After three decades working with the energy sector – first as a partner with the white shoe firm of Milbank, Tweed, Hadley & McCoy, followed by a decade with Lehman Brothers and Société Générale – Jacob Worenklein decided the time was right to work in the sector. Seeing an opportunity in the recently deregulated power generation industry, Worenklein founded US Power Generating in New York, in partnership with Chicago private equity giant Madison Dearborn Capital Partners and the family of Dallas oil magnate Ray Hunt.
To get started, Worenklein needed only look across the river from his Park Avenue office for his first opportunity: With strategic assistance from global project management consultant PIPC, he bought a trio of power plants – supplying nearly a quarter of the Big Apple’s electricity – in Brooklyn and Queens from Reliant Energy for $975 million in February. From such not-so humble beginnings, Worenklein and his team expect to build a $10 billion investment company within three years.
Worenklein spoke with DailyII.com’s Jonathan Shazar about his new firm, opportunities in the power generation business and the irresistible lure of New York City.
DailyII: Where’s the opportunity in power generation?
Jacob Worenklein: There was a point, four years ago, when we started this business, that there was an absolute abandonment of hope in the sector – the banks were taking back assets that were coming into default in the aftermath of the Enron bankruptcy and the overbuilding that took place in the United States. There was a period of time when wholesale prices were collapsing, and therefore the asset values were collapsing.
We are in a period that is shaped by a decision made in the mid-1990s to deregulate the generation sector in the United States: It became possible for new competitors to enter the market and build new power plants across the United States, and that happened in a massive way; [it] added in excess of 20% of the nation’s generating capacity in approximately four years. That was an extraordinary overbuilding, far more than the country needed in that time frame.
DII: So where does a business like this one fit in?
JW: We started our business in 2003 thinking that we would resolve a problem for the banks who are taking over these assets by essentially giving them both a current return and an upside for future revenue increases. It actually took a long time for the banks to get their act together and get ready to sell their assets. By the time they were ready to sell at the end of 2004, a hedge fund piled in and bought the debt, because they were buying into the story that we were telling – that, even though there’s an excess in capacity today, there will be a need for new capacity in the future.
The country will continue to grow, and we will grow out of the excess capacity we have today. We’ll take a few years to grow out of it, but by the end of the decade, we’ll actually be in balance in the United States. That was our investment thesis, and the hedge funds bought that. So we then started moving toward buying assets from strategic sellers, and the New York City assets were the first assets that we’ve purchased.
DII: Does New York offer a unique opportunity, or is it a part of a larger, nationwide trend?
JW: What caused us to be most interested in these plants is, fundamentally, that New York City is an area where the ability to create new power stations is highly constrained by the difficulty in finding the sites that you need to build a new power plant. In fact, almost all proposals on new sites have been turned down in recent years. The real issue is, how you build new capacity in New York. The answer’s going to be on the existing sites, primarily.
If we’re sensitive to community issues, if we’re concerned about being reliable and available when needed, and build [new capacity] in a way that’s environmentally sound and sensitive, we can actually make money in New York City. The constrained ability to import power into New York City is really driving the value of the assets up.
DII: But has the overbuilding adversely affected the New York plants?
JW: We felt that, even if there was a reduction in revenues that comes from a little bit of excess capacity over the next several years, over the longer term, New York City is going to need significant increased capacity because it’s growing. New York City remarkably has had an increased demand for power over the last 10 years, averaging 2.1% per year. People don’t actually realize that New York City as a whole is growing in population, in economic activity, in power demand use.
DII: And you can add capacity to your sites?
JW: There’s something very wonderful about being a local person in New York. I have a long experience representing New York utility companies, banks and others, and involvement with government officials in New York, [and am] perceived as a credible participant in the New York energy scene.
We have permits for the addition of new capacity in the Astoria plant, which is called repowering. You basically take the older facilities and you upgrade them into newer and environmentally more attractive facilities. We’re going to have to do the right things in terms of the new plants to make sure that they are environmentally attractive enough to gain community support.
DII: Is that an effective tactic for dealing with the community?
JW: Sure. We have not yet gotten to the stage where there’s any commitment to repower. There’s still an economic discussion that has to be had as to how people are going to pay the price. To give you a sense of it, to repower the plant at Astoria would probably cost $2 billion. Our team has some real experience doing that in other parts of the world, and that’s what we have to do in cities like New York, when we’re dealing with 40 to 50 year old plants.
We’re trying to get people to feel like we’re always there, doing what we’ve said we’re going to do. We [also] have a tremendous base of capital. Our two main investors are Madison Dearborn Capital Partners, which just completed a $6.5 billion fundraising effort in their new fund, and are prepared to commit a significant amount to our business, and the Hunt family.
DII: How has the relationship with a private equity powerhouse like Madison Dearborn worked?
JW: They were very active in the acquisition stage. They are extraordinarily value-added and hands on. They are part of the team: They do the work with us, they help us structure our various hedging and financing arrangements, they are very focused on the business. This is not at all a situation where they said, “OK, we trust you guys, we’re going to invest in you, now go ahead and do the deal.”
And we have had the benefit of their active involvement. Similarly, the Hunts have been extremely active with us. Of course, their expectation is that, once we’ve acquired an asset, we will manage it directly without the need for their day to day involvement.