Banking on Predictability
and that's certain.
Lessons Learned: Four Capital Structures
- Vertically Integrated Utility: Demonstrates the composition of a traditional utility, cost of service, capital structure. Concerned investors perceive this regime as the lowest-risk regime because of its capital structure. Roughly 50 percent (give or take) is represented as debt. That debt would be considered recourse and corporate in nature. Around five percent of the capital structure, plus or minus, is preferred, and around 45 percent of the capital structure is common equity
- Contracted Power: The PURPA Contracted Power Project regime relies upon the strength of a contract-a ratable contract that is viewed by the markets as a creditworthy instrument-to keep relative risk fairly low. Roughly 80 to 90 percent of the capital structure of a project financed with this type of revenue contract could be debt. That debt is non-recourse and project finance. This is different from the recourse and corporate debt you find in a vertically integrated utility. Used for highly specific infrastructure situations, this debt's payback or return on the capital is wholly dependent upon the operations of the project and the revenue that the contract generates. The remainder of the capital structure in these circumstances is typically equity.
- Merchant Power: This is the highest relative risk, meant to illustrate the EWG Merchant Power Projects-largely gas-fired generators, green-field, and construction in nature-that were financed during the boom times of the power market, leading up to the energy crisis. Typically, these projects did not involve long-term contracts; they involved merchant revenue streams that the market, both debt and equity, needed to gain comfort with respect to the composition of those streams.
- The Future Capital Model: What might capital investment look like today in a post-energy-crisis environment? Where will the capital markets draw the line with respect to a capital structure and/or any capital flowing into new infrastructure investment? Most decisions will be based on the lessons learned.-F.N.
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