Duke Energy, which according to spokesperson Randy Wheeless has been preparing to exit the “merchant [power] generation” business since last year. The plants “all run on natural gas and the price of natural gas has gone up tremendously over the last couple of years, making them not economical,” says Wheeless.

Martin Edwards, vice president of the Interstate Natural Gas Association of America, says price volatility has hurt many power plants over the last five years, especially those that didn’t lock in long-term contracts to buy natural gas at a stable price.

Gas prices have been on a “roller coaster ride,” says Edwards, whose Washington, D.C.-based trade group has some 30 members. Costs jumped to near $15 per million British thermal units (MMBTU) after the hurricanes last year. Prices have since settled near $7 per MMBTU, but remain a far cry from the $2 they were in 2000.

Karpadia declined to say whether LS Power plans to convert the plants from natural gas use.

In California, the site of four of the eight plants the investment group is taking over, two of the facilities are located at Morro Bay and Moss Landing on the state’s scenic central coast, one is in Oakland and one is in Chula Vista in Southern California.

According to the Monterey County Weekly

in California, the Moss Landing plant’s five-year permit to discharge pollutants expired in December and has been automatically renewed, pending a review of the facility’s discharge equipment.

Edwards says California built numerous power plants during the 1990s. But the economic downturn of the early 2000s cut deeply into the demand for energy, leading to an “over-capacity of power supply” for the largest U.S state. As a result, says Edwards, some power companies sold off excess capacity, allowing buyers to acquire attractive facilities at bargain prices.

“If you’ve got a plant on the ground, it’ll be easier to make money off it than it will be to build a new plant,” Edwards says. “If you can get a good price, over the long-term they [power plants] could be a good asset.”

E-mail to bquinlan@njbiz.com