Resurrection?
Uncertainty over how the Californian power fiasco eventually will
play out is causing spreads to widen on those deals that are going
to the project market for financing. Lenders are now looking with
concern at some companies, such as Edison Mission and Pacific Gas
& Electric, which were perceived as blue chip. Credit analysts
at some banks are getting rattled at the energy sector in general
while deal-makers are being forced to sweeten the take to lure in
recalcitrant lenders.
?There is no doubt that the California energy crisis has had a chilling effect on the perception of how robust the US energy market is, but activity is not grinding to a halt,? says Ken Malloy, chief executive of the Centre for the Advancement of Energy Markets and a former Federal Energy Regulatory Commission official. ?California is unique from a number of perspectives. While every state has at least one stupid energy policy, California has a combination of stupid policies ? not least of which is that no other state requires sell-off at fixed retail prices. Couple that with a confluence of events ? dry season, nuclear plants down, gas prices up and increased demand ? and you have the genesis of the crisis. If only two of those events had occurred, there wouldn't have been a crisis.?
Business as usual for some
However, for companies with committed lines of credit, the West Coast meltdown has had little effect. Calpine, for example, has launched the largest power generating initiative in California. With an existing 2,400 megawatt (MW) of in-state generation, Calpine has 2,030 MW of energy centres under construction and has announced the development of almost 3,300 MW of additional California generation capacity. By the end of 2005, Calpine will have put an additional 12,000 MW on line in California.
In early August, Calpine also announced that it had initiated full-scale construction activities on a 115 MW simple-cycle peaking unit located at Calpine's existing Auburndale Energy Centre in Polk County, Florida. The $40 million facility is expected to be in commercial operation next summer.
On August 24, Calpine filed a formal application for the development of a proposed 540 MW electric generating facility to be located in Orange County, New York. Calpine publicly announced its intent to develop the Wawayanda Energy Centre in March 2000 and filed a preliminary scoping statement in July 2000, initiating the pre-application phase of New York State's comprehensive regulatory review process. Calpine hopes to obtain approval in time to begin construction in late 2002, in order to place the facility in commercial operation in 2004.
But Calpine is a maverick, keeping billions of dollars available in the form of revolving credit facilities. Calpine uses that capital to build generating plants, and takes it out at the corporate level using a shelf, debt or equity ? or whatever product is attractive that day. Calpine will be in the debt markets for $1 billion a year for the next three years.
Jon Lindenberg, managing director in the project finance group at Citigroup, says: ?There have been multiple deals done through construction revolvers. That business has not abated.? About $20 billion has been committed to the power sector so far this year, with the probable addition of about $8 billion more before the year is over ? a record year for the power sector.
?There is real critical mass in the market. Synthetic leases have been big and are being taken out in the bond market. There seems to be an endless appetite for power deals,? adds Lindenberg.
While there has not been widespread defection by banks from lending to the power sector, some banks have begun monitoring power pools, with some institutions dropping out of deals in certain regions, particularly the West Coast.
Spreads have widened by about 25bp in the last year, although this is not just because of problems in California. Lindberg says: ?A lot is size related. When a deal is so large that you can't miss a bank ? and you have to contend with such requirements as marginal bank pricing models ? spreads may go up.?
Lindenberg believes that the bond market will play an increasingly important role in financing power projects. He adds that a new paradigm is emerging which is a combination of construction revolver with traditional one-off financing, allowing for flexibility such as the ability to release collateral.
Spreads go up
As well as spreads the California energy crisis has had a broad impact on the syndication market, making deals harder to syndicate, according to Tom Murray, a director specialising in power deals in the syndicated loan group at Credit Suisse First Boston in New York.
Spreads for project finance loans have increased perhaps 25bp over last year, with fees up 12.5bp to 25bp over last year, said Murray. ?Banks are looking for strong sponsorship ? with smaller credits having a more difficult time ? as well as conservative leverage, and deals that don't push the envelope too far.
?The number of deals definitely has not decreased. Some deals have attracted up to 40 banks. We just completed the first stage of an $822 million project financing for PSEG with 15 banks in the initial syndicate, which we expect will go to 25 at retail. The TECO/Panda deal attracted 40 banks. There have been a number of jumbo deals, including the $1.5 billion NEG deal that attracted widespread participation.
?Banks are playing in the sector but are definitely more cautious because of California. But banks are also filling up on the energy sector and are looking for good investments in other areas.?
Municipal bond solution?
