Wednesday, August 18, 2010



Energy Commentary from Karl Miller - Read Bio and More info
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Large, Burgeoning Market Sector

August 18, 2010 ( energy newswire) - The energy sector is large and burgeoning and is a cornerstone of the American economy. It is one of immense scale and scope, being the third largest industry in the United States. Total expenditures for energy services in the U.S. are expected to grow from approximately $1.2 trillion in 2010 to over $1.7 trillion in 2030.1

1Energy Information Administration, Annual Energy Outlook 2009 with Projections to 2030, March 2009, Report number DOE/EIA-0383(2009).

Total U.S. Energy Services Expenditures 2010–2030

Deep Industry Value Chain

The U.S. energy industry value chain can be divided into three inter-connected segments, "upstream" businesses, "midstream" businesses, and "downstream" businesses. Upstream businesses find and extract energy resources such as gas, oil, and coal. Midstream businesses gather and refine the raw inputs generated upstream so they may be used by wholesale power generation customers. Downstream businesses include electric utilities and independent power producers, as well as businesses that sell refined gasoline, petrochemical, and propane, among others to end-user customers.

Significant investment opportunities exist across the spectrum of the energy value chain. The U.S. energy industry value chain is detailed on the following page:

U.S. Energy Industry Value Chain2

2Cambridge Energy Research Associates.

Compelling Investment Opportunity

The energy industry in the United States and Europe began a transformation in the 1990s primarily due to the deregulation of the energy industry. As a result, the energy industry has been in a state of constant change and evolution ever since. A number of key market dynamics are currently affecting the energy industry and creating unique investment opportunities, including:

* Supply/Demand Imbalance – A significant amount of power generation capacity, along with ancillary facilities like gas storage and transmission, was constructed in anticipation of the newly deregulated environment. Much of the forecast demand never materialized, leading many companies to default on debt service obligations. Once owners walked away from the assets, leaving them as collateral to the banks and other creditors, the banks are forced to sell the assets at a fraction of their original cost in order to recoup a portion of their investment.
* Financial Distress – Economic fatigue has taken its toll on many energy companies and creditors have become more willing to force asset sales. The financial and operational patience of many distressed owners and new owner banks is wearing thin. This has led to significant opportunities for private capital to provide liquidity to debt-holders and to facilitate significant operational and balance sheet restructuring.
* Asset Write downs – The write-down of assets to market value, as required by accounting rules, should narrow the bid-ask spread. As a result, creditors are taking significant write-offs on their distressed debt in order to redeploy capital. This has resulted in assets being sold off at a fraction of their original values.
* Portfolio Divestitures –Significant excess capacity, depressed power prices, uncertain regulatory structures, excessive debt, and credit rating pressure are forcing energy and utility companies to re-evaluate their asset portfolios with an eye on divestitures. Many of the largest U.S. companies in the power and gas sector have accumulated large amounts of debt in recent years, leading to portfolio sales to enhance liquidity.
* FDIC Bank Liquidations – Large amounts of distressed assets will be sold over the next several years as banks go into receivership or seek to strengthen their balance sheets, creating a significant pipeline of acquisition and investment opportunities. Approximately $525 billion of commercial mortgages held by U.S. banks and thrifts are scheduled to come due before 2012, a substantial portion of which will not qualify for refinancing due to loan-to-value thresholds3. Due to current negative market trends, many troubled banks will be forced to liquidate through the FDIC, creating buying opportunities for high quality, attractively-priced energy and energy-related assets currently held on bank balance sheets.

3Hui-Yong Yu, Corus May Be Model as Investors Seek Troubled Assets (Update1), October 8, 2009,

Energy and energy-related assets will continue to experience financial difficulty. Furthermore, energy companies will continue to divest assets at discounted prices to obtain liquidity and retire project debt.

As a result, unprecedented portfolio and individual asset acquisition and restructuring opportunities exist across the entire Energy Value Chain in the United States. The current market environment present a unique and optimal opportunity for seasoned investors to leverage their backgrounds, experiences, skills, and experiences to acquire and invest in energy assets that will generate strong returns.

Unique Competitive Positioning

Investors must be uniquely positioned to take advantage of the current market disruption and will benefit from the following factors:

* Reduced Competition for Assets –Demand for energy industry assets have not yet fully recovered. As a result of the industry's financial difficulties, many of the traditional buyers of energy assets have experienced financial distress, forcing them to become net sellers of energy assets. While potential investors exist, few investors possess the depth of experience at the financial and operational level.
* Strong Positioning Relative to Competitors – Strong investors will recognize the need to develop a competitive operating advantage. Developing a unique blend of experience and skills that will enable investors to leverage to improve profit margins and strengthen risk management of target assets, differentiating it from other investors.

Attractive Target Sectors

The energy sector has seen high levels of consolidation and rationalization over the last few years. Much of this restructuring resulted from originally flawed fundamentals and unrealistic expectations. As a result, market participants are in many cases being forced to restructure their balance sheets and divest assets.

Assets are being priced at or below fair value with few potential buyers due to a lack of capital among many industry participants, primarily the ability to raise third party debt financing. For many of these assets, the ability to act quickly and opportunistically on an acquisition will favorably influence price negotiations.

