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Flying Through Turbulence

Volatile markets are causing delays, but most deals are moving forward.

Fortnightly Magazine - April 2008

sold off, but financings that require syndication have slowed in some cases. Hammered by subprime losses, some lenders have pulled back from participating in syndicated power-related project debt. Some are short on funds, some are tightening lending standards and some are putting all their efforts into solving real estate related problems. Transactions are taking longer and more frequently lenders are closing deals they plan to hold, rather then sell off in pieces. For example, CoBank and Siemens Financial Services say they do not expect to syndicate the recent $90 million refinancing of the 310-MW Blue Spruce Energy Center.

Deal Flow

Despite market turbulence, deals are getting done.

Numerous sales, accounting for over 10,000 MW, closed during the last six months, and many of these sales involved regulated and municipal utilities. A few examples: KeySpan completed a sale of 15 generating facilities with a combined capacity over 6,600 MW to National Grid last summer. Wisconsin Electric Power sold its interest in Point Beach to FPL Energy LLC. Alliant Energy subsidiary Interstate Power and Light Company purchased a 300-MW wind farm.

Pending acquisitions by regulated utilities include the Northern Indiana Public Service and Wabash Valley Power Association purchase of three facilities with a combined capacity of over 1,300 MW from Duke Energy, LS Power and NiSource. Jersey Central Power & Light and the City of Klamath Falls are awaiting final approvals to divest over 500 MW of assets to independent power owners Maxim and PPM Energy. Oklahoma Gas & Electric, a subsidiary of OGE Energy Corp., agreed to acquire the 1,230-MW Redbud facility for about $852 million from a unit of Kelson Holdings LLC. OG&E then plans to resell a total of 49 percent to the Oklahoma Municipal Power Authority and the Grand River Dam Authority. Several of these transactions may have closed by press time.

Recent sales and transactions underway also involve independent power companies. Calpine became an icon for the risks associated with merchant power and rapid growth. With debt over $18 billion, it filed for Chapter 11 bankruptcy protection in 2005. After years of restructuring it emerged on January 31st and its stock now trades on the NYSE. Restructuring efforts continue and Calpine recently agreed to sell the partially-completed 774-MW Hillabee facility to Constellation Energy for $155 million.

Utilities also have been busy issuing new debt and equity. Southern California Edison issued $600 million in 30- year bonds. Florida Power & Light announced its intention to sell bonds with that same total value and term at a rate of approximately 6 percent. Duke Energy Carolinas LLC issued $400 million in 10-year bonds at 5.25 percent and another $500 million in 30-year bonds at 6 percent. El Paso Pipeline raised over $500 million in its initial public offering.

Strategic Moves

Flying above the deals getting done on the ground are strategies being pursued by various utilities. Turbulence in financial markets does not appear to have caused material course changes. Delmarva Power, PNM Resources and Puget Energy Inc. are examples of companies that are continuing to implement broad strategic initiatives.

Delmarva’s strategy is