Q&A: John Foster, Southwest Generation – Part II
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Q&A: John Foster, Southwest Generation – Part II


Denver-based Southwest Generation plans to use its operating experience and its platform to differentiate itself from peers. “Having a platform allows us to bring more economies of scale and synergies, either with buying new assets or combining with companies who have assets but don’t really have an operating platform,” John Foster, president and ceo, tells PFR. In the second session of this exclusive Q&A, Foster discusses the state of the M&A and financing markets and Southwest Gen’s ideal profile for potential asset acquisitions.

PFR: The refi press release mentions the company’s focus on growing its asset base this year. Can you elaborate on that strategy? Why is this effort coming to fruition right now?

Foster: In order to grow, we needed to stabilize the business platform. The ability to grow prior to this time was a challenge, because of some uncertainty around the existing financing and the un-contracted assets. It was not necessarily the best time to try to get new investors or to get existing investors to put in new money.

Having now completed the sale of the Las Vegas assets and the refinancing, the reality is that we have an approximately 750 MW portfolio spread across five plants giving the company $25 -30 million in EBITDA on an annual basis. That is not a sustainable size for a company going forward.



The new objective, as agreed with our shareholders, is to create a diversified, sustainable, self-funding power generation platform in North America. We’ll be looking to grow that portfolio over the next several years to achieve those objectives, which probably means, on a financial basis at a minimum, tripling the size of the company. It’s not going to happen overnight. It’s not going to happen in the first three months or six months of 2015, but it needs to happen within the next few years.

We’ve got good alignment with our shareholders and that’s where they want to see us take the company and where we hope we can take the company. We are primarily a gas-fired company in the Southwest. That’s still going to be our sweet spot. But we’re not going to be limited to the Southwest and we’re not necessarily going to be limited to gas-fired generation. We’ll continue to do that where possible. We’re still going to be looking for some kind of contracted cash flows. We’re not necessarily going to be looking at only long-term PPAs, but some kind of contracted cash flows and other options where we can bring some of our experience and track record to re-contract or otherwise maneuver in some of these different forms.

PFR: What are you looking at in terms of size for investments and megawatts?

Foster: We have 750 MW spread across five assets, so individually relatively small projects. That’s an area where I think we have demonstrated success, working with aero-derivative technology from GE. We’re likely to continue to look at that kind of play in terms of our sweet spot.

The projects we’ll be looking at, particularly in 2015, are going to be of smaller rather than larger size. Based on our success, we may then look at increasingly larger projects. The bigger projects are probably in a more competitive space. I think we can achieve our objectives better if it fits more with our operating profile. We will be looking at projects that are more in the 50 MW to 250 MW range as opposed to 500 MW to 800 MW.

PFR: How does Southwest Gen look to differentiate itself from competitors in auctions and sales? How will it finance purchases?

Foster: In terms of our key strengths and competitive advantages, we have a solid and proven operating platform. Before the Nevada sale we had seven assets with 1,000 MW and a stellar operating track record. We have high reliability, availability and strong environmental compliance and safety records. We know from discussions with other investors and owners in the industry that there are some companies that do not have platforms who would like their assets operated by a high quality, proven team.

Having a platform allows us to bring more economies of scale and synergies, either with buying new assets or combining with companies who have assets but don’t really have an operating platform. I think our asset management track record will also allow us to be perhaps more aggressive in some areas in how we view re-contracting risk and the comfort level in being able to obtain that.

We’re going to continue to do the kind of financing that we just did. One thing you do learn in this industry is that things never stay the same. But, if it was the same environment that it is now, we would probably still be looking at the commercial banks and term loan A-type financings. It may make more sense to look at some fixed-rate products or bond financings, but right now I think it’s more likely to be in the commercial bank market.

PFR: How are you finding the M&A market for power assets these days compared to years’ past? Any significant changes or trends out there in auctions and sales?

Foster: It remains really competitive. There are big trends, as everyone in our industry is well aware. The whole trend in the renewable space with the yieldcos is definitely a new phenomenon. They are obviously aggressive players. There is some likelihood that they will expand their reach beyond renewable assets, looking at other contracted assets like gas or nuclear or other resources. That’s one thing to keep an eye on.

Pension funds continue to be quite aggressive on different types of assets. We still think there’s going to be room for us to get our fair share of success looking at relatively smaller assets in areas where they are not fully contracted, where we can bring value to the transaction.


PFR: Do you have anything else to add that we haven’t touched on?

Foster: I know that JPMorgan, Hastings and the company are really excited for this next chapter of Southwest Generation. We went through what was, frankly, a difficult period. For a lot of people, not just in our industry, the impacts of the Great Recession were felt far and wide. We’re at the point now where we can have a more stable platform and grow and be able to provide the shareholders with attractive returns. We had a nice distribution at the end of last year in connection with closing our deals. We’re expecting to be able to continue that moving forward. I think people are pretty excited. We have open eyes about the challenges, but we believe we have a good chance of success.

For the first installment of this Q&A, please visit www.powerfinancerisk.com.







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