Upload
kody-wimbrow
View
213
Download
0
Tags:
Embed Size (px)
Citation preview
11
FitchRatings
CreditCredit OutlookOutlook U.S. Power and GasU.S. Power and Gas
Richard HunterRichard HunterManaging Director, North AmericaManaging Director, North America
Global Power GroupGlobal Power Group
Energy Finance & Credit Summit, Houston, February 2004Energy Finance & Credit Summit, Houston, February 2004
Return to Risk Limited website: www.RiskLimited.com
22FitchRatings
Capital Markets EnvironmentCapital Markets Environment Credit EnvironmentCredit Environment Major ThemesMajor Themes Outlook for the SectorsOutlook for the Sectors
UtilitiesUtilities Utility Parent Holding CompaniesUtility Parent Holding Companies Competitive Gencos & Energy MerchantsCompetitive Gencos & Energy Merchants
TopicsTopics
33FitchRatings
Capital Markets EnvironmentCapital Markets Environment
1999 -20021999 -2002 Excessive capital market exuberanceExcessive capital market exuberance
Late 2002- Late 2002- January 03January 03
Reaction: “Liquidity Black Hole”Reaction: “Liquidity Black Hole”Credit market and bond market showed a strong Credit market and bond market showed a strong linkage to the equity marketlinkage to the equity market
Bank consolidation has reduced diversityBank consolidation has reduced diversity
20032003 Capital and credit market access restoredCapital and credit market access restoredPrivate investment sources provided liquidityPrivate investment sources provided liquidity
Pure utilities & public power retained market access Pure utilities & public power retained market access
Current Current 20042004
Low interest rates, good market accessLow interest rates, good market access
44FitchRatings
Equity and Debt Capital MarketsEquity and Debt Capital Markets
0
20
40
60
80
100
120
1Q 01 2Q 01 3Q 01 4Q 01 1Q 02 2Q 02 3Q 02
Bond
Equity
55FitchRatings
Equity and Debt Capital MarketsEquity and Debt Capital Markets
0
20
40
60
80
100
120
1Q 01 2Q 01 3Q 01 4Q 01 1Q 02 2Q 02 3Q 02 4Q 02 1Q 03 2Q 03 3Q 03 4Q 03
Bond
Equity
1Q 03
Source: Merrill Lynch, Bloomberg
66FitchRatings
Near-term OutlookNear-term Outlook
Gas price volatility and commodity price riskGas price volatility and commodity price risk Merchant power overbuilt in nearly all regionsMerchant power overbuilt in nearly all regions Pendulum swings back toward integrated utilities Pendulum swings back toward integrated utilities
and regulationand regulation System reliability and environmental protection System reliability and environmental protection
require higher capital spendingrequire higher capital spending Low interest rate environment is benign for Low interest rate environment is benign for
capital intensive and over-leveraged sector, but capital intensive and over-leveraged sector, but higher rates may lie aheadhigher rates may lie ahead
Mergers and consolidations are likelyMergers and consolidations are likely
77FitchRatings
Longer- Term IssuesLonger- Term Issues Global WarmingGlobal Warming
Carbon tax in our future?Carbon tax in our future? Price elasticity, “demand destruction” and demand-side Price elasticity, “demand destruction” and demand-side
management, obsolete technologiesmanagement, obsolete technologies Is wired distribution of power a post-mature industry? Is wired distribution of power a post-mature industry? How much new investment is needed?How much new investment is needed?
Distribution and transmission:Distribution and transmission:
• Patch up the old system, orPatch up the old system, or
• Invest heavily in an intelligent wired networkInvest heavily in an intelligent wired network Power productionPower production
• Retrofit old thermal generation, orRetrofit old thermal generation, or
• Invest in new technologiesInvest in new technologies
88FitchRatings
Credit EnvironmentCredit Environment
2003 vs. 20022003 vs. 2002
0
10
20
30
40
50
60
70
Q103 Q203 Q303 Q403
0
10
20
30
40
50
60
70
Q102 Q202 Q302 Q402
Downgrades
Upgrades
Credit stress increased through 2002 and stabilized in 2003.
Source: Fitch Ratings
99FitchRatings
Credit Outlook by Sub-sectorCredit Outlook by Sub-sectorJanuary 1, 2003 January 1, 2003 January 1, 2003 January 1, 2003
January 1, 2004 January 1, 2004 January 1, 2004 January 1, 2004
Parent CompaniesParent Companies Integrated UtilitiesIntegrated Utilities Distribution UtilitiesDistribution Utilities Diversified/Merchant Energy
Diversified/Merchant Energy
Note: Refers to the percentage of senior ratings in each sector with Positive Rating Outlook or Rating Watch status, Negative Rating Outlook or Rating Watch status or Stable Rating Outlook/Evolving Watch status.
