Surplus electric capacity deters Wall Street interest in new deals

Kate Thomas
OGJ Online

HOUSTON, Feb. 13 -- With surplus capacity building up, Wall Street financiers are not spending much time thinking about how to fund new power plants, speakers at the Cambridge Energy Research Associates conference said Wednesday.

Getting through the surplus is the first priority, they said. Turmoil in energy markets triggered by Enron Corp.'s collapse and subsequent accounting scandal, including the use of off balance sheet partnerships to hide billions of dollars in debt, has shaken confidence in the markets, panelists explained.

Compared to the go-go days of just 2 years ago, money is on the sidelines while institutions, bankers, and private capital sources assess the situation and look for high quality deals. Meanwhile, companies are wondering how they will fund projects in the current environment of battered stock prices and squeamish capital markets.

"I am very concerned about liquidity," said Alexander M. Kloosterman, senior executive vice-president at ABN AMRO Bank NV. "Surprises, I have seen enough of them."

While many large firms aren't feeling the squeeze, those who are issuing equity when their stock valuations are low are being "very kind" to their commercial bankers, said Thomas Tyree Jr., managing director, Goldman Sachs & Co.

He said the situation fosters mergers but noted in the midstream sectors the opportunities are limited. "If you are an El Paso, who do you merge with?" He said cross border combinations with Canadian and European companies represent possibilities.

Nor are utilities likely to reabsorb recently spun off independent power producers such as a Mirant Corp. or NRG Energy Inc., the panelists said. "I don't think people are thinking of doubling down their risk profiles," Tyree said.

Vehicles such as project financing are likely to go on the back burner for awhile, most agreed. Project financing put the industry in a "long position" in electricity generation in the first place, said Thomas Langford, managing director, Morgan Stanley.

There are legitimate reasons to use off balance sheet financing to limit risk," said S. Todd Maclin, managing director and group executive, Global Oil & Gas, J.P. Morgan Chase & Co., one of Enron's largest creditors. But, presently, he said, "We have all had our confidence shaken to a level without precedent. There are good things that can happen in project finance structures, but it will take time for folks to settle down."

Panelists disagreed over how prominent a role trading will play in energy companies' future strategic plans. Tyree predicted trading will no longer be "front and center" when companies talk about themselves because of the Enron debacle. "They have not eliminated it. They have just quit highlighting it."

Others on the panel suggested trading will remain an important and prominent element, pointing to Dynegy Inc. as an example.

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