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UBS: Merchant conditions in West could mean cheap plants for utilities

UBSSecurities LLC expects the oversupply of combined-cycle gas plants in the Westto lead to low contracting and sale prices for assets, with utilities likely inthe best position to pick them up.

Theresearch firm said bids into Pinnacle West Capital Corp.'s for 400 MWto 600 MW of capacity are likely to be "quite low," as a result ofthe volume of merchant plants in the region.

UBSanalyst Julien Dumoulin-Smith wrote in a June 17 research report that theHarquahala,Gila River, Arlington Valley and Mesquite gas plants could opt to participate inthe RFP given the challenging merchant economics.

"We think the best chance for these assets remains tobe acquired by utilities and entered into ratebase, rather than furthercapacity & energy tolling RFPs," Dumoulin-Smith wrote.

The analyst noted that "excess regional supply dampensexpectations for sales prices" when it comes to IPPs looking towarddivesture.

Dumoulin-Smith pointed to CalpineCorp.'s refusal to disclose the sale price for its South Point asset as one example of the financial woesfacing merchant generators in Arizona. 's of the Harquahalaplant, with a target value of $50 million to $150 million and related concernsabout creating value by movingthe asset into a different region, is another example.

"Bottomline, we think scenarios for $200/kW values are likely to remain outside ofutility acquisition scenarios; the question is whether the steady trend backtowards utility held consolidation will enable companies to acquire atdiscounted prices," Dumoulin-Smith wrote.

Theanalyst said the depressed valuation for gas assets extends beyond Arizona,with recent deals in California as low as $100/kW.

UBS,however, said power plants to watch are Calpine's Hermiston Power Project in Oregon and inCalifornia, both of which the brokerage values at $250/kW or $310 million.

Inaddition, Dynegy marketing its small California portfolio, which UBS values at $160 millioncollectively.