Powering up
2002 was billed as the perfect storm, the culmination of poor
access to capital markets, overcapacity, depressed demand and
prices, and Enron-related suspicion. By the end of the year, more
than one banker began to doubt privately whether the integrated
merchant energy player was a good idea at all. The doubts are not
completely unfounded ? the enormous demands of being a growth
stock, and at the same time satisfying non-recourse lenders can be
hard to reconcile.
There were plenty of potential culprits, from the ratings agencies, to the marketing consultants, to credit committees and inflexible treasurers. The rating agencies were at pains to, at the same time, clarify their methodology, insist it was robust, and make some changes to personnel. Moody's Investors Service made a number of personnel changes, and both it and Standard & Poor's hastened to issue new measures of a company's liquidity and vulnerability to ratings triggers.
Market consultants also attracted a fair amount of criticism as the most visible cheerleaders of boom times in the US power market. Their defence was that they had been consistently conservative in their approach to forward power prices, had ignored the effect of retirements (crucial to the strategy of some gas-fired merchants), and that prices would pick up in the medium term.
What was clear, however, was that most of the really good places to be a merchant generator were not likely to stay that way, or never truly had been. California's troubles with plant permitting and a lack of transmission capacity were brushed aside as memo after memo laid out price- and revenue-inflating trading strategies appeared. Some of Enron's trades ? ?Get Shorty? and ?Death Star?, for instance ? were taken straight out of popular culture, and threatened to become permanent parts of the financial lexicon.
The fact that energy traders were able to game the system to such an extent, to say nothing of the round-trip trades that boosted merchant revenues, points to the one area of growth in the US market ? getting transmission infrastructure up to scratch. In this the trailblazer is Trans-Elect, a specialist transmission owner and developer that could be the start-up to watch ? the ?next Calpine? as one lender put it. Given the ongoing problems at the old one, the allusion was an odd one, albeit symptomatic of a power industry looking desperately for hope on the horizon.
Trans-Elect, formed around a core of former CMS executives, secured $278 million of financing for its purchase of Consumers' Energy's transmission assets through CIBC and Deutsche. For its purchase of Illinois Power's assets (parent company ? Dynegy) it has mandated SG and WestLB. Private equity players, securitization boutiques, finance houses, and GE Capital (which does all three) are all interested, not least in the depreciation benefits available from the tax authorities. New projects, such as the Path 15 transmission project in California, and a rumoured tender from the Bonneville Power Administration, will provide a sterner test of appetite.
The other area of infrastructure provision attracting interest is pipeline construction, although El Paso's ownership of pipeline capacity has exposed it to a judgement by the Ferc's Administrative Law Judge that it withheld capacity into California crisis. Still, the most successful financing of the year was that for the Kern River Pipeline expansion project. Kern River, a pipeline into California that benefited from rock-solid shipping contracts, raised $875 million from the bank market in a deal that even at subunderwriting stage attracted plaudits and deal of the year nominations.
Kern River was formerly the crown jewel in the Williams Companies' portfolio, but the pipeline was sold to MidAmerican Energy, part of Warren Buffett's Berkshire Hathaway group in April. Banks hoped that Buffett, who had saved a number of industries before, including insurance and hedge funds, would do likewise for energy. The $1.9 billion sale by Dynegy of former Enron property Northern Natural Gas (NNG) made some bankers salivate.
Berkshire's strategy did not really live up to these promises ? NNG's price was raised through a corporate issue, and Berkshire's attention moved elsewhere in the sector. Its next high-profile deal was with Texan utility CentrePoint Energy, formerly part of Reliant Energy. CentrePoint borrowed $1.3 billion from Berkshire and CSFB at 9.25%, and Berkshire, along with Lehman Brothers, also lent $9 billion to Williams at 14%.
More ominously, the move by the leading investment banks into this distressed lending was accompanied by hedge funds looking to buy war-weary banks out of distressed positions. This makes the wave of restructurings, of which there are several ongoing or in view, hard to call.
The two most bruised players, NRG Energy and PG&E's National Energy Group, are the closest to the wire. NRG, whose breakneck acquisition spree left it dangerously overleveraged, is in talks with corporate and project lenders about how to divide any restructured entity. A group of banks led by CSFB is still owed almost $1 billion in equity contributions to its groundbreaking construction finance revolver, for which no letter of credit was required.
The NEG, meanwhile, is the first US player to hand over some of its assets to lenders after writing off its investments in them. The GenHoldings I portfolio, with a mixture of completed and constructed plants, is now in the hands of a syndicate led by SG and Citigroup. The NEG was believed to be in better shape than its peers following a restructuring at its parent PG&E Corporation, a victim of California, but this return to health came at the expense of ratings triggers, whose activations send the merchant generator into a credit spiral.
