Q&A: Carl Peterson and Don Kyle, GE Energy Financial Services – Part II
A slew of gas-fired projects are slated for development in the next 12-18 months, however, several factors will decide which projects make it through financial close. “It will be decided on timing to market, allocation of capital based on deal structure, and the equity raise—critical in all structures,” noted Don Kyle, senior managing director of GE Capital Markets. Kyle and Carl Peterson, managing director and head of energy lending at GE Energy Financial Services, spoke with PFR Editor Sara Rosner about the impact of the natural gas boom and GE EFS’ strategy for deploying capital in the near-term.
PFR: How is the boom in natural gas discovery going to affect the deals that we see coming to market in the near- and mid-term?
Peterson: The boom in natural gas production has driven low gas prices and is making, some coal plants uncompetitive, leading to a number of announcements about impending coal retirement. This has kind of fed upon itself such that you have more gas plants being announced for development and construction than will probably get done. But this won’t last forever. Gas prices will eventually go up, which is why, whether you’re a lender or investor in energy markets with long lived assets, you always want to make sure you have a balanced portfolio from a fuel perspective. When gas prices eventually rise again, coal plants strategically positioned will once again be very valuable.
PFR: In terms of GE EFS and its strategy, what is on tap for the next 12-18 months for power investment? Has strategy in power investment evolved in the last year? If so, how?
Peterson: The partial merchant transactions we’ve been talking about--that is the recent evolution. But tactically and strategically, we like to keep it simple. We want to stay close to our customers, successfully execute for them, hear where they think markets are going, and try to help them be successful in those markets.
One of the good things about GE EFS is that we’re able to look at a fully contracted deal, a partial-merchant deal, or even a full merchant deal—in fact, we have financed all three types in the last 12 months. Our expertise and flexibility positions us well to help our customers execute in their markets.
The other thing on our radar screen, is the new technology coming through on the GE systems side. The new GE H SystemTM machine is going to have a significantly lower heat rate than existing technology. We are constantly thinking about how we help GE and our customers implement this new technology. As an example, we discussed how the shale boom has made coal less competitive. As a result, we have had discussions with utilities that are interested in replacing those older coal plants with new H machine technology. Some of these utilities are considering non-recourse financing. Not sure where that will lead but we find it to be an interesting development.
Kyle: On Woodbridge, it was a similar situation in that we were rolling out our most current .05 turbine. With a deal of that size, which is more desirable to do in the bank market, we stepped up to anchor. We really wanted to stand behind the financing of reliable turbine technology. Similarly on the H technology, GE will step up and stand behind its technology but to the extent that we can take the lead on putting the debt together, it’s very strategic for us. We’ll want to replicate the success we had on Woodbridge and the .05 with the H.
PFR: Do you have an idea of what kind of volume you’re expecting in terms of capital to deploy in the next 18 months, or a number of deals or any way of quantifying that?
Peterson: We want to deploy as much capital as possible that meets our risk-return hurdles. We’re somewhat flexible on those hurdles. We have the ability to do fully contracted deals, partially merchant deals, and fully merchant deals, and we have appropriate risk-return criteria for the entire spectrum.
Kyle: I think that off of that lengthy list of greenfield quasi-merchants that PFR has put together, I’d say six of them get done over the next 12-18 months. It will be decided based on timing to market, allocation of capital based on deal structure, and the equity raise--critical in all structures.
For the PF guys who are not doing just power, a lot of their dance card has been filled with very sizable LNG projects. We’ve invested in two of them ourselves, but I think that’s taking up a lot of time. And out of the New York offices, we’re seeing a fair number of folks active in Latin America. It’s been much more limited to equity in LatAm, but I think we may take a fresh look down at Latin America on the debt side, too. Pricing’s been pretty tight down there, so we’ll have to see.
Check www.powerintelligence.com for the first installment of this Q&A, when Kyle and Peterson discuss the market for structuring and GE EFS’ experience with the transaction backing Competitive Power Ventures’ St. Charles project in Maryland.
