Americas Power Report
By all accounts, the world has changed in the past year for Independent Power Producers (IPP's) in the US. After several years of giddy growth, with new merchant power plants being built all over the country and regulated utilities spinning off competitive power producers, is the party finally over? Ben Carliner reports on the state of the US power industry.
2001 saw both the highest levels of volatility US energy markets have ever recorded, as well as the spectacular implosion of Enron, the single biggest player in the wholesale gas and electricity markets. And while by many measures the wholesale markets stood up well to the crisis - power deliveries continued uninterrupted and defaults were avoided - the prospects for continued deregulation seem at risk. Ben Carliner reports on the state of the US energy markets and the state of the deregulation process.
The complex accounting standard known as FAS 133 was adopted in 1998 by the Financial Accounting Standards Board (FASB) to resolve inconsistent reporting standards and practices for derivatives. It was met with much confusion and negativity, but went into effect at most US corporations at the beginning of 2001. PFI looks at how a few major project sponsors have dealt with the implementation of the new procedures and the concerns that remain a year later. By Alison Healey.
What a difference four months make. Before Enron Corp and a number of its subsidiaries tumbled into bankruptcy court on December 2, 2001, off-balance sheet financing was seen as a positive and important corporate finance tool. More than 20 years ago, the technique was used to securitise residential mortgages and added much needed liquidity to the American housing market. Since then, the technique has been applied to a long and still growing list of assets and has opened the capital markets to a wider spectrum of companies. Today, it is difficult to identify an income-generating asset that has not been securitised. By Ken Coleman, partner, and Hugh McDonald, senior counsel, Allen & Overy, New York.
Many countries have either moved to establish a wholesale electricity market or are considering such a move, with the wholesale electricity market facilitating competition among non-regulated generators or other participants (eg, traders) to supply power. At the same time, but often on a slower schedule, there are moves to establish competition at the retail end of the market, allowing electric utility customers to select their provider and encouraging competition among non-regulated retailers (sometimes known as supply companies) to serve these retail customers. By Edward Kee, PA Consulting Group.
With the slowdown in US power deal flow, some US project finance shops have begun to look to the north for opportunities. And as the major Canadian provinces finally move forward on deregulation, there is certainly a need for financing in everything from transmission to ppa buyouts. By Alison Healey.
Brazilian energy company Petrobras unveiled its accelerated programme for investment in thermoelectric power plant construction last May. The aggressive plan for new construction was announced as record-low hydroelectric reservoir levels were about to force Brazil into mandatory power rationing; the plans fit in with state-owned electricity holding company Eletrobras' stated goal to double thermoelectric generation capacity in Brazil by 2005. As rainfall levels increased and emergency rationing ended early this year, Petrobras renewed its commitment to the programme. But the company may have trouble signing up equity partners in the evolving Brazilian power market. By Nicole Gelinas.
Things looked dim for AES as the stock fell to US$3.42/share from a 52-week high of US$55.85, and AES looked as if it were stranded somewhere between Enron and Argentina. Investors concerned about Enron were scrutinising AES' 2001 financial reports for evidence of potential downward-spiral triggers or corporate-level guarantees on operating-level debt. Investors concerned about this year's currency devaluations in Argentina and in Venezuela seemed to take note for the first time of AES' intense focus on the Latin American region. Standard & Poor's also weighed in mid-month with its placement of AES on CreditWatch Negative. By Nicole Gelinas.
On 15 May 2001, the Tietê Certificates Grantor Trust issued US$300m of Certificates to be used by subsidiaries of The AES Corporation to repay debt incurred in the acquisition of hydroelectric generator AES Tiete SA. The transaction was significant for three reasons. First, it is the longest tenor financing yet achieved by a Brazilian corporate issuer. Second, it marked the first capital markets transaction to provide investors with protection against devaluation. Third, and perhaps most significant, it is the first electric power financing in a below-investment grade country to achieve an investment-grade rating. The success of AES Tiete raises the question of whether it provides a model for financing the expansion of Brazil's electric sector. By Robert Sheppard, who was responsible for Project Finance Capital Markets at Banc of America Securities when the Tietê transaction was completed.
In response to one of the largest emerging markets crises in recent years, the Argentine government has chosen to pesify its economy, declare a debt moratorium, and abandon the Argentine peso's once sacrosanct one-to-one parity with the US dollar. In the past several months, US and other foreign investors in Argentina have been subjected to a dizzying series of federal and provincial enactments that have substantially transformed the investment landscape. Such enactments have altered tariffs, imposed foreign exchange controls, forced conversion of US dollars into Argentine pesos, voided provisions of public contracts, and effected pro-debtor changes to Argentina's bankruptcy law. US-based investors who must work within the new environment may look to the bilateral investment treaty held between the US and Argentina for some support. By Mark R Spivak, partner in the Washington office; James L Loftis, partner in the Houston office; and Douglas J Lanzo, associate in ...
The classic project finance approach is not well suited to the poorest countries of the world, where governments and people are too poor to pay for the critical water, power, transportation, health and other infrastructure facilities they need. A new form of public-private partnership is needed for the world's poorest countries under which (1) private sector companies would take the lead in developing, financing, implementing, and operating projects deemed to be of the highest priority by the governments of the recipient countries and by Western donor countries and (2) Western donor countries would pay - in whole or in part - for the services provided by these projects as part of a program of official development assistance (directly or through multilateral institutions such as the World Bank). By Jacob J Worenklein, Managing Director and Global Head of Project and Sectorial Finance, Societe Generale.
With the global economic recession that has now taken root, the clobbering of the stock prices of the major international power developers in the aftermath of the Enron collapse, and the largest emerging markets default in history coming out of Argentina, the financing of infrastructure projects in emerging markets would be difficult even if the emerging markets were doing everything right. But there are some fundamental problems at play that further undermine the credibility of investments in emerging markets - and these are within the ability of the countries involved to address and resolve. By Barbara Gibian, associate, Latham & Watkins in Washington.