FW: What key developments have taken place in the energy & utilities space in recent months? In your estimation, how are companies in this sector faring?

Vince: Today's big story in energy is change and volatility, with extraordinary geopolitical, economic, technological and policy changes affecting the sector. Tremendous geopolitical shifts in the Middle East and the collapse of oil markets have had a ripple effect across the globe. Indeed, disruptions of BRIC economies, particularly in China, have been felt worldwide. Russia's movement into Crimea has shaken Europe and beyond. Global policy is dominated by climate issues, anticipating the upcoming COP 21. In terms of technology, every- thing from resource extraction to energy distribution and use is being impacted by game-changing developments including shale gas and oil, the rise of big data, strides in energy storage, and numerous other advancements. Successful companies are embracing the challenges and are actively seeking opportunities in the evolving new energy paradigm. Companies that merely brace against a changing tide, hoping to return to business as usual, are in for a rough ride.

Speier: In recent months, the energy sector, and particularly up- stream E&P companies, has been struggling with re-determinations under reserve based lending facilities due to the extended period of low commodity prices. For most upstream E&P companies, reserve based lending facilities, which are based on the value of the company's reserves, are the primary financing tool for the development and operation of its asset base. The borrowing bases under these re- serve based facilities – the permitted maximum borrowing amount – are generally re-determined in April and October to account for the current commodity prices and value of the company's reserves and, when evaluations occurred in the past month, many companies found themselves over-levered. Many of these over-levered companies have been forced to evaluate alternative financing sources in order to either repay their borrowing base or finance continued development. At the same time, we've also seen a large uptick in the number of companies evaluating restructuring opportunities as a means of shoring up their balance sheets.

Giardinelli: The past few months have been eventful for the US power and utility industry, with a different story for each sub-sector of the space. In the regulated utility sub-sector, we have seen continued consolidation with acquirers seeking growth, additional scale and expansion into new service territories and businesses. With interest rate increases looming, organic growth opportunities limited, and distributed generation expanding and potentially impacting load significantly, M&A is viewed as a viable solution for many regulated names. For YieldCos, the newest asset class in the sector, the past year has been marked by extreme volatility. Following a string of well-received acquisition announcements and dramatic share price appreciation, YieldCos have experienced a substantial reversal with yields far exceeding previous levels. The players in this space are evaluating next steps against this challenging backdrop. For the IPPs, the down- draft in commodity prices has triggered share price declines, albeit to a lesser extent than that of the YieldCos. With natural gas prices near historic lows, fuel and geographic diversity, scale and capacity prices have become increasingly important.

McCarthy: Three recent developments are resulting in an acceleration of the changes to the already shifting mix of power generation resources in the US power sector. The first development is the continued low price of natural gas and the second is developments in natural gas turbines that have increased energy conversion efficiency. Some companies in the sector are better situated to take advantage of these developments than others, based on their asset profile and geographic location. The third development is regulatory, with the US Environmental Protection Agency's (EPA) Clean Power Plan (CPP) intended to reduce US greenhouse gas emissions. The CPP is in the earliest stages of implementation and much of its implementation will take place at the state level. Moreover, there are significant legal challenges facing the initiative. Accordingly, for many companies, it may simply be too early to assess whether and how the CPP could affect their bottom line.

Howard: Developments are occurring in each of the generation, net- work and retail sectors, as they are forced to adapt to cope with new challenges. Generators in the national electricity market are facing continued pressure from oversupply brought about by a combination of softer demand and a steady flow of new renewable generation entrants. The softer demand has arisen due to demand side management, increased efficiency in electricity use and significant uptake in distributed solar PV. While coal fired generators are no longer currently subject to carbon price in Australia, they continue to struggle with lower overall wholesale market prices and competition from subsidised larger renewables such as wind. On the east coast of Australia, there is constrained long term availability of gas at a price suitable to support new investment in gas fired generation. This is primarily due to the significant gas demand that is required to support the three LNG facilities on Curtis Island in Queensland that are nearing commissioning or just embarking on their first shipments of LNG.

FW: Could you provide an insight into how energy prices are currently affecting the market? How are energy companies responding?

Howard: Energy price pressure is being felt in the market in different ways, varying by location and sector. For example, in Queensland, wholesale electricity prices for the first quarter of 2016 are forecast to be substantially higher than current wholesale prices. This is based on an expectation that there will be a considerable increase in electricity consumption, as a result of the ramping up of coal seam gas extraction and transportation required for the LNG projects. While this is good news for the incumbent generators, it is putting added economic pres- sure on large scale commercial and industrial users such as mining companies, which are already under financial stress from lower commodity prices and are looking for a longer period of reduced electricity prices. In the electricity network space, allowable returns have grown significantly over the past five years but are now coming under pres- sure from regulators and government in an effort to moderate overall electricity cost to end users. Lower oil prices are having a significant negative affect on petroleum and LNG companies' returns.

