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<title>May 2004: Name This Tune</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
</u></b><u><b>May 2004</b></u></p>
<p align="center"><font size="6"><b>Name This Tune</b></font></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2</em>004/06/10)<br>
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<p>Will the name of this publication, “Merchant Power Monthly” soon join its
earlier incarnation, “The Cogeneration Letter” in the dust bin of history?
Will its listings of EWGs, QFs and proposed projects give way to a listing
of trading indices? Is a league table of leading investors in the works? Or
alternatively, something like the major league baseball standings of the
country’s 32 utilities, with little reports on their chief acquisitions or
major capital investments? Was US power deregulation, along with its vaunted
overseas cousin, privatization, the source of a speculative bubble unfounded
in the dynamics of the cyclical business of electric energy production
and transmission?<br>
<br>
The answer is to be found more in the capital markets than in the policy
studies of FERC or even the porkladen proposed energy bills of Congress. And
at the moment, it is particularly uncertain because many of the players now
idling in the financial corridors of potential utility power are of a
different sort than those common in the past. They are funds for the
investment of “private equity” or high yield debt, in any case at return
levels commensurate with the risk now deemed to be characteristic of this
once stolid and solid power industry.<br>
<br>
Fact is, we are now dealing with what is now again termed a commodity
(someone noticed!) and one whose production costs are the subject of the
vagaries of another commodity, now once again said to be in short supply
(natural gas) and of the politics of pollution (coal) and security,
(nuclear, LNG and perhaps even renewables).<br>
<br>
The capital markets are also grappling with the prospects for non-payment of
the debt which the developers of energy merchants accumulated in the course
of developing a massive overbuild of capacity in many geographic regions. A
year ago this was perceived as creating an immediate overarching shelf of
risk that might taken down the entire industry. Nine out of the twelve
merchants and firms dodged that bullet by selling assets or restructuring
debt. In a scathing analysis Peter Rigby of Standard & Poor has suggested
that debt levels are still excessive and the problem has not gone away. He
assembles a variety of data to support the underlying hypotheses that the
fundamentals of companies involved in the industry simply are not
attractive; plants are long lived; market entry is not as difficult as was
thought; and spark spread margins are thin, declining and subject to risk
and market competition forces which merchant power into a price taking
position. His conclusions: “By almost every measure, the 12 energy merchants
exhibit surprisingly weak credit fundamentals . . . (T)hey will struggle to
improve their credit measures by any significant degree.” He anticipates
that traditional lenders will back away from the sector.”<br>
<br>
All that said, there is both a terrific build up of private equity funds
seeking to acquire power assets (generally those with existing contracts)
and an increasing amount of high yield debt filling the vacuum previously
occupied by traditional providers (possibly with equity swaps in mind).
There are also firms taking possession of the restructured shells of IPPs.
In short, while much money has been lost and is endangered, a considerable
amount has come to the table.<br>
<br>
There is one problem: it is money seeking high yields in a short period of
time. If not from operations — which seems likely to be the case where
lucrative and leverageable long-term contracts are not involved- then from
asset flips based on attractive purchase and sale prices. Why, however, this
should be the case, given the S&P analysis of the fundamentals, remains to
be seen. Who will the buyer of last resort be? Logically, I would suggest
only the utilities will be left standing, investing in assets for future
use. As of now, FERC’s renewed emphasis on competition has locked them out
of their own markets. It remains to be seen if that will continue to be the
case in the future. Perhaps, the “Merchant Power Monthly” should consider a
fine old name like “Public Utility Reports.”</p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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