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State of Flux: U.S. Energy Sector Creates Challenges, Opportunities for ABLs

08/21/2018

The U.S. power industry once epitomized stability, with long-term, low-risk financing for coal-fired power plants that could operate for half a century. However, in today’s “disrupted” energy sector, asset-based lenders face the challenge of reassessing risk related to technology, demand, regulations and the creditworthiness of borrowers. In comparison to when coal was king, deals involving the likes of wind, solar, bio-gas or battery-storage generally feature shorter terms and substantially altered risk profiles. Asset-based lenders need to account for this in the appraisals, loan structures and due diligence methodologies they employ moving forward.

Gone are the days in which the majority of energy deals involved 30-year loans to public utilities for the construction of coal or nuclear plants. Uncertainty has supplanted what once was a seemingly safe assumption—namely, that the power business would stay the same save for the fluctuation of regulatory enforcement under different political administrations.

The revolution in natural gas is a prime example of the shifting nature of the energy market. Twenty years ago, when energy buyers and sellers negotiated a contract, the price of natural gas was $15 for a million BTUs of energy. Today, it has plummeted to $3. In earlier eras, gas companies would routinely sign 20-year contracts with utilities in which the price was locked in. Now those contracts have shriveled to five years or less in length. Thanks to rising global demand and continued investment in LNG export infrastructure, gas companies understand that today’s price could easily double or triple in a few years.

Read the full article in the ABL Advisor here.

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