Giardinelli: A few years ago, the shale gale unlocked an abundant domestic natural gas supply and established a new normal of persistently low gas prices. Within recent weeks, however, gas prices have dropped below $2 for the first time since 2012, with inventories at seasonal records and mild weather projected for November. Gas prices are not expected to rebound in the near term, even as production spending has been cut. IPPs have seen the biggest impact. Expanding or buying into markets with robust capacity markets has offered some insulation against commodity price movements, although those IPPs most tethered to gas prices stand to gain the most when prices eventually rise. Also affected have been the YieldCos, which have experienced a major sell-off, at least in part driven by technical factors, such as MLP investors seeking liquidity in the midst of oil market turmoil. YieldCos' heightened cost of capital has led them to seek out alternative financing vehicles for asset drop-downs, including so-called 'warehouses'.

Vince: The collapse of global oil prices is hugely significant. With continued output by Saudi Arabia, the US and Libya, and with Iran coming online in the next year, there is an expectation that abundant supply and low prices will become the norm. Nearly all oil industry companies in the US are trimming their workforces, cutting expenses and slowing new exploration. Many funds that believed they were investing in a buying opportunity were burned as prices continued to plummet. Nevertheless, we are seeing new investors, including Chinese investors, seeking longer term opportunities in the current low prices. In the US, cheap natural gas has sideswiped coal and nuclear as the fuel of choice. Low gas prices have also impeded some competition that otherwise would have been posed by renewables, although the falling cost of renewables is levelling the playing field somewhat.

Speier: While many upstream E&P companies have hedged a large portion of their hydrocarbon production through the end of 2015, the extended period of low commodity prices seen over the past year has caused energy companies to re-evaluate development budgets and reduce internal capex to be spent on exploration and development. At the same time, companies are also evaluating their core asset positions and are forced to face the hard reality that certain 'core' plays may not be economic at the current commodity prices without either a large reduction in service costs or new technological advances. As the capital intensive nature of upstream oil and gas requires large infusions of capital, many companies are increasingly looking to off balance sheet financings to fund development, including a relatively new 'DrillCo' structure which permits a sponsor to invest at the asset level in exchange for a large working interest in wells drilled until a specified return hurdle is achieved. Expanding or buying into markets with robust capacity markets has offered some insulation against commodity price movements

FW: In your opinion, how are energy policies and political agendas altering the playing field for energy & utilities companies?

McCarthy: The EPA's CPP is an example of energy policy that may alter the playing field for various utilities companies. However, the outcome for specific companies will depend in part on what actions the state or states relevant to that company take – meaning, how the state plans to achieve the CPP objectives it is subject to – as well as pending legal challenges to the CPP, so it may be too early to assess how much the playing field may be altered at present. As a practical matter, to the extent that certain states'CPP implementation is initiated and cannot easily be reversed, even if the requirements of the CPP were then overturned in response to legal challenges, state actions may alter the playing field nonetheless. The CPP also provides for certain trading programmes that could be used to satisfy state emission standards. Depending on how such programmes are implemented, some utilities companies could be advantaged – or disadvantaged – over others.

Giardinelli: Over the past several years, the introduction of environ- mentally-focused regulation and improvements in technology that have allowed us to access the massive reserves of gas trapped in the shale have fundamentally shifted the landscape of the power space. The Hazardous Air Pollutants rule from the EPA has forced power generators to retrofit or retire many coal plants. According to SNL, 12 GW of coal will be taken offline in 2015 alone. Natural gas generation has filled this void. In the absence of the low gas prices facilitated by shale supply, however, remaking the electric fleet may have been too costly to electric ratepayers to be politically palatable. This shift to natural gas is likely to accelerate under the EPA's Clean Power Plan if it survives the appeal process – it currently faces legal challenges from 25 states. The CPP is targeting a 32 percent increase in gas-fired out- put by 2022. In addition, 29 states and Washington, DC have renew- able portfolio standards or goals, which have provided a state-level policy stimulus for moving toward a greener electric fleet. This has been bolstered at the federal level by production and investment tax credits. We will see if this federal support continues with an extension of the PTC and ITC, which are set to expire at the end of 2015 and 2016, respectively.

Speier: While, at least in the US, much of the energy policy discussion has centred on the federal government's subsidies for wind and solar power and more restrictive regulations from the EPA granting a 'death sentence' to the coal industry, one of the more interesting de- bates occurring in the energy space is the crude export ban. In recent years, Congress has shown at least some desire to lift the crude export ban, but as recently as the beginning of October 2015, the Obama administration has continued to state that it would veto any bill easing the export restrictions. The ban, which was signed into law in the 70s, was meant to reduce or eliminate our reliance on imported crude oil from the Persian Gulf and to protect against another oil crisis. But with US crude production at record high, the ban has the unintended consequence of saturating the local oil markets. This oversaturation requires US oil companies to sell product at a discount to WTI pricing, which places a larger strain on upstream E&P companies in today's environment.

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