Clean Coal Technologies, Coal

Four Pros Talk Credit

Issue 1 and Volume 113.

By David Wagman, Chief Editor

Power generators are not entirely immune to effects of the global credit crisis. At POWER-GEN International last month in Orlando, Heather Johnstone, senior editor of Power Engineering International, and I moderated an hour-long panel discussion whose aim was to shed light on the crisis and its implications for power generators.

Panel members included Doug Houseman, CTO for Capgemini’s global utilities practice; Lynn Bertuglia, managing director of enterprise management solutions at Black & Veatch; Art Simonson, managing director and team leader in Standard & Poor’s utilities and infrastructure ratings group; and Ron Nichols, managing director with Navigant Consulting.

Highlights from the discussion follow. A video of the complete briefing is available at the Power Engineering magazine web site, www.power-eng.com.

Heather Johnstone opened the session by asking the panel for their “realistic assessment” of the continuing economic turndown on the power generation sector.

Doug Houseman said that many vendors report a good backlog of orders, but that equipment delivery times have shrunk by as much as 50 percent compared with six months ago. A tangible slowdown is underway in new capital projects. “There are a number of companies in Europe where their reserve margins are less than 5 percent, yet there are no new power projects that have been started in those countries in the last 18 months and none projected to be started in the next 18 months,” he said.

Lynn Bertuglia described a “tremendous slow-down in new orders,” including delays on projects that were well underway. “They’re not being canceled, but they are being put on delay,” she said. The result is a general slow-down when it comes to meeting load growth.

On the up side, she said that when the industry has endured similar cycles in the past, investors have enjoyed an opportunity to “go out and make good investments on which they make tremendous profits.”

Art Simonson said S&P has seen several projects that make sense economically yet are unable to borrow the money they need. “As we all know, these projects are all highly capital-intensive and financed largely with borrowed money. Until that frees up from the lender’s perspective, this is going to continue.”

Ron Nichols called the current situation a “more extreme version of what we saw in the early 1980s and in the early 1990s” and that the credit crisis is “sort of Darwinian” in terms of its effect on projects.

“We are still seeing among our clients strong projects and strong power purchase agreements behind them. They have good market numbers to go in the door with. They are still planning on moving forward.”

Simonson said one industry sector still able to issue debt in 2008 was regulated utilities. “Obviously, they’re paying a bit more money this time around than they did last time around,” he said. “But for these particular entities, the bond market is definitely open.”

Bertuglia said she sees investor-owned utilities with big balance sheets or huge asset bases and a “vision about where they’re going to be eight years from now” taking the attitude, “‘Well, we can’t stop now. If we’re going to get there at all, it’s got to be today.’” She cited Duke Energy as one utility that is pursuing new projects because their vision says “‘This is where we’re going and we’re not slowing down.’”

A Question of When?

Just when might “the cork come out of the bottle,” one audience member asked. Doug Houseman said he sees a bottom “sometime in 2011” but no real loosening in credit until “about ’13 or ’14.” In the interim, many suppliers have three- to five-year backlogs, which he said suggests their revenues will remain good even as their book-to-bill deteriorates.

Bertuglia said her clients—lenders as well as the borrowers—are taking things 60 days at a time. “I think there’s going to be a re-examination of opportunities to deploy capital after the first of the year,” she said.

Nichols declined to speculate on when the market may turn around, but said the crisis will likely have a “very long-term effect” on market players. “I think it will have a strong support for the large, well-capitalized players, the strong balance sheet players in this market.”

He said he sees no significant new nuclear or new clean coal projects before 2020, but looks for a focus on renewable energy and “a lot of gas.” That focus on natural gas-fired generation will put pressure on natural gas prices, which in turn will “reinforce the interest in clean coal and nuclear” at about the time when developers need to put in major capital.

“It might just be serendipitous that this comes together in a way that works,” Nichols said. One “interesting problem” is how difficult it will be between 2010 and 2016 for renewable and natural gas plants to obtain financing needed to fill the gap.

Houseman ended the session on a somewhat optimistic note, saying one opportunity may exist for those companies that provide plant maintenance services and equipment. “If we’re not going to build them, we’ve got to keep them running,” he said.

That’s a sentiment you can take to the bank. Almost.