Zilkhas.Wind Energy. Tax Credits .... Bonanza time again for Goldman Sachs

Selim Zilkha the son of the fabled Banker of Baghdad set up the Mothercare retail chain of children’s clothing and baby goods stores in the UK, and sold out in the 70’s and moved to the USA. In the mid-1980s, while oil was cheap and most drillers were pulling out of the Gulf of Mexico, Selim Zilkha started stocking up on Gulf leases. Using sophisticated computer analysis he was able to identify those areas where there was still oil to drill for using new deep water techniques. In 2001, when oil prices were starting to rise, Zilkha sold out, trading his Zilkha Energy Co. for a $660 million stake in El Paso Corp.

His next play was to put a $110 million bet on a notorious money pit: wind farms.

With his son Michael (record producer and manager of the red Hot Chilli Peppers) , Zilkha bought a Houston-based wind energy company, now called Zilkha Renewable Energy, for $6 million with plans for further investment.

But generating electricity alone won't make money. The business plan was to sell the turbines to a bigger player, who will want the windmills not for their power capacity, but for the tax credits they generate - 1.9 cents per kilowatt-hour.

Late in 2005 Zilkha Renewable Energy with an energy portfolio of nearly 4,000 MW in various stages of development in a dozen states finished negotiating with the Goldman Sachs Group of New York on an acquisition agreement. Goldman Sachs purchased a controlling interest in Zilkha which said to involve sums not unadjacent to $400Mn.
At the time Goldman Sachs said that,

“less than 1% of US power-generating capacity currently comes from wind. Goldman Sachs sees considerable room for growth in wind energy. This is the fastest growing segment of the energy market.”

The Production Tax Credit (PTC) which was scheduled to end December 2005 was extended in July by Congress By simply changing the PTC expiration date to December 31, 2007, the extension left in place the PTC’s current 1.9 cent per kilowatt-hour value, the annual inflation adjustment provision, and the 10-year term to generate credits following the installation of a wind turbine.

The company was renamed Horizon Wind Energy in August 2005. More here. The Zilkhas are no longer involved.

Goldman Sachs Group Inc., Wall Street's most profitable firm, paid employees an average $521,000 last year, the No. 2 U.S. securities firm by market value, paid $11.7 billion in compensation to 22,425 employees for the fiscal year that ended in November.

Goldman's profit rose 24 % in fiscal 2005 to an all-time high of $5.6 billion. It paid out 47.2 % of revenue in compensation, up from 46.7 % in 2004.