Williams's difficulties threw the solidity of tolling agreements, especially those of 20 or so years, into perspective. AES' two project bonds, Red Oak and Ironwood, were dependent on tolls with Williams, and suffered ratings downgrades. Tenaska had a degree of exposure through some of its projects, as did Kinder Morgan.
Kinder Morgan led the trickle of lease bond deals that closed in 2002 ? less of a flood than many of their practitioners had expected. Its $193 million AlphGen issue differed from the norm, in that it was for a facility that was close to, but not at completion, but carried little in the way of parental guarantees. Previous genco lease financings had carried a small premium over the credit of the parental guarantor. The NEG put through a $300 million issue for the Attala plant, one that it had acquired from Duke Energy. Little has been heard of this JP Morgan paper since the deal closed. Lenders will be thankful that the NEG was unable to do a synthetic lease ? another forgotten relic of the boom years ? on the plant.
In fact, only WestLB came close to open tinkering with the off balance sheet template. Rumours surfaced that it had achieved a restatement of a synthetic for Dynegy's Renaissance project ? one that resembled more closely a true lease. WestLB stayed characteristically cagey about what it had achieved structurally. Citigroup remains one of the few institutions comfortable with such products, leading the AlphGen bonds, issuing a $430 million lease bond series for Tractebel's Choctaw plant, and completing a hybrid/ synthetic for FLP's RISEP plant in Rhode Island.
But Tractebel's US portfolio deal is still in gestation, now in its second year, and still far from the market. The last public word had lead arranger CSFB examining some form of loan fund backed up by heavy parental guarantees. After some changes in the syndication group shifting debt in the region of $1 billion to previously generous participant banks will be even harder.
CSFB can take comfort in leading one of the rare single asset deals to close in 2002. It closed a $365 million loan for Conectiv's, $600 million, 500MW Bethlehem project. Conectiv is a new name, but a strong utility, and the transaction was very conservatively leveraged. The plant, while merchant, had a five-year toll backing the four-year debt. This could well have been the last deal of its kind.
The other high-profile single-asset financing was for reliable developer Tenaska, which closed a $497 million financing for its 885MW plant in Virginia. The five mandated leads ? DZ, HVB, Credit Lyonnais, Bank of Tokyo-Mitsubishi and Dexia ? look like the sort of institutions, both in size and capabilities, that will be picking up a large slice of the few upcoming plant mandates.
The problems with creditworthiness affecting traders, and the decision by a host of others to pull back from the business, make merchant offtakes almost worthless. There are exceptions ? Shell's Coral Energy has made deals from Tenaska and InterGen (another Shell affiliate) very attractive. A select number of counterparties with utility operations ? Duke, Southern and FPL ? are also in demand.
There were plenty of potential culprits, from the ratings agencies, to the marketing consultants, to credit committees and inflexible treasurers. The rating agencies were at pains to, at the same time, clarify their methodology, insist it was robust, and make some changes to personnel. Moody's Investors Service made a number of personnel changes, and both it and Standard & Poor's hastened to issue new measures of a company's liquidity and vulnerability to ratings triggers.
Market consultants also attracted a fair amount of criticism as the most visible cheerleaders of boom times in the US power market. Their defence was that they had been consistently conservative in their approach to forward power prices, had ignored the effect of retirements (crucial to the strategy of some gas-fired merchants), and that prices would pick up in the medium term.
What was clear, however, was that most of the really good places to be a merchant generator were not likely to stay that way, or never truly had been. California's troubles with plant permitting and a lack of transmission capacity were brushed aside as memo after memo laid out price- and revenue-inflating trading strategies appeared. Some of Enron's trades ? ?Get Shorty? and ?Death Star?, for instance ? were taken straight out of popular culture, and threatened to become permanent parts of the financial lexicon.
The fact that energy traders were able to game the system to such an extent, to say nothing of the round-trip trades that boosted merchant revenues, points to the one area of growth in the US market ? getting transmission infrastructure up to scratch. In this the trailblazer is Trans-Elect, a specialist transmission owner and developer that could be the start-up to watch ? the ?next Calpine? as one lender put it. Given the ongoing problems at the old one, the allusion was an odd one, albeit symptomatic of a power industry looking desperately for hope on the horizon.
Trans-Elect, formed around a core of former CMS executives, secured $278 million of financing for its purchase of Consumers' Energy's transmission assets through CIBC and Deutsche. For its purchase of Illinois Power's assets (parent company ? Dynegy) it has mandated SG and WestLB. Private equity players, securitization boutiques, finance houses, and GE Capital (which does all three) are all interested, not least in the depreciation benefits available from the tax authorities. New projects, such as the Path 15 transmission project in California, and a rumoured tender from the Bonneville Power Administration, will provide a sterner test of appetite.
