ck to results for ""
Below is a cache of http://www.milbank.com/NR/rdonlyres/29B34F29-A360-4F6C-A55E-4371CD0E2A43/0/2006_Projects_Plus.pdf. It's a snapshot of the page taken as our search engine crawled the Web.
The web site itself may have changed. You can check the current page or check for previous versions at the Internet Archive. Yahoo! is not affiliated with the authors of this page or responsible for its content.
Addiction to Oil At Its Peak?
Inside Projects Plus
Addiction to Oil
At Its Peak?
J
ust as President Bush declared in his
recent State of the Union address that
America is addicted to oil, a long-
simmering debate has flared up again: has
the worlds production of petroleum reached
a peak? In the 1970s the worlds dwindling
supply of oil was heralded by environmentalists
as a rallying cry to promote energy conservation
and development of alternative energy sources.
Readers with an interest in history will note that
peak oil was also a concern in the early part
of the last century. Warnings have been issued
in the past about the world running out of oil,
but in each case the alarms have proved false.
Oil shortages have occurred and prices have
spiked, but in each prior instance, higher prices
have been followed by new discoveries, con-
servation on the demand side and, on occasion,
a price collapse. The energy experts who had
raised the concern were, at best, dismissed as
relying on overly simplistic models and, at worst,
subjected to ridicule.
� 2006 Milbank, Tweed, Hadley & McCloy, LLP

2

2006 Market Outlook
Energy and Power Investment
Ready for Take-off

4



Whats Up, in Space?

7

Washington Perspective
Fueling the Future Gas, Coal,
Renewables or Nuclear Power?

11
New Partners Projects, Private
Equity and Leveraged Finance

14
Rising Concern for Petro-Politics
in Latin America

14
Milbank to Open Beijing Office
16
Green to Head Leveraged
Finance Group

17
Recent Deals
(continued on page 12) 2

2006 Market Outlook
Energy and Power Investment
Ready for Take-off
U.S. Power
I
n the U.S., private equity and hedge funds are
providing most of the liquidity which is fueling
hopes for recovery of the merchant power sector.
But Calpines recent bankruptcy filing serves as a
reminder that the merchant power sector remains
volatile. With more than $20 billion of debt and
26,500 MW of generating assets, the Calpine
bankruptcy is certain to have a major impact on
asset values and electricity markets, especially
in important regions like California, Texas and
the Southeast. Calpine has already signaled its
intent to reject a number of unprofitable long
term power supply contracts and is expected to
substantially restructure its generation fleet and
trading operations while under court protection.
Calpines liquidity crisis was caused by record
high gas prices, low utilization of its base load
generating fleet and an adverse court decision
in a Delaware legal battle with bondholders,
which required Calpine to repay $312 million by
January 22, 2006.
Improved Market Fundamentals
Spark spreads are increasing in many regions
of the country and high natural gas prices are
driving up the value of non-gas generating units
as well as highly-efficient, gas-fired combined
cycle generators. The recently announced sale of
Texas Genco to NRG for more than $5.8 billion
(plus assumption of $2.5 billion of Texas Genco
debt) illustrates this trend. A private equity group
led by US PowerGen and Madison Dearborn
recently purchased Reliants New York City gen-
erating assets for approximately $975 million. In
the fourth quarter of 2005 there were several suc-
cessful recapitalization/sale transactions involv-
ing distressed merchant power assets including
Boston Gen, Lake Road and La Paloma IPPs.
These transactions mark a major turning point for
the merchant power market, as there is a sense
that asset values have firmed in many regions and
are poised to move higher.
The improved market outlook has been a catalyst
for increased M&A activity, with utilities (e.g.
Duke, TXU, Sempra and Northeast Utilities) and
financial sponsors (Goldman/Cogentrix, Texas
Pacific Group, Blackstone, Carlyle/Riverstone)
seeking to dispose of portfolios of non-regulated
power assets. Private equity investors recorded
huge profits on the Texas Genco sale (assets
were acquired from CenterPoint Energy in June
2004 for $3.65 billion). AIG Highstar and Ontario
Teachers Pension Plan outbid several other strate-
gic investors to acquire the InterGen international
power portfolio (10 plants, 5500 MW) for approx.
$1.75 billion last year. LS Power has been named
as the preferred bidder to acquire DENAs 6200
MW portfolio of generating assets in the West and
Northeast for approximately $1.5 billion.
Private Equity Targets Energy Sector
As 2006 begins, there is an unprecedented amount
of private equity capital focused on power and
energy investments. EIF recently raised $750 mil-
lion for its new US Power Fund II. Blackstone is
backing a development team from Sithe Global.
Reservoir Capital is backing an investment team
led by ex-AES restructuring chief, Joe Brandt.
LS Power, Energy Capital Partners and Tenaska
have raised substantial new private equity funds
targeting the power and energy sectors. So look
for heightened competition among private equity
investors as they search for attractive investment
opportunities and seek to deploy the billions of
new capital that has been raised.
The project finance debt markets remain highly
attractive from an issuer perspective. Long term
rates remain low and there is ample liquidity to
promote strong competition among funds pro-
viders in the bank, bond and private placement
markets. Accelerating development activity in
the renewables sector is likely to be a significant
source of deal flow in 2006. However, due to the
relatively modest size of most renewable energy
projects, banks cannot rely on this sector to
offset the decline in business from the merchant
power sector.
For the most part, the merchant sector remains
the sweet spot of the Term B market, as many
banks have sharply reduced their credit exposure
to volatile merchant power companies. In this
regard, it is worth noting that there were no com-
mercial banks among Calpines largest unsecured
creditors as of the date of its bankruptcy filing in
late December 2005. This is in marked contrast to
the massive losses suffered by the banks in the
post-Enron merchant power meltdown.
Ironically, banks appear enthusiastic about the
prospects for increasing exposure to emerging
market energy, power and mining projects, at the

same time they are pulling back from domestic
power opportunities. Financial institutions with
integrated leveraged finance and commodities
trading, energy hedging and risk management With more
than $20 billion
of debt and 26,500
MW of generating
assets, the Calpine
bankruptcy is
certain to have
a major impact
on asset values
and electricity
markets,
especially in
important regions
like California,
Texas and the
Southeast.
For the most
part, the merchant
sector remains the
sweet spot of the
Term B market,
as many banks
have sharply
reduced their
credit exposure
to volatile
merchant power
companies.


platforms are poised to lock-up the most profit-
able opportunities in the merchant sector.
U.K. Power
In the U.K., Drax Power has been the main event
in 2005 as three private equity bids (in the range
of �2.2 billion) were rebuffed ahead of the �877
million recapitalization and listing of shares on
the London Stock Exchange. Drax debt has traded
up dramatically since early 2005 in response to
surging prices in the U.K. power market and the
prospects of a bidding war for control of Draxs
4000MW of coal-fired generating assets (represent-
ing 6% of Britains generation capacity). The value
of coal-fired assets has generally risen in response
to soaring gas prices which, on the margin, have
pushed up power prices, thereby increasing spark
spreads for coal fired generators.
Oil and Gas
Record high energy prices throughout 2005 will
stimulate growth in capital spending by interna-
tional oil companies and independents. As ener-
gy companies seek to increase production and
reserves, they will continue to explore opportuni-
ties in the emerging markets