Note: Refers to the percentage of senior ratings in each sector with Positive Rating Outlook or Rating Watch status, Negative Rating Outlook or Rating Watch status or Stable Rating Outlook/Evolving Watch status.
PositiveNegativeStable/Evolving
1010FitchRatings
Credit EnvironmentCredit Environment
Total Sector Power & GasTotal Sector Power & Gas 20032003 2002 2002 Upgrades to downgrades Upgrades to downgrades 1:21:2 1:12 1:12 Stable outlooks (at year end)Stable outlooks (at year end) 80%80% 64% 64% Negative to positive outlooksNegative to positive outlooks 2:1 2:1 6:1 6:1 Ratings stable, but low:Ratings stable, but low: Median RatingMedian Rating
• Competitive wholesale energyCompetitive wholesale energy BB• Regulated utility Regulated utility A-A-• Utility group parentUtility group parent BBB+BBB+
1111FitchRatings
Credit EnvironmentCredit Environment
Affiliate action as the largest single cause …Affiliate action as the largest single cause … Affiliate action as the largest single cause …Affiliate action as the largest single cause …
28
19 20 19
74
8
83
49
10 82 2
10
57
27
11 12
1 0
9
0
30
60
90
Group Linkage UnregulatedBusiness
RegulatedBusiness
Acquisitions Regulation Other External Other Internal
200120022003
Investor-Owned Power & Gas companies, All Rating Actions, Source: Fitch
1212FitchRatings
Regulated UtilitiesRegulated Utilities
The Morning After…The Morning After…
1313FitchRatings
Credit Outlook: Regulated UtilitiesCredit Outlook: Regulated Utilities
THEMESTHEMES
““Back to Basics”Back to Basics” Gas and power price Gas and power price
fluctuationfluctuation
Mandated capital Mandated capital spending for increased spending for increased reliability and supply reliability and supply securitysecurity
IMPLICATIONSIMPLICATIONS
Lower credit risk Lower credit risk Risk for utilities with Risk for utilities with
fixed tariffs and fixed tariffs and obligation to serve obligation to serve
Higher external Higher external financing needs financing needs (Potential mitigant: a (Potential mitigant: a clear regulatory clear regulatory recovery mechanism)recovery mechanism)
1414FitchRatings
Risks faced by Regulated Utilities Risks faced by Regulated Utilities
Commodity price riskCommodity price risk Ability to hedge commodity price risk Ability to hedge commodity price risk
Mergers and AcquisitionsMergers and Acquisitions Debt burdenDebt burden Unsuccessful merger/ consolidation implementationUnsuccessful merger/ consolidation implementation
Regulatory riskRegulatory risk Low interest rate, ergo low ROE Low interest rate, ergo low ROE Shifts in policyShifts in policy
1515FitchRatings
Risks faced by Regulated Utilities Risks faced by Regulated Utilities
Lower Returns on Equity?Lower Returns on Equity?
0 5 10 15 20
8.0%-8.9%
9.0%-9.9%
10.0-10.9%
11.0%-11.9%
12.0%-12.9%
Source: PUR Utility Regulatory NewsSource: PUR Utility Regulatory News
1616FitchRatings
RoE impact on coveragesRoE impact on coverages
2.0x
2.4x
2.8x
3.2x
3.6x
4.0x
11.50% 10.50% 9.50% 8.50% 7.50% 6.50%
Median for BBB-
Operating Cash Flow/Interest Expense
assumes 50:50 debt:equity funding, 7% cost of debt, 35% tax rate
assumes 50:50 debt:equity funding, 7% cost of debt, 35% tax rate
1717FitchRatings
Risks faced by Regulated Utilities Risks faced by Regulated Utilities
Success Rates?Success Rates?0 5 10 15 20
Rate Decrease
0% Increase
Increase <33% of request
Increase between 33% and 50%
Increase of 50% or more of request
Source: PUR Utility Regulatory NewsSource: PUR Utility Regulatory News
1818FitchRatings
Credit Outlook: Parent CompaniesCredit Outlook: Parent Companies
THEMESTHEMES ““Back to Basics” in 2004Back to Basics” in 2004
Prior unsuccessful Prior unsuccessful diversification activitiesdiversification activities
Industry consolidation Industry consolidation aheadahead
IMPLICATIONSIMPLICATIONS Lower business riskLower business risk
Need dividends from Need dividends from
utilities to reduce parent utilities to reduce parent debt; affects ability to debt; affects ability to fund capex fund capex
Event risk for both Event risk for both acquirers and targetsacquirers and targets
1919FitchRatings
Credit Outlook: Parent CompaniesCredit Outlook: Parent Companies
Analytical IssuesAnalytical Issues Parent-level debt service coverageParent-level debt service coverage
Tax-sharingTax-sharing Management feesManagement fees Subsidiary injectionsSubsidiary injections
Recovery AnalysisRecovery Analysis Non-consolidation in bankruptcyNon-consolidation in bankruptcy Parent-subsidiary notchingParent-subsidiary notching
2020FitchRatings
Competitive Wholesale and Competitive Wholesale and Merchant Energy CompaniesMerchant Energy Companies
Asset Sales
Equity Cash Flow
…exiting the debt hole
2121FitchRatings
What Does it Take?What Does it Take?