The contemplated sale of some $12.5 billion in California power bonds ? the largest municipal bond issue in US history ? may be the mechanism for curing the state's energy crisis, and may restore overall lender confidence in the power sector. If approved by California Public Utilities Commission officials on September 6, the issue will be led by JP Morgan, with co leads Lehman Brothers and Merrill Lynch. Some insiders have expressed surprise that Goldman Sachs, Morgan Stanley and Salomon Smith Barney ? big players in the stranded cost sector ? are missing from the roster.
However, the $12.5 billion issue could be delayed beyond the targeted sale date in October because of challenges at the state's public utilities commission. California's Department of Water Resources (DWR) has spent billions of dollars purchasing power for the state's financially-troubled utilities, including Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric.
The bond issue is viable only if major customers are prevented from buying power from other than the DWR. Left unchecked by state regulators, residential customers will be saddled with the burden of paying off the bonds.
?Problems on the West Coast and California in particular have slowed down US power projects,? according to Steve Fetter, managing director at Fitch Ratings. ?The uncertainty has left some projects in limbo.? Fetter predicts that dealflow may be constricted for up to a year until West Coast problems are resolved. ?Recent deals have mainly been done by utilities spinning off regulated and deregulated businesses rather than large power generation projects.?
American Electric Power filed documents last week with SEC seeking approval for changes necessary to complete a planned restructuring of the corporation's regulated and unregulated holdings. The filing, which amends an SEC filing made in November 2000, requests authority to create subsidiaries and transfer assets into those subsidiaries. The filing also seeks authority to finance the new subsidiaries' ongoing requirements.
The Columbus, Ohio energy company ? which owns and operates more than 38,000 MW of generation, making it the largest generator in the US ? is following what is a growing trend among utilities that divide potentially high-growth unregulated assets from a regulated core business, typically in the transmission and distribution (T&D) sector.
AEP plans to form two wholly owned companies. One will hold AEP's unregulated generation, trading and marketing operations and other unregulated activities. The second will hold AEP's energy delivery or wires operations in deregulated states, the company's generation and wires in regulated states, and foreign utility subsidiaries subject to rates or tariffs regulations.
?More than a few generating companies have put their names in a hat to build projects. But a lot won't see one shovel in the ground because of no access to financing. I would estimate that only about one to four proposed deals will get built and financed because of a variety issues, including permitting and the threat of overbuilding. But lack of investor appetite is a significant reason,? according to Robert C. Bellemare, vice president at electricity industry consulting group Scientech.
This has been borne out through a number of recent cancellations. For example, the Rhode Island Energy Facility Siting Board on August 30 voted thumbs-down on a proposed 350 MW gas-fired merchant power plant proposed by Indeck.
Bellemare's statement echoes that of Duke Energy Chairman and CEO Rick Priory, who told investors on an August 16 conference call that concerns that construction of new power plants will lead to an oversupplied power market are unfounded. Priory downplayed reports of a possible energy glut, stating that most of the announced power projects across the country probably will not be built anyway. Further, Priory said he expects the supply and demand balance in North America to remain tight, at least until 2004 or 2005.
One of the most interesting potential deals has privately-held City Light & Power about to place a bid for Edison International, including the nearly insolvent Southern California Edison (SCE), the state's second-largest utility, and the Edison Mission Energy power-generating unit. City Light's main business is the operation of street lights in Long Beach, California.
The David-buys-Goliath transaction would have City Light, with about $250-300 million in annual revenues, acquire Edison in a deal which could be worth upwards of $5 billion. City Light officials have already met with Edison to pitch the deal.
Some market participants maintain that Edison International is not for sale ? and even if it were, the Denver company would not be able to afford the price. But bankers say that Bear Stearns and Salomon Smith Barney were advising City Light on the transaction. Given Edison's financial trouble, it is more likely that a financial buyout firm would make a play for Edison rather than a company already in the energy sector.
However, the City Light bid probably is serious given its previous run at Edison. The company attempted to buy the distribution assets of Southern California Edison through a partnership with Enron. Given City Light's previous attempt and the nature of its business, it would be safe to assume that any deal would eventually lead to the sell-off of Edison's generation portfolio.
But things may be looking up for Southern California Edison. A bill aimed at keeping the utility out of bankruptcy cleared a major hurdle on August 28, winning the approval of the California Assembly's Committee on Energy Costs and Availability. SCE is seeking to recover about $3.9 billion in debts, including around $400 million in accumulated interest incurred buying power on behalf of its customers at skyrocketing prices in the wholesale market.
The bill which cleared the Senate allowed SCE to recover $2.5 billion of its debt through a mandatory charge on customers bills. The Assembly committee raised that total to $2.9 billion to allow for the accumulated interest.
