Merchant Energy Road to Recovery

Abstract

Over the past year, energy merchant restructurings and bankruptcies have signaled that the sector has entered the bottom of a business cycle. The questions any current or potential investor in energy assets should ask are: “What are the factors driving the current energy market depression?” and “What are the factors that will affect the timing of market recovery?” For the energy company in distress, the road to financial solvency must consider three main concepts: portfolio composition, regional market exposure, and capital structure. This article addresses the effect of regional market exposure on a portfolio9s performance in this downward business cycle. The important regional market characteristics are reserve margin, fuel on the margin, and spark spreads. Other possible complications outside these fundamentals that could change the way the market recovers include a slowing down of project cancellations and postponements, a continuing credit crunch, and tightening government environmental policies.