Example: Interest CoverExample: Interest Cover
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
1999 2000 2001 2002 LTM
Industrials - BBB
All Regulated Utilities
All Parent Companies
All High Yield Unregulated
Source: Fitch Ratings
2222FitchRatings
How Deep is the Hole?How Deep is the Hole?
$136,000,000
$351,000,000
$51,000,000
Stand-alone UtilitiesIntegrated Utility GroupsWholesale Energy Companies
Debt Outstanding
Source: SNL, Inc.Data as at 9-30-03Source: SNL, Inc.
Data as at 9-30-03
2323FitchRatings
Sector High Yield Debt Sector High Yield Debt MaturitiesMaturities
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
2004 2005 2006 2007 2008 2009
$m
per 12-17-03
per 2-17-04
Source: Fitch Ratings
2424FitchRatings
High Yield Debt MaturitiesHigh Yield Debt MaturitiesCompanyCompany Total 5 yearsTotal 5 years PeakPeak
Dec. 17, 2003Dec. 17, 2003 Feb 17, 2004Feb 17, 2004 Dec. 17, 2003Dec. 17, 2003 Feb 17, 2004Feb 17, 2004
Reliant Resources Reliant Resources & Orion Power& Orion Power
$ 6,400$ 6,400 $ 6,400$ 6,400 1Q 2007: $ 4,8771Q 2007: $ 4,877 1Q 2007: $ 4,8771Q 2007: $ 4,877
Calpine & subsCalpine & subs $ 9,286$ 9,286 $ 9,286$ 9,286 4Q 2004: $ 1,0484Q 2004: $ 1,048
$ 2,500$ 2,500
4Q 2004: $ 1,0484Q 2004: $ 1,048
$ 2,500$ 2,500
AES Corp.AES Corp. $ 3,018$ 3,018 $ 2,048$ 2,048 3Q 2007: $ 1,1933Q 2007: $ 1,193 3Q 2007: $ 6933Q 2007: $ 693
El Paso Corp.El Paso Corp. $ 5,176$ 5,176 $ 5,176$ 5,176 2005: $ 1,6002005: $ 1,600
2006: $ 1,7322006: $ 1,732
2005: $ 1,6002005: $ 1,600
2006: $ 1,7322006: $ 1,732
Allegheny Energy Allegheny Energy Inc. A E SupplyInc. A E Supply
$ 2,460$ 2,460 $ 662*$ 662* 1Q 2005: $ 1,0771Q 2005: $ 1,077 3Q 2005: $ 3003Q 2005: $ 300
1Q 2007: $ 3001Q 2007: $ 300
Dynegy HoldingsDynegy Holdings $ 1,742$ 1,742 $ 1,742$ 1,742 1Q 2005: $ 1,1391Q 2005: $ 1,139 1Q 2005: $ 1,1391Q 2005: $ 1,139
Aquila Inc.Aquila Inc. $ 1,272$ 1,272 $ 1,272$ 1,272 2Q 2006: $ 4452Q 2006: $ 445 2Q 2006: $ 4452Q 2006: $ 445
Source: Companies, Fitch Ratings
* assuming successful execution of refinancings currently in market
2525FitchRatings
Appetite for Roll-Over?Appetite for Roll-Over?
Oil, Gas, Pipeline & Oil, Gas, Pipeline & UtilitiesUtilities ( ($ bn)$ bn) 20032003 20022002 20012001 20002000
Loans + CommitmentLoans + Commitment 198.1198.1 226.1226.1 224.5224.5 174.5174.5
Classified Classified 38.038.0 17.017.0 4.34.3 4.04.0
Special Mention Special Mention 12.312.3 15.515.5 7.07.0 1.01.0
% Classified % Classified 19.5%19.5% 7.5%7.5% 1.9%1.9% 2.3%2.3%
% Special Mention % Special Mention 6.2%6.2% 6.9%6.9% 3.1%3.1% 0.6%0.6%
2626FitchRatings
Whose Loss is it Anyway?Whose Loss is it Anyway?
