Financing Power Infrastructure in New England Electricity Restructuring
- Slides: 17
Financing Power Infrastructure in New England Electricity Restructuring Roundtable June 10, 2011 Mauricio Del Valle Morgan Stanley Vice President, Global Power and Utilities
Capital Markets Environment
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Equity Markets and Volatility Indexed Price Chart and Volatility Index (VIX) Last 4 Years (%) S&P 500 VIX Source: Fact. Set 3
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Utility Debt Issuance By Year 2006 – Present (U. S. ) Investment Grade Debt Issuance High Yield Debt Issuance ($MM) BBB Index Term Cost of Debt 5 y – 30 y 3. 0% – 6. 0% Source: Thomson Reuters, Bloomberg BB Index Term Cost of Debt 5 y – 12 y 4. 5% – 6. 0% 4
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Project Finance Market Update Global Project Finance Volume (Debt and Equity) ($Bn) Sectors Regions (Debt and Equity) Volume (Debt and Equity) Telecom Industrial Mining Asia Pacific Volume Energy Latin America and Caribbean Oil & Gas Middle East and Africa Infrastructure Source: Project Finance Magazine, Dealogic Europe North America 5
NE Supply / Demand Dynamics
prototype template (5428278)screen library_new_final. ppt 9/15/2020 ISO – NE Fuel Mix Composition Capacity vs. Generation 2010 Capacity Fuel Mix 2010 Generation Fuel Mix Others Coal Gas / Oil Others 1% Wood / Refuse Hydro Oil <1% Natural Gas Hydro Coal Nuclear Gas / Oil Natural Gas Oil Nuclear Installed Capacity: 30, 380 MW Source: ISO – NE Total Generation: 126, 403 GWh 7
prototype template (5428278)screen library_new_final. ppt 9/15/2020 ISO – NE Capacity Auction Results of First Five Capacity Auctions (MW) (USD) (1) Total Cleared Capacity (MW) Excess Supply (MW) Floor Price ($/k. W-month) Source: ISO – NE (1) Represents preliminary results 8
prototype template (5428278)screen library_new_final. ppt 9/15/2020 ISO – NE Capacity Auction Results ISO – NE Reserve Margins Reserve Margin (%) Projected Reserved Margin (includes only operating capacity, capacity under construction, and expected retirements) Target Reserve Margin Source: Ventyx Advisors 9
Financing New Power Infrastructure in NE
prototype template (5428278)screen library_new_final. ppt 9/15/2020 What Is Needed to Finance New Power Infrastructure? Capital Availability (Debt and Equity) Adequate Documentation (Engineer’s Report, etc. ) Project Viability (Permitting / Interconnection) Policy Support (Regulatory / Environmental, Tax Credits) Adequate Investor Returns (Power Supply and Demand / Energy and Capacity Pricing) 11
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Project Finance: Required Diligence Materials · Material Project Agreements - Offtake Agreements, EPC / Construction contract , O&M Agreements · Independent Engineer · Environmental Consultant · Market Consultant · Insurance Consultant · Legal / Tax 12
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Key Characteristics for Successful Project Finance Lender’s Perspective Equity Perspective · Project size greater than $100 MM · No risk of “cram down” · 3 x EBIT / Interest · Strategic partners in place · Contracted revenues (PPA or off-take agreement) · Certain path to profitability · Liquidation value greater debt obligation · Limited technology risk · Reputable contracted suppliers · Secured control · No conflicts of interest · Anti-dilution rights · Creditors control uses of cash flow · Commercialization timeline matches exit strategy · No quick exit for sponsor · Liquidity event in near-term · Creditor has ability to veto · Returns on capital at least 500 bps above WACC Source: Jefferies Equity Research 13
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Financing Solar and Wind Projects Key Items Wind Solar · Long-term PPA or offtake agreement from an investment grade purchaser · Long-term PPA or offtake agreement sufficient in length to fully amortize project debt · Independent engineer’s report · EPC contract with performance surety · “Bankable” meteorological wind data · Contracted site control · Reputable project manager · Environmental permits · Adequate turbine technology · Transmission / interconnection agreement 14
prototype template (5428278)screen library_new_final. ppt 9/15/2020 IPP Trading Analysis – $/k. W Trading Analysis – $AV/k. W ($/k. W) Median: 445/k. W Source: Company filings, Fact. Set 15
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Gas Asset Precedent Analysis – $/k. W Precedents Analysis – $/k. W ($/k. W) Northeast Median: $509/k. W California Median: $658/k. W Texas Median: $435/k. W (1) Northeast (1) Transaction terminated (1) Texas California 16
prototype template (5428278)screen library_new_final. ppt 9/15/2020 Illustrative Pricing Required to Support New Build Key Model Assumptions · 500 MW combined-cycle gas turbine plant · 7, 000 Btu/k. Wh heat rate · 40% capacity factor · 1, 300 $-k. W total capital cost Illustrative Pricing Needed to Attract New Investment Capacity Pricing (1) Energy Pricing (2) Current Forecasted Pricing Range Pricing Needed to Achieve Target Returns ~ 3 area ($/k. W-month) 9 – 12 ($/k. W-month) 50 – 60 ($/MWh) 75 – 85 ($/MWh) (1) Capacity pricing calculated assuming current forward energy prices held constant. (2) Energy pricing calculated assuming current forward capacity prices held constant. 17
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