The other area of infrastructure provision attracting interest is pipeline construction, although El Paso's ownership of pipeline capacity has exposed it to a judgement by the Ferc's Administrative Law Judge that it withheld capacity into California crisis. Still, the most successful financing of the year was that for the Kern River Pipeline expansion project. Kern River, a pipeline into California that benefited from rock-solid shipping contracts, raised $875 million from the bank market in a deal that even at subunderwriting stage attracted plaudits and deal of the year nominations.
Kern River was formerly the crown jewel in the Williams Companies' portfolio, but the pipeline was sold to MidAmerican Energy, part of Warren Buffett's Berkshire Hathaway group in April. Banks hoped that Buffett, who had saved a number of industries before, including insurance and hedge funds, would do likewise for energy. The $1.9 billion sale by Dynegy of former Enron property Northern Natural Gas (NNG) made some bankers salivate.
Berkshire's strategy did not really live up to these promises ? NNG's price was raised through a corporate issue, and Berkshire's attention moved elsewhere in the sector. Its next high-profile deal was with Texan utility CentrePoint Energy, formerly part of Reliant Energy. CentrePoint borrowed $1.3 billion from Berkshire and CSFB at 9.25%, and Berkshire, along with Lehman Brothers, also lent $9 billion to Williams at 14%.
More ominously, the move by the leading investment banks into this distressed lending was accompanied by hedge funds looking to buy war-weary banks out of distressed positions. This makes the wave of restructurings, of which there are several ongoing or in view, hard to call.
The two most bruised players, NRG Energy and PG&E's National Energy Group, are the closest to the wire. NRG, whose breakneck acquisition spree left it dangerously overleveraged, is in talks with corporate and project lenders about how to divide any restructured entity. A group of banks led by CSFB is still owed almost $1 billion in equity contributions to its groundbreaking construction finance revolver, for which no letter of credit was required.
The NEG, meanwhile, is the first US player to hand over some of its assets to lenders after writing off its investments in them. The GenHoldings I portfolio, with a mixture of completed and constructed plants, is now in the hands of a syndicate led by SG and Citigroup. The NEG was believed to be in better shape than its peers following a restructuring at its parent PG&E Corporation, a victim of California, but this return to health came at the expense of ratings triggers, whose activations send the merchant generator into a credit spiral.
Williams's difficulties threw the solidity of tolling agreements, especially those of 20 or so years, into perspective. AES' two project bonds, Red Oak and Ironwood, were dependent on tolls with Williams, and suffered ratings downgrades. Tenaska had a degree of exposure through some of its projects, as did Kinder Morgan.
Kinder Morgan led the trickle of lease bond deals that closed in 2002 ? less of a flood than many of their practitioners had expected. Its $193 million AlphGen issue differed from the norm, in that it was for a facility that was close to, but not at completion, but carried little in the way of parental guarantees. Previous genco lease financings had carried a small premium over the credit of the parental guarantor. The NEG put through a $300 million issue for the Attala plant, one that it had acquired from Duke Energy. Little has been heard of this JP Morgan paper since the deal closed. Lenders will be thankful that the NEG was unable to do a synthetic lease ? another forgotten relic of the boom years ? on the plant.
In fact, only WestLB came close to open tinkering with the off balance sheet template. Rumours surfaced that it had achieved a restatement of a synthetic for Dynegy's Renaissance project ? one that resembled more closely a true lease. WestLB stayed characteristically cagey about what it had achieved structurally. Citigroup remains one of the few institutions comfortable with such products, leading the AlphGen bonds, issuing a $430 million lease bond series for Tractebel's Choctaw plant, and completing a hybrid/ synthetic for FLP's RISEP plant in Rhode Island.
But Tractebel's US portfolio deal is still in gestation, now in its second year, and still far from the market. The last public word had lead arranger CSFB examining some form of loan fund backed up by heavy parental guarantees. After some changes in the syndication group shifting debt in the region of $1 billion to previously generous participant banks will be even harder.
CSFB can take comfort in leading one of the rare single asset deals to close in 2002. It closed a $365 million loan for Conectiv's, $600 million, 500MW Bethlehem project. Conectiv is a new name, but a strong utility, and the transaction was very conservatively leveraged. The plant, while merchant, had a five-year toll backing the four-year debt. This could well have been the last deal of its kind.
The other high-profile single-asset financing was for reliable developer Tenaska, which closed a $497 million financing for its 885MW plant in Virginia. The five mandated leads ? DZ, HVB, Credit Lyonnais, Bank of Tokyo-Mitsubishi and Dexia ? look like the sort of institutions, both in size and capabilities, that will be picking up a large slice of the few upcoming plant mandates.
The problems with creditworthiness affecting traders, and the decision by a host of others to pull back from the business, make merchant offtakes almost worthless. There are exceptions ? Shell's Coral Energy has made deals from Tenaska and InterGen (another Shell affiliate) very attractive. A select number of counterparties with utility operations ? Duke, Southern and FPL ? are also in demand.
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