When Diamond
Generating Corp. was formed in 1999 in Los Angeles, it chose to avoid
the then ambitious merchant market and pursue a quiet multi-step development
strategy. Hiro Sakuma, the company’s executive vice president said
from the beginning the company chose to develop and acquire generation
assets that had a guaranteed stable income and cash flow that offered
a 3% annual growth rate.
REENTERING
THE AMERICAN POWER MARKET
Mitsubishi, the parent of Diamond
Generating, chose to reenter the American power market in 1999 after dissolving
its U.S. subsidiary Diamond Energy three years earlier to concentrate
on the Asian market. Its experience in that market strengthened its view
that it needed to get back into the U.S. market, the biggest in the world
and growing at an annual rate of 3%, explained Sakuma. It also appreciated
the much fairer U.S. legal framework, even to foreign nationals, than
what it found with some of the Asian governments, he added.
But from its start, Sakuma
said, Diamond Generating decided to take a much more conservative strategy
in comparison to many of the merchant developers who were aggressively
pursuing green field projects in 1999. They were buying up fleets of turbines
with an expectation of eventually seeing annual returns of 18% to 20%
or more. Diamond Generating decided not to use recourse financing and
to only invest in those projects that had off-take or power purchase contracts,
Sakuma explained.
Diamond Generating also had
the advantage of an initial capitalization from its parent company. It
was able to utilize Mitsubishi’s financial strength and strong credit
rating in structuring its transactions.
Diamond Generating’s
initial strategy was to make passive investments in a small number of
projects with long-term power contracts to create cash flow that would
cover general and administrative expenses, debt and new development activities.
It began with a $120-million investment in an 18% stake in Orion Power
Holdings, a joint venture of GS Capital Partners II, an investment fund
managed by Goldman Sachs & Co., and Constellation Power Source, a
power marketing affiliate of Baltimore Gas & Electric. By 2000, Orion
held more than 5000 MW of operating assets it had acquired from developers
and utilities. Diamond sold its stake in Orion to Reliant Resources in
Sept. 2001 to invest in new generation assets.
Shortly after the Orion investment
in 2000, Diamond teamed up with Tenaska to form Tenaska Diamond L.P. They
now own joint interests in seven operating power plants totaling 5,825
MW in Texas, Georgia, Alabama, Oklahoma and Washington in which Tenaska
is the controlling partner. Diamond Generating’s interests in these
plants total 1,730 MW.
GREEN-FIELD
DEVELOPMENTS
In 2003, the company began
investing its proceeds in its first two green-field developments in which
it holds controlling interests: the 500-MW Ivanpah project in Nevada and
the 600-MW Wanapa project in Oregon. Both will be gas-fired combined cycle
facilities. Ivanpah’s site is permitted and the company is negotiating
a power purchase contract with an unnamed buyer. Its partner is Black
Hills Generation, Inc. The plant is expected to be on-line in 2006.
The Oregon project is being
developed in partnership with the Umatilla Indian Confederated Tribe at
Hermiston. The Eugene, Oregon Water and Electric Board, the City of Hermiston
and Port of Umatilla are also partners. Wanapa project development is
six or seven months behind that of the Ivanpah project. Its environmental
permit application is being reviewed and the company is working on a power
purchase agreement. Diamond hopes have the project on-line by 2007.
Today, in 2004, Diamond Generating
is taking its next strategic step, according to Sakuma, by seeking to
acquire controlling interests in existing generation assets having long-term
power purchase agreements with creditworthy power purchasers. It is seeking
a managing general partner role in gas, oil or coal-fired projects, either
in operation or under construction.
POWER MARKET
COME BACK ‘07
Sakuma predicts the power
market will come back by 2007. While the company is intent on taking a
leading role in developing green field projects with a focus on the western
U.S., it must keep its development team in place, and maintain its development
costs within the cash flow of its Tenaska projects, as the recovery continues.
The privately-held company’s net income in 2002 was $24 million
after taxes.
But Sakuma emphasized that
Diamond Generating is also interested in other investments in the extended
electric industry, one example being transmission which is very stable.
“If we grow enough and cash flow is large enough, we will invest
in merchant plants in the middle to long-term-three to five years,”
he said. The August 2003 blackout in the Eastern U.S. proved there must
be transmission-related investments in merchant facilities, he said.
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