The price of oil carried the headlines in the closing months of 2014, and industry analysts are still competing to fix the high and low point for a commodity that many see as the epitome of “old” energy. In a world where renewables are rapidly gaining ascendancy across the developed and developing world, the price of oil reminded the market that petroleum remains a critical element in the global energy mix.
The fall in oil prices had its most dramatic impact on the pricing of many alternative energy projects, which were profitable when oil was priced above its current level. At the same time, several private equity investors are building war chests to buy stakes in the industry, seeing its longer-term potential. In the interim, investment in renewables is continuing, helped by extensive subsidies and active government promotion.
What is the key trend to watch in terms of leveraged finance opportunities in the energy industry over the next 12 months—and how do you expect it will impact our clients?
Continuing pricing pressures in the crude oil market are creating opportunities for acquisitions in the sector. Over the past few months, a number of public and private investors have made evident their interest in pursuing acquisitions, and leveraged finance will have a role to play in the overall financing structure. While the continued downward pressure on prices remains a risk factor, it has so far not seriously affected the overall high yield market in the sector.
Master limited partnerships and other innovative arrangements are reshaping capital flows in the United States. What are the biggest challenges for MLPs?
With over 130 MLPs and 70 MLP funds approaching a combined market cap of US$770B, energy- related alternative entities continue to attract large amounts of capital. However, aside from midstream investment-grade MLPs, they are being challenged by the outlook for oil prices and interest rate increases. Exploration and production MLPs are seeking capital for drilling and acquisition partnerships. Mid-size and smaller MLPs are working to imaginatively rethink existing capital structures while continuing to access traditional capital markets.
What are the most critical developments you see coming from the Federal Energy Regulatory Commission (FERC) influencing the U.S. energy industry in the year ahead?
FERC continues to focus on incentivizing construction of new transmission facilities to enhance the electric system’s reliability and provide access to good sites for renewable resources when these are distant from the existing grid. Simultaneously, FERC has to rationalize and manage an often contentious cost allocation process. FERC also focuses on promoting new technologies including energy storage facilities, an area where developers can find there is no, or overlapping, regulation and conflicting jurisdiction.
What trend or development do you see having the greatest impact on the outlook for energy projects in Europe this year?
Europe’s energy market is a mix of the unstoppable growth of renewables, persistently declining demand (reflecting both cost and energy efficiency policies) and, in certain markets, immense capital expenditures for decommissioning nuclear plants. The most common reaction has been a selective mothballing or “flexibilization” of thermal plants. Traditional power utilities will need to evolve by developing, or acquiring through JVs, new business models and skill sets to transition from asset-centric commodity providers to customer-centric service managers.
In terms of disputes and litigation, what are the top trends that will impact our energy clients this year?
Depressed and volatile energy prices tend to increase disputes as parties try to reduce costs or exit unprofitable ventures. Poor earnings also increase the likelihood of shareholder suits as companies struggle to meet expectations; difficulties that were obscured by rising prices and high returns become more apparent. Finally, declining earnings put pressure on corporate compliance programs and create greater risks that managers may pursue illegal activity—such as bribery or anticompetitive conduct—to sustain business activity.
High-yield debt in the energy sector has tripled in volume since 2008
Source: The EconomistWe advised Edison and EDF EN on the acquisition of a majority stake in their 594 MW renewable power portfolio by infrastructure investor F2i, the largest Italian infrastructure fund. The deal combined project and corporate financing structures and innovative governance agreements to create Italy’s third-largest wind power operator. Our work on this transaction was recognized by Project Finance International and LegalCommunity, which named it European Renewables Deal of the Year and Energy Deal of the Year, respectively.
We advised Deutsche Bank on a JPY11.1B non-recourse loan facility for construction of a 32 MW solar energy plant in Fukuroda, Japan by Gestamp Solar. The transaction is the largest non- recourse solar financing in Japan, the largest solar financing by a foreign bank in Japan, and the largest solar financing in Japan provided to a foreign sponsor. This also marks the first in a series of international standard non-recourse solar project finance deals in Japan between Gestamp Solar and Deutsche Bank.
We represented Atlas Pipeline Partners, L.P., a master limited partnership, in amending its revolving credit facility with the initial borrowing capacity of US$800M. The financing structure includes an accordion feature of up to an additional US$250M, which, if exercised, increases the partnership’s total available borrowing capacity to more than US$1B.
We advised many of our financial services clients on a series of billion-dollar-plus energy financings, as energy companies responded to the major shifts in the sector.
We represented Morgan Stanley & Co. LLC, Barclays Capital Inc., Credit Suisse Securities (USA) LLC, RBC Capital Markets, LLC, and UBS Securities LLC as representatives of the initial purchasers in Dynegy, Inc.’s US$5.1B notes offering. This was the largest high-yield deal in the U.S. in 2014, the 10th largest high-yield deal on record, and the largest U.S. dollar-only financing completed last year.
Our lawyers also advised the underwriters on Dynegy’s concurrent public offerings of US$1.1B in common stock and convertible preferred stock. We represented Morgan Stanley, Barclays, Credit Suisse, RBC Capital Markets, and UBS Investment Bank as joint bookrunning managers and BNP Paribas, BofA Merrill Lynch, Credit Agricole CIB, Deutsche Bank Securities, J.P. Morgan, MUFG, and SunTrust Robinson Humphrey as co-managers.
In addition, we represented many of our bank clients in the financing of Canadian energy company Jupiter Resources’ US$2.2B acquisition of Encana’s Bighorn assets. The deal included a reserve-based credit facility, with an initial borrowing base of CAD$550M, and a US$1.1B senior notes offering.
We also represented longstanding client Wells Fargo Securities, LLC as sole lead arranger and bookrunner and Wells Fargo Bank, N.A. as the administrative agent on a US$1.5B senior secured amended and restated credit agreement for Legacy Reserves LP.