0
10
20
30
40
2002 2003
$bn
Non-Banks
Int'l Banks
U.S. Banks
Classified Commitments Classified as % of Commitment
0%
10%
20%
30%
40%
50%
2001 2002 2003
$bn
"Classified" Commitments on Syndicated Loans in excess of $20m
Source: Shared National Credit Survey, U.S. Federal Reserve Board
2727FitchRatings
Wholesale Energy MarketWholesale Energy MarketCompetitive GenerationCompetitive Generation
Current StatusCurrent Status Excess capacity, low spark spreadsExcess capacity, low spark spreads Speculative-grade ratings a barrier to negotiating Speculative-grade ratings a barrier to negotiating
term contractsterm contracts
Bankruptcies and restructuringsBankruptcies and restructurings Asset values at a cyclical low or permanently Asset values at a cyclical low or permanently
impaired?impaired? Jurisdictional issues about contract rejectionJurisdictional issues about contract rejection
2828FitchRatings
Wholesale Energy MarketWholesale Energy Market Competitive Generation Competitive Generation
Near-term OutlookNear-term Outlook Pendulum swings back toward integration and Pendulum swings back toward integration and
regulated utility power generationregulated utility power generation Examples: Examples: CA; AZ; WI CA; AZ; WI Load-serving entities shun executory contracts and Load-serving entities shun executory contracts and
dependence on gasdependence on gas Cost of capital advantage for utilities versus gencosCost of capital advantage for utilities versus gencos
2929FitchRatings
Option AOption A
Equity
3030FitchRatings
Equity performanceEquity performance
0
20
40
60
80
100
120
140
J-02
F-02
M-02
A-02
M-02
J-02
J-02
A-02
S-02
O-02
N-02
D-02
J-03
F-03
M-03
A-03
M-03
J-03
J-03
A-03
S-03
O-03
N-03
D-03
J-04
Dynegy
AES
Williams
Reliant
Calpine
El Paso
Monthly average share prices, indexed at 100 as at Jan. 1, 2002
Source: Bloomberg
3131FitchRatings
Option BOption B
Asset Sales
3232FitchRatings
Who's Buying?Who's Buying?
Source: Henwood Energy Services
0 1,500 3,000 4,500 6,000
Exelon
GoldmanSachs
TransCanada
Dominion
FPL
PSEG
Salt River
Brascan
DQE
MW 0 1,000 2,000 3,000 4,000
GoldmanSachs
Exelon
FPL
Dominion
TransCanada
PSEG
Salt River
Brascan
DQE
$m
3333FitchRatings
Sales characteristicsSales characteristics
22GW sold in past two years for c.$11bn22GW sold in past two years for c.$11bn Much of the value in contractsMuch of the value in contracts 60GW left on the block60GW left on the block Older contracts running offOlder contracts running off
Munis - self-build or fire sale?Munis - self-build or fire sale? LSEs - FERC warning shots?LSEs - FERC warning shots? Energy majors - Opposite direction?Energy majors - Opposite direction? Financial companies - Speculative??Financial companies - Speculative??
3434FitchRatings
Wholesale Energy MarketWholesale Energy MarketCompetitive GenerationCompetitive Generation
Regulatory and policy gridlockRegulatory and policy gridlock Bankruptcy Court versus FERC jurisdiction Bankruptcy Court versus FERC jurisdiction Congressional wrangling over Energy Policy ActCongressional wrangling over Energy Policy Act FERC versus states on RTOsFERC versus states on RTOs MISO members change their betsMISO members change their bets
3535FitchRatings
Wholesale Energy MarketWholesale Energy MarketFERC versus Bankruptcy CourtFERC versus Bankruptcy Court
If FERC prevails:If FERC prevails: If Bankruptcy Court prevailsIf Bankruptcy Court prevails::
A no-win situation for wholesale market competition
Lower asset recoveries for genco investors
Steeper cost of capital for gencos
Gencos less competitive
Utilities and PSCs will see greater risk to public in supply contracts
More incentive for utilities to build or buy power generation
Gencos less competitive
3636FitchRatings
Option COption C
Cash Flow
3737FitchRatings
Outlook: Competitive Wholesale Outlook: Competitive Wholesale Generators and MerchantsGenerators and Merchants
Regions - Generators by Rating
0% 20% 40% 60% 80% 100%
FL
SO
AEP
ERCOT
SPP
High IG Low IG High SG Low SG
Based on published and senior unsecured debt ratings, weighted by capacity
