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This report analyzes the financing requirements and key considerations for new power infrastructure projects in New England, including capital availability, policy support, investor returns, project viability, and required diligence materials.
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Financing Power Infrastructure in New England New England Electricity Restructuring Roundtable June 10, 2011 Mauricio Del Valle Morgan Stanley Vice President, Global Power and Utilities
S&P 500 VIX Equity Markets and Volatility Indexed Price Chart and Volatility Index (VIX) Last 4 Years (%) Source: FactSet
Cost of Debt Cost of Debt Term Term BBB Index 5y – 30y 3.0% – 6.0% BB Index 5y – 12y 4.5% – 6.0% Utility Debt Issuance By Year 2006 – Present (U.S.) Investment Grade Debt Issuance High Yield Debt Issuance ($MM) ($MM) Source: Thomson Reuters, Bloomberg
Project Finance Market Update Global Project Finance Volume (Debt and Equity) ($Bn) Sectors Regions (Debt and Equity) (Debt and Equity) Mining Asia Pacific Volume Volume Telecom Industrial Energy Latin America and Caribbean Oil & Gas Middle East and Africa Europe Infrastructure North America Source: Project Finance Magazine, Dealogic
ISO – NE Fuel Mix Composition Capacity vs. Generation 2010 Capacity Fuel Mix 2010 Generation Fuel Mix Others Oil 1% Others <1% Wood / Refuse Coal Hydro Gas / Oil Natural Gas Hydro Coal Nuclear Gas / Oil Natural Gas Oil Nuclear Installed Capacity: 30,380 MW Total Generation: 126,403 GWh Source: ISO – NE
ISO – NE Capacity Auction Results Results of First Five Capacity Auctions (MW) (USD) (1) Total Cleared Capacity (MW) Excess Supply (MW) Floor Price ($/kW-month) Source: ISO – NE • Represents preliminary results
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
What Is Needed to Finance New Power Infrastructure? Capital Availability (Debt and Equity) Adequate Documentation (Engineer’sReport, etc. ) Policy Support (Regulatory / Environmental,Tax Credits) Adequate Investor Returns (Power Supply and Demand / Energy and Capacity Pricing) Project Viability (Permitting / Interconnection)
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
Key Characteristics for Successful Project Finance Lender’s Perspective Equity Perspective • Project size greater than $100MM • 3x EBIT / Interest • Contracted revenues (PPA or off-take agreement) • Liquidation value greater debt obligation • Limited technology risk • Reputable contracted suppliers • Creditors control uses of cash flow • No quick exit for sponsor • Creditor has ability to veto • No risk of “cram down” • Strategic partners in place • Certain path to profitability • Secured control • No conflicts of interest • Anti-dilution rights • Commercialization timeline matches exit strategy • Liquidity event in near-term • Returns on capital at least 500bps above WACC Source: Jefferies Equity Research
Financing Solar and Wind Projects Key Items Wind Solar • Long-term PPA or offtake agreement from an investment grade purchaser • Independent engineer’s report • “Bankable” meteorological wind data • Reputable project manager • Adequate turbine technology • Long-term PPA or offtake agreement sufficient in length to fully amortize project debt • EPC contract with performance surety • Contracