Volatile markets are causing delays, but most deals are moving forward.
Jeff Bodington is president of Bodington & Company, based in San Francisco. Email him at email@example.com.
While trouble in financial markets grabs the headlines, dozens of transactions have closed this year and many continue moving forward. These transactions involve asset sales, financing new generation and transmission, and making long-term strategic moves. (See table, showing at least 2,300 MW of power plant sales announced or closed in February.)
The industry’s ability to close deals is closely related to its role as a defensive investment in troubled times. Although problems in the power business grabbed the headlines early this decade, the industry now seems fundamentally strong. In contrast to their ratings of banks, rating agencies appear to have recently upgraded more of the electric sector than they have downgraded. It remains a strong investment grade, usually BB or BBB. For an index of 68 electric utilities, the debt-to-equity ratio averaged only 55:45 and return on equity exceeded over 13 percent through January.
However, the industry is affected by difficulties in other sectors of the economy, and some aspects of financing are experiencing difficulty as a result. Market turbulence may persist for some time. But although a few deals have been destroyed or delayed, far more are getting done on reasonable terms.