The state would prefer for SCE to remain a player so it can resume purchasing power for its 11 million customers. If SCE can remain on its feet, it will moot any takeover attempt by City Light & Power or anyone else.
?There is no doubt that the California energy crisis has had a chilling effect on the perception of how robust the US energy market is, but activity is not grinding to a halt,? says Ken Malloy, chief executive of the Centre for the Advancement of Energy Markets and a former Federal Energy Regulatory Commission official. ?California is unique from a number of perspectives. While every state has at least one stupid energy policy, California has a combination of stupid policies ? not least of which is that no other state requires sell-off at fixed retail prices. Couple that with a confluence of events ? dry season, nuclear plants down, gas prices up and increased demand ? and you have the genesis of the crisis. If only two of those events had occurred, there wouldn't have been a crisis.?
Business as usual for some
However, for companies with committed lines of credit, the West Coast meltdown has had little effect. Calpine, for example, has launched the largest power generating initiative in California. With an existing 2,400 megawatt (MW) of in-state generation, Calpine has 2,030 MW of energy centres under construction and has announced the development of almost 3,300 MW of additional California generation capacity. By the end of 2005, Calpine will have put an additional 12,000 MW on line in California.
In early August, Calpine also announced that it had initiated full-scale construction activities on a 115 MW simple-cycle peaking unit located at Calpine's existing Auburndale Energy Centre in Polk County, Florida. The $40 million facility is expected to be in commercial operation next summer.
On August 24, Calpine filed a formal application for the development of a proposed 540 MW electric generating facility to be located in Orange County, New York. Calpine publicly announced its intent to develop the Wawayanda Energy Centre in March 2000 and filed a preliminary scoping statement in July 2000, initiating the pre-application phase of New York State's comprehensive regulatory review process. Calpine hopes to obtain approval in time to begin construction in late 2002, in order to place the facility in commercial operation in 2004.
But Calpine is a maverick, keeping billions of dollars available in the form of revolving credit facilities. Calpine uses that capital to build generating plants, and takes it out at the corporate level using a shelf, debt or equity ? or whatever product is attractive that day. Calpine will be in the debt markets for $1 billion a year for the next three years.
Jon Lindenberg, managing director in the project finance group at Citigroup, says: ?There have been multiple deals done through construction revolvers. That business has not abated.? About $20 billion has been committed to the power sector so far this year, with the probable addition of about $8 billion more before the year is over ? a record year for the power sector.
?There is real critical mass in the market. Synthetic leases have been big and are being taken out in the bond market. There seems to be an endless appetite for power deals,? adds Lindenberg.
While there has not been widespread defection by banks from lending to the power sector, some banks have begun monitoring power pools, with some institutions dropping out of deals in certain regions, particularly the West Coast.
Spreads have widened by about 25bp in the last year, although this is not just because of problems in California. Lindberg says: ?A lot is size related. When a deal is so large that you can't miss a bank ? and you have to contend with such requirements as marginal bank pricing models ? spreads may go up.?
Lindenberg believes that the bond market will play an increasingly important role in financing power projects. He adds that a new paradigm is emerging which is a combination of construction revolver with traditional one-off financing, allowing for flexibility such as the ability to release collateral.
Spreads go up
As well as spreads the California energy crisis has had a broad impact on the syndication market, making deals harder to syndicate, according to Tom Murray, a director specialising in power deals in the syndicated loan group at Credit Suisse First Boston in New York.
Spreads for project finance loans have increased perhaps 25bp over last year, with fees up 12.5bp to 25bp over last year, said Murray. ?Banks are looking for strong sponsorship ? with smaller credits having a more difficult time ? as well as conservative leverage, and deals that don't push the envelope too far.
?The number of deals definitely has not decreased. Some deals have attracted up to 40 banks. We just completed the first stage of an $822 million project financing for PSEG with 15 banks in the initial syndicate, which we expect will go to 25 at retail. The TECO/Panda deal attracted 40 banks. There have been a number of jumbo deals, including the $1.5 billion NEG deal that attracted widespread participation.
?Banks are playing in the sector but are definitely more cautious because of California. But banks are also filling up on the energy sector and are looking for good investments in other areas.?
Municipal bond solution?
The contemplated sale of some $12.5 billion in California power bonds ? the largest municipal bond issue in US history ? may be the mechanism for curing the state's energy crisis, and may restore overall lender confidence in the power sector. If approved by California Public Utilities Commission officials on September 6, the issue will be led by JP Morgan, with co leads Lehman Brothers and Merrill Lynch. Some insiders have expressed surprise that Goldman Sachs, Morgan Stanley and Salomon Smith Barney ? big players in the stranded cost sector ? are missing from the roster.
