Looking ahead at 2010, Fitch Ratings' Global Infrastructure & Project Finance team is considering how the looming economic rebound will affect the credit quality for U.S. energy projects. According to Fitch, the sector is likely to improve in 2010 with energy demand mirroring an improving economy, although non-contracted projects are likely to experience a lag in improved performance. Fitch is planning to issue more detailed outlook reports for each sector in early 2010, however, brief commentaries focusing on key credit implications for the intermediate and long-term are as follows:
Thermal Power Projects:
Thermal power generators with long-term offtake agreements have shown resilience to the adverse economic conditions of 2009 and are expected to perform similarly in 2010. The credit profile of competitive generators relying on spot sales of unhedged power is weaker. Lower demand due to weak economic conditions and excess supply resulted in very low natural gas prices, energy prices and spark spreads in 2009, and similar or slightly improved results are expected for 2010. Merchant coal-fired generators are particularly likely to continue experiencing reduced levels of cash flow. While energy prices are expected to increase somewhat in 2010, exposure to new and increasing environmental compliance costs elevates the risk of reduced cash flow for coal plants.
National laws regulating emissions of greenhouse gases (GHG) are looming, with little impact in 2010, but are expected to negatively affect the profitability of power generating projects in the longer term. The specific form and cost of GHG regulation is unknown but the financial impact could be significant. Both coal-fired and gas-fired plants will be affected, with non-contracted merchant facilities suffering the most significant impact. Power generators with zero and minimal emissions, namely nuclear, hydro and renewable energy projects, stand to benefit from eventual GHG regulation.
Renewable Power Projects:
Renewable portfolio standards in many states require utilities to purchase increasing proportions of their power from renewable energy sources. These requirements allow utilities to sign long-term offtake agreements with renewable power projects, enabling investment grade project ratings in the sector. Significant tax incentives and federal loan guarantee programs have stimulated investments in renewable power in 2009 and the trend is expected to continue in 2010. However, renewable energy projects selling power into wholesale spot markets without the benefit of offtake contracts will face the same depressed pricing issues expected for fossil fuel generators.
Oil and Gas Projects:
The pricing environment for oil and gas projects in 2009 is expected to improve modestly in 2010. U.S. liquefied natural gas (LNG) terminals saw minimal regasification activity in 2009, and the situation is unlikely to change in 2010 without significantly improved gas pricing. As with thermal power facilities, LNG terminals with fixed-price take-or-pay usage contracts were able to maintain investment grade ratings even at minimal levels of utilization. Oil pipeline projects with merchant capacity exposure face similar cash flow risks, although pricing pressure has not been as significant as for natural gas. Petroleum refinery projects experienced significantly compressed refining margins in 2009 and pricing conditions are expected to persist in 2010, gradually moderating as the general economy improves and demand for refined products increases.
Top Three Positive Credit Implications for U.S. Energy Projects:
1) Increasing economic activity expected to raise power demand and energy prices;
2) Mandated renewable energy requirements starting to enable investment grade projects;
3) Fuel prices expected to revert to long-term averages.
Top Three Negative Credit Implications for U.S. Energy Projects:
1) Improvement in spark spreads may be slower than expected;
2) Expected emissions regulations likely to reduce project cash flows;
3) Non-contracted natural gas projects likely to face slow rate of gas price increases.
For additional analysis on these sectors, please visit Fitch's web site at www.fitchratings.com.
Additional information is available at www.fitchratings.com.
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