|
Server : Apache/2.4.62 System : FreeBSD fbsdweb2.web.rcn.net 14.1-RELEASE FreeBSD 14.1-RELEASE releng/14.1-n267679-10e31f0946d8 GENERIC amd64 User : www ( 80) PHP Version : 8.3.8 Disable Function : NONE Directory : /domains/enrgy/articles/ |
Upload File : |
<html>
<head>
<title>Risk Management For Merchant Power Plant Financing</title>
</head>
<body style="font-family: Arial" vlink="#808080">
<div align="center"><center>
<table border="0" cellpadding="8" cellspacing="0" width="98%" bgcolor="#000000">
<tr>
<td width="100%" valign="middle"><a name="top"></a><img src="../images/pmamagsm.gif" alt="PMA Online Magazine" border="0" align="right" WIDTH="229" HEIGHT="100"></td>
</tr>
</table>
</center></div><div align="center"><center>
<table border="0" cellpadding="8" width="98%">
<tr>
<td width="25%" valign="top" align="center"><map name="FPMap0">
<area href="http://www.powermarketers.com/adrates.html" shape="rect" coords="14, 297, 97, 322">
<area href="http://www.powermarketers.com/pmajobs.htm" shape="rect" coords="11, 230, 95, 257">
<area href="http://www.powermarketers.com/main.htm" target="_parent" shape="rect" coords="12, 163, 96, 189">
<area href="http://www.powermarketers.com/power2.htm" target="_blank" shape="rect" coords="12, 95, 96, 121">
<area href="../pmamag.htm" shape="rect" coords="11, 29, 96, 54"></map><img rectangle="(12,163) (96,189) http://www.powermarketers.com/main.htm##_parent" rectangle="(12,95) (96,121) http://www.powermarketers.com/power2.htm##_blank" rectangle="(11,29) (96,54) ../pmamag.htm" src="../images/magmenu.gif" alt="PMA OnLine Magazine Menu" border="0" align="center" usemap="#FPMap0" width="110" height="350"><p><a href="../searchpma.htm"><img src="../images/archives.gif" alt="Archives Search" border="0" align="center" WIDTH="70" HEIGHT="40"></a></p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p> </p>
<p><a href="#top"><img src="../images/b-t-top.gif" alt="Back To Top" border="0" width="71" height="35"></a></td>
<td width="75%" valign="top"><b><font face="Arial" size="6">RISK MANAGEMENT
FOR MERCHANT POWERPLANT FINANCING</font></b>
<p><font face="Arial"><strong><big>by Roger D. Feldman<br>
</big><font size="2">Partner, Bingham Dana LLP</font></strong></font></p>
<p><font face="Arial">(<em>originally published in the <b>Cogeneration and
Competitive Power Journal</b>. For subscription information, call (770)
925-9388</em>)</font></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">The
use of risk management devices has been an increasing response to merchant
power plant finance uncertainties. The importance of credit enhancement as
an element of successful merchant plant financing clearly is an evolving
matter which will be affected by the maturity of systems of regulation,
and the reliability of power marketing backstops for projects. The basic
question is: can risk management be a satisfactory surrogate in the
financial markets for cash flow stress elements arising from those
fundamental transactional elements typically singled out by the rating
agencies?<o:p>
</o:p>
</font><font face="Arial" size="3"><o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">The
types of risk management being undertaken today are not necessarily
disclosed by the way in which energy marketing affiliates have entered
off-take arrangements with their special purpose project development
companies. It is to be anticipated that over time there will be greater
analysis of the track records of individual power marketing affiliates as
risk managers, and, of counter party/credit enhancers as well who assume
risk and seek to hedge it.<o:p>
</o:p>
</font><font face="Arial" size="3"><o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Certainly
the experiences of the summer of 1998, highlighting the uncertainties of
the risk management markets, will necessitate such analysis in individual
deals, particularly to the extent that power export outside of the local
grid is an important part of the project�s power marketing strategy.