However, the $12.5 billion issue could be delayed beyond the targeted sale date in October because of challenges at the state's public utilities commission. California's Department of Water Resources (DWR) has spent billions of dollars purchasing power for the state's financially-troubled utilities, including Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric.
The bond issue is viable only if major customers are prevented from buying power from other than the DWR. Left unchecked by state regulators, residential customers will be saddled with the burden of paying off the bonds.
?Problems on the West Coast and California in particular have slowed down US power projects,? according to Steve Fetter, managing director at Fitch Ratings. ?The uncertainty has left some projects in limbo.? Fetter predicts that dealflow may be constricted for up to a year until West Coast problems are resolved. ?Recent deals have mainly been done by utilities spinning off regulated and deregulated businesses rather than large power generation projects.?
American Electric Power filed documents last week with SEC seeking approval for changes necessary to complete a planned restructuring of the corporation's regulated and unregulated holdings. The filing, which amends an SEC filing made in November 2000, requests authority to create subsidiaries and transfer assets into those subsidiaries. The filing also seeks authority to finance the new subsidiaries' ongoing requirements.
The Columbus, Ohio energy company ? which owns and operates more than 38,000 MW of generation, making it the largest generator in the US ? is following what is a growing trend among utilities that divide potentially high-growth unregulated assets from a regulated core business, typically in the transmission and distribution (T&D) sector.
AEP plans to form two wholly owned companies. One will hold AEP's unregulated generation, trading and marketing operations and other unregulated activities. The second will hold AEP's energy delivery or wires operations in deregulated states, the company's generation and wires in regulated states, and foreign utility subsidiaries subject to rates or tariffs regulations.
?More than a few generating companies have put their names in a hat to build projects. But a lot won't see one shovel in the ground because of no access to financing. I would estimate that only about one to four proposed deals will get built and financed because of a variety issues, including permitting and the threat of overbuilding. But lack of investor appetite is a significant reason,? according to Robert C. Bellemare, vice president at electricity industry consulting group Scientech.
This has been borne out through a number of recent cancellations. For example, the Rhode Island Energy Facility Siting Board on August 30 voted thumbs-down on a proposed 350 MW gas-fired merchant power plant proposed by Indeck.
Bellemare's statement echoes that of Duke Energy Chairman and CEO Rick Priory, who told investors on an August 16 conference call that concerns that construction of new power plants will lead to an oversupplied power market are unfounded. Priory downplayed reports of a possible energy glut, stating that most of the announced power projects across the country probably will not be built anyway. Further, Priory said he expects the supply and demand balance in North America to remain tight, at least until 2004 or 2005.
One of the most interesting potential deals has privately-held City Light & Power about to place a bid for Edison International, including the nearly insolvent Southern California Edison (SCE), the state's second-largest utility, and the Edison Mission Energy power-generating unit. City Light's main business is the operation of street lights in Long Beach, California.
The David-buys-Goliath transaction would have City Light, with about $250-300 million in annual revenues, acquire Edison in a deal which could be worth upwards of $5 billion. City Light officials have already met with Edison to pitch the deal.
Some market participants maintain that Edison International is not for sale ? and even if it were, the Denver company would not be able to afford the price. But bankers say that Bear Stearns and Salomon Smith Barney were advising City Light on the transaction. Given Edison's financial trouble, it is more likely that a financial buyout firm would make a play for Edison rather than a company already in the energy sector.
However, the City Light bid probably is serious given its previous run at Edison. The company attempted to buy the distribution assets of Southern California Edison through a partnership with Enron. Given City Light's previous attempt and the nature of its business, it would be safe to assume that any deal would eventually lead to the sell-off of Edison's generation portfolio.
But things may be looking up for Southern California Edison. A bill aimed at keeping the utility out of bankruptcy cleared a major hurdle on August 28, winning the approval of the California Assembly's Committee on Energy Costs and Availability. SCE is seeking to recover about $3.9 billion in debts, including around $400 million in accumulated interest incurred buying power on behalf of its customers at skyrocketing prices in the wholesale market.
The bill which cleared the Senate allowed SCE to recover $2.5 billion of its debt through a mandatory charge on customers bills. The Assembly committee raised that total to $2.9 billion to allow for the accumulated interest.
The state would prefer for SCE to remain a player so it can resume purchasing power for its 11 million customers. If SCE can remain on its feet, it will moot any takeover attempt by City Light & Power or anyone else.
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.