Based on published and senior unsecured debt ratings, weighted by capacity
Source: Fitch Ratings
3838FitchRatings
Outlook: Competitive Wholesale Outlook: Competitive Wholesale Generators and MerchantsGenerators and Merchants
Regions - Generators by Rating
0% 20% 40% 60% 80% 100%
FL
SO
AEP
ERCOT
SPP
High IG Low IG High SG Low SG
Based on published and senior unsecured debt ratings, weighted by capacity
Based on published and senior unsecured debt ratings, weighted by capacity
Source: Fitch Ratings
3939FitchRatings
Outlook: Competitive Wholesale Outlook: Competitive Wholesale Generators and MerchantsGenerators and Merchants
Regions - Generators by Rating
0% 20% 40% 60% 80% 100%
ENT
PJM
NY
CA
High IG Low IG High SG Low SG
Based on published and senior unsecured debt ratings, weighted by capacity
Based on published and senior unsecured debt ratings, weighted by capacity
Source: Fitch Ratings
4040FitchRatings
Outlook: Competitive Wholesale Outlook: Competitive Wholesale Generators and MerchantsGenerators and Merchants
Regions - Generators by Rating
0% 20% 40% 60% 80% 100%
ENT
PJM
NY
CA
High IG Low IG High SG Low SG
Based on published and senior unsecured debt ratings, weighted by capacity
Based on published and senior unsecured debt ratings, weighted by capacity
Source: Fitch Ratings
4141FitchRatings
Regional Wholesale MarketsRegional Wholesale Markets
10
20
30
40
50
2004 2005 2006 2007 2008 2009 2010 2011 2012
$/M
wh
WECC - Southern CANE - PJM WestSE - EntergyMW - ComedERCOT - Houston
10
20
30
40
50
2004 2005 2006 2007 2008 2009 2010 2011 2012
$/M
wh
Source: Henwood Energy Services, Fitch Ratings
Market Clearing Price (Spring 2003) Market Clearing Price (Fall 2003)
4242FitchRatings
Regional Wholesale MarketsRegional Wholesale Markets
0
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009 2010 2011 2012
$ m
illio
ns
WECC - Southern CA
NE - PJM WEST
SE - Entergy
MW - Comed
ERCOT - Houston0
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009 2010 2011 2012
$ m
illio
ns
Net Revenues, hypothetical CC gas plant* (Spring 2003) (Fall 2003)
* Based on a combined cycle gas plant with a 6,900 Btu/Kwh heat rate, $2/Mwh variable O&M, and a 2% forced outage factor.
4343FitchRatings
Wholesale Energy MarketWholesale Energy MarketLonger-term OutlookLonger-term Outlook
Wholesale energy market will still exist, but no Wholesale energy market will still exist, but no guarantee that players will be the same.guarantee that players will be the same.
Broken models will be replaced by new and Broken models will be replaced by new and different models.different models.
4444FitchRatings
Wholesale Energy MarketWholesale Energy MarketLonger Term: Model 1Longer Term: Model 1
Utility
Merchant Producer
Merchant Producer
Distressed asset sale
Merger
Self-build
Consolidation and
Reintegration
4545FitchRatings
Wholesale Energy MarketWholesale Energy MarketLonger Term: Model 2Longer Term: Model 2
Utility
Project Developer
Project Developer
Asset lease
Build & transfer
Plant Operator
Service Contract
Preserves roles for specialists in project development and operation, but not a major role.
4646FitchRatings
Wholesale Energy MarketWholesale Energy MarketLonger Term: Model 3Longer Term: Model 3
Merchant Producer
Utility
Supply contract priced at floating market index
FinancialCounterparty
FinancialCounterparty
Financial hedge Financial
hedge
Consumers
Tariff adjustments
Both parties get the benefit of ‘Forward Contract’s provisions on the financial Hedge Contracts
Both assure physical supply and off-take in the Supply Contract
4747FitchRatings
Hong Kong SingaporeAustraliaFrance
USA SpainUKUSA
One State Street Plaza 2 Eldon Street 55 E. Monroe Street Rambla de Cataluna 124
New York City London Chicago Barcelona
NY 10004 EC2M 7UA IL 60603 E-08008
+1 212 908 0500 +44 20 7417 4222 +1 312 368 3100 +34 93 415 1823
25 rue Murillo 300 Queen Street Lippo Centre 7 Temasek Boulevard
Paris Brisbane 89 Queensway Singapore
75008 Queensland 4000 Hong Kong 038987
+33 1 44 29 91 29 +61 7 3222 8600 +852 2263 9963 +65 336 6801
www.fitchratings.com
Fitch Global Power GroupFitch Global Power Group