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Interesting Times

Utilities stay the course in a volatile market.

Fortnightly Magazine - October 2011

depends on what’s going on in a given state at that point. So many factors come into play.

 

Fortnightly: Isn’t it unusual for companies to engage in M&A during a time of such turmoil in the financial markets?

Kingston, Goldman Sachs: During the recent volatility, if you look at individual deals, generally you’ll see that they’re announced at times of relative calm. Large cash deals are difficult in this environment. The alternative is to do a stock-for-stock transaction. If the relative valuation is right, both stocks will move up and down together in the market.

This type of M&A activity is further proof of the resiliency of our sector, despite the global turmoil.

Napolitano, RBC: In terms of asset sales, the question is what’s driving the sellers, given the fundamentals of low prices for gas and power? In some cases the sellers are private equity funds or hedge funds that acquired assets through debt exchanges. They might be driven by technical factors involving timing or strategy. A fund’s strategy might change and that can mean a decision to liquidate assets. We’ve also had corporate sellers with changing strategies or financial drivers.

Nastro, Morgan Stanley: Companies are looking at their portfolios and asking whether they have the optimal business structure. Hybrids are trading at a discount to regulated companies, so some utilities are looking to sell off non-regulated assets to help mitigate that valuation discount. Other companies are looking at non-core assets as a source of funding. They still need to finance the equity component of their cap-ex programs, and bonus depreciation won’t always be available.

 

Fortnightly: Much of the asset-related financing activity in the past couple of years has involved renewable power plants, both for acquisitions and new development. But federal incentives seem unlikely to continue at their current levels. Is the renewable energy business headed for a downturn and a shakeup?

Redinger, KeyBanc: The renewable industry is largely financed in the bank market. This is the last year before the cash grant expires, so a slew of projects are rushing to get financing before the end of the year. However, that’s being affected by what’s happening in Europe. The European banks were very important players in financing renewable energy in the United States, and there are now clouds on the horizon.

A lot of federal incentives are expiring or going away for renewables, and developers are trying to come up with alternative financing vehicles to take the place of those incentives. Some people are talking about REITs and MLPs [real estate investment trusts and master limited partnerships]. Renewable projects don’t qualify for those structures now, but if they did, it would open a new source of capital that’s attractively priced. We’re at the point now where the renewable sector needs to think about ways to finance projects through other investment vehicles. And the government would be well served by, instead of only providing direct incentives, to allow these things to be financed with a REIT or MLP.

Eisenstat, Dickstein Shapiro: Allowing REIT or MLP financing would help. Extending the