Opportunities exist in the following assets and industries, listed below in order of priority:

* Power Generation – This asset type should be investors primary focus. Power generation assets include coal, natural gas, wind, hydroelectric, waste-fuels, and other resource-based facilities. Investments should be considered in both base load or peaking facilities and both merchant and contracted output.
* Power Transmission and Distribution – Primarily includes electricity transmission and distribution assets. In addition, recent regulatory changes have forced some entities to divest themselves of non-core transmission infrastructure assets.
* Natural Gas Infrastructure – Includes gas transportation, pipelines, gas local distribution companies ("LDC's"), compression stations, storage facilities, and liquefied natural gas ("LNG") terminals.
* Power and Natural Gas Supply – Includes electricity and natural gas supply companies.

Clean Energy Investment Opportunities

Renewable and "green" energy has experienced substantial growth driven primarily by a series of technology breakthroughs, significant corporate and venture investments, and increased government awareness and backing. In early 2009, President Obama pledged $70 billion in tax credits, grants and loan guarantees to transform the U.S. into a green powerhouse.

Furthermore, a climate bill still circulating through the Senate that, if passed, could mandate that up to 20% of electricity come from renewable energy sources by 20204. In 2009, the clean energy market in the U.S., comprised of biofuels, wind, solar, and fuel cells was estimated at just under $85 billion in revenue. The market is projected to continue its growth trajectory and become a $225 billion market by 2016, a compound annual growth rate ("CAGR") of approximately 15%.5

U.S. Projected Clean Energy Growth 2009-2016

4Christopher Lawton, German Energy Giants Eye a Greener U.S., Business Week, October 30, 2009,
5Joel Makower, Clean Energy Trends 2007, Clean Edge, March 2007.

Significant opportunities exist in the renewable and "green" energy sector to acquire, re-power, and develop natural gas, clean coal and renewable assets in key geographic transmission and energy-constrained locations in the Western U.S. including California, Arizona, Nevada, New Mexico and Colorado. With over 700 sub-250MW natural gas plants, this region represents a substantial area of investment opportunity.

Value Creation Strategies

Investors should only acquire or invest in energy assets and companies in which we have been able to clearly delineate a plan for creating value and producing attractive returns. As a result, substantial operating and financial experience is required in addition to a broad perspective on how best to approach value creation. To successfully effect change, Investors should focus on high-impact value creation strategies, such as:

* Build Better Businesses - Success will depend on building superior portfolio assets and companies. As a result, should focus on improving both the quality and performance of investment portfolios through fundamental change to strategic focus areas, including competitive positioning, product and service offerings, management incentives, organizational structure, target customers and distribution channels, organic and acquisition-driven growth initiatives, supplier arrangements, and cost-cutting initiatives.
* Ensure Appropriate Resources – In many instances energy companies do not have sufficient resources, whether financial or human capital, to execute critical functions, particularly new initiatives. Investors should identify such deficiencies and provide management support or capital to facilitate strategic objectives. Extensive energy industry management skills are absolutely required.
* Right-Size Cost Structure – Cost structures evolves over time to a point where it may no longer be appropriate for the asset or business. Sometimes it becomes bloated with unnecessary elements, either excess personnel or other resources. Other times, the cost structure may reflect underinvestment in areas that, if adequately funded, could dramatically improve operations. It is critical to appropriately adjust the cost structure to support and promote, rather than hinder, the operations of the business.
* Invest in Managers and Employees – Investors must develop the corporate talent pool is an effective way of introducing consistent improvement to operations, thereby creating long-term value. This will lead to building stronger organizations with enhanced effectiveness. It is critical to develop company personnel, assisting in recruiting, training, and retention of employees.
* Continuously Reevaluate Strategy and Plan – Circumstances change during the course of an investment and it is essential to reassess strategy continuously. It is necessary to proactively make adjustments to a strategic plan to keep momentum in the business. It is necessary to monitor results closely and exercise good judgment in effecting change.

About Karl Miller:

Mr. Miller is a globally recognized energy executive and institutional investor with a balance of both financial and energy sector expertise. Mr. Miller began his career on Wall Street during the 1980s and has an extensive background in banking, commodities trading and risk management.

Mr. Miller is acclaimed for multiple ground breaking market calls and investments, including the U.K switching from a net gas exporter to a net gas importer in 2000, called the California energy crisis in 2001, called the Ethanol and Bio diesel boom and bust in 2007, called the renewable energy boom and bust cycle underway in 2008, and most recently called the revival of natural gas in the United States in 2009.

Mr. Miller has a long history in the global energy business and has held a variety of executive management positions both within the United States, Europe and Asia. Mr. Miller has bid on over $25 billion in energy related assets during his career.

Mr. Miller has built, restructured and managed energy businesses for major public energy companies on several continents, including PG&E Corporation, Electricite de France, El Paso Energy, Enron Corporation and JPMorgan Chase.

Mr. Miller holds an MBA in Finance from the Kenan-Flagler Business School at The University of North Carolina, Chapel Hill. Mr. Miller also holds a B.A. in Accounting from Catholic University located in Washington DC.

Karl Miller Disclaimer:

Energy Commentary and Analysis from Karl Miller is the opinion of Karl Miller. Content found in the articles does not represent a recommendation of investment advice by Mr. Miller. Investors should seek the advice of a qualified investment professional prior to making any investment decisions.


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1 comment:

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