Whether private sector Transcos will exacerbate the pressure on power
price volatility, in an effort to maximize profit, remains to be seen.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">The
rating agencies have, of course, already taken note that effective risk
management techniques will distinguish the emerging merchant power plant
(�MPP�) industry from the old IPPs. Standard & Poors emphasizes
the value to proposed project financings of in-place power marketing
services, including presence of in-house risk management infrastructure
and quality of plant information technology, and real time data
acquisition abilities to track price fluctuations and load flows in
volatile markets.<o:p>
</o:p>
</font><font face="Arial" size="3"><o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Initial
specific transaction design should build on these features by taking into
account the need to preserve flexibility in energy transaction options
with respect to transportation, sales, transmission and mode of operation,
as well as form of credit support. However, while sales strategies based
on specific market niches tied to hedging may be feasible and attractive
in certain instances, S&P notes: �as in the case for most commodity
markets, identifying, developing and dwelling in that ephemeral position
on the kinked portion of the demand curve may prove to be forever
elusive.�<o:p>
</o:p>
</font><font face="Arial" size="3"><o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Strategies
to alleviate excessive trading market risk include the fashioning of
quasi-merchant plants around strong industrial off takers; to establish
them as split offs from utility plants selling back to utilities; to
preserve them as continued providers under preexisting power sales
arrangements with the utility which previously directed their sales or to
structure other partial, long-term off-take arrangements.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">There
are limits to what risk management can achieve on individual projects. The
transition of the use of risk management for individual projects into a
broadening of merchant plant capital markets is provided by credit
enhancement.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Increasingly
larger integrated capital pools for risk assumption are seeking ways not
merely to provide a credit grade up tick, but to assume those specifically
identified risks necessary to achieve project financeability (and
themselves, thereafter, backfill behind those risks through a mixture of
commodity-type trading, risk spreading through reinsurance, and
development of appropriately priced financial products). Credit enhancers
are reaching into the marketplace as teammates, but perhaps ultimately as
the displacers, of traditional investment banking structuring activities.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3"><b>PORTFOLIO
FINANCE<o:p>
</o:p>
</b></font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">At
this intersection between fuel convergence energy projects and credit
enhancement, is where the future prospects for merchant plants as the
building blocks of large enterprises which possibly may be corporate
financed. Power revenues as a type of cash flow, with which risk
management markets have gotten statistically comfortable as to their
aggregate forward price curve profile, may be credit enhanceable to a
level where merchant plant securitization as well as corporate finance is
possible. It becomes, of course, easier the greater the diversity of
project portfolio.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">This
perception of the future role of merchant plant development multiple
facilities, simultaneously developed in a single region like New England,
could take hold in other U.S. settings, where combinations of merchant
plants and acquired assets are effectively creating new supply utilities
to interface with the newly emergent transmission utilities.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Certainly
the vision of many transactions being fleet-financed or jointly
portfolio-financed�with or without credit enhancement�is the one many
bankers assume will evolve into the reality of the future for merchant
plants. Current merchant structures are perceived as simply a product of
where expertise resides right now in terms of transactional capability.
Domestically, it is seen as a transition stopgap while different
regulatory requirements, auction processes and stranded cost recovery are
sorted out. Historically, project-financed projects generally have been
dismissed as not being subjectable to portfolio treatment like mortgages,
because of their absence of homogeneity, particularly where multiple
sponsors, multiple power off-takers and multiple credits have been
involved. [The law of numbers invoked for dispersion of portfolio risk in
effect has been deemed trumped by the application of Murphy�s Law to
each project or capital markets risks.]<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Recently,
efforts to develop a collateralized loan obligation (�CLO�) structure
for merchant power plant finance has received increasing attention, as one
offering risk diversification for investors and greater liquidity for
lenders. Of course, the quality of given debt issues, rather than generic
assumptions about loan portfolio performance, must be in control.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">A
portfolio of properly credit enhanced merchant plants, or a single credit
enhanced portfolio, may be the foundation for portfolio-based issuance of
securities.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Particularly
is this true in the domestic merchant plant arena, where as we have seen,
there is an emerging group of transactions where the structural issues key
to financing are coming into clear focus, and specific risk management
techniques being used to offset them in the trenches of the Northeast, and
in the less settled portions of the rest of the U.S. In this context,
contingent equity commitment can be substituted for contributed capital.</font><font face="Arial" size="3"><o:p>
</o:p>
</font></span></p>
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">The
effective expansion and addition of the risk management and credit
enhancement pieces to transaction and capital structuring innovations is
what will put merchant plant development over the top on a national basis.
That is why the New England trenches experience is such a useful platform
for what we will be doing nationwide.<o:p>
</o:p>
</font><font face="Arial" size="3"> </font></span></p>
<hr color="#FFFF00">
<p class="MsoNormal"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3"><b>ABOUT
THE AUTHOR</b><o:p>
</o:p>
</font></span></p>
<p class="MsoNormal" align="center"><font face="Arial" size="3"><b>Roger
D. Feldman</b> </font></p>
</center>
<p class="MsoNormal" align="left"><font face="Arial" size="3"is
co-chair of the Project Finance Group of Bingham Dana LLP a century-old
300+ attorney firm with offices in Boston, Hartford, New York, Washington,
Los Angeles, London and Tokyo (Counsel). The Group is a leader in all
facets of New England power venturing and project finance.<o:p>
</o:p></font><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">A
30-year veteran of utility and IPP finance in which he has participated in
the closing of over $10 billion in transactions, he is currently a NECA
board member and chair of the DC Bar International Investment and Finance
Committee. He has chaired the American Bar Association�s Energy Finance
Committee and is a board member of
</font></span><font face="Arial" size="3">The
Journal of Project Finance,
The
Cogeneration and Power Marketing Letter, Cogeneration and Competitive
Power Journal, and
the Construction
Business Review.<o:p>
</o:p>
</span></font></p>
<p class="MsoNormal" align="left"><span style="font-size:10.0pt;font-family:Palatino-Roman"><font face="Arial" size="3">Mr.
Feldman is a graduate of Brown University, Yale Law School and Harvard
Business School, and served as a deputy administrator tothe Federal Energy
Administration.<o:p>
</o:p>
</font></span></p>
<p class="MsoNormal" align="left"><span style="font-size:10.0pt;font-family:Palatino-Italic"><font face="Arial" size="3">Bingham
Dana LLP, Suite 400, 1200 19th St. NW, Washington, DC20036-2400
(202)778-6150, fax 6155.</font></span><font face="Arial" size="3"><o:p>
</o:p>
</font></p>
<center>
<hr width="98%" color="#FFFF00" size="1">
</td>
</tr>
</table>
</div>
<p align="center"><a href="#top"><img src="../images/b-t-top.gif" alt="Back To Top" border="0" width="71" height="35"></a></p>
</body>
</html>