U.S. Power Projects Start to Rely More Heavily on Hedging

The demand for power during the unusually cold weather in the first months of 2014 far exceeded the supply, reports Project Finance International, causing fluctuations in prices that many power suppliers were not prepared for after a long period of relative stability. This led to the failure of some hedge arrangements when organizations were no longer able to pay back investors.

Project finance professionals are now focused on crafting more appropriate hedge agreements to avoid such failures in the future—an important objective for the industry, since hedged projects typically enjoy more favorable financing conditions. One type of hedge that that natural gas project sponsors are increasingly driving is the revenue put, which provides risk protection in exchange for a payment, usually at the close of a financing deal.

“Sponsors are looking to get the best financing they can and leverage as much as they can, said Energy & Infrastructure Projects partner Daniel Budofsky. “Lenders may lend more if they have greater certainty in terms of the project being able to pay the debt service, and a revenue put helps ensure this.”

But Budofsky adds that the type of hedge offered isn’t the only thing that interests a potential lender.

“One very important point is the creditworthiness of the financial counterparty,” he told PFI. “From a project perspective, the hedge is basically an asset. It is really important to the sponsor and the lenders that that asset doesn’t go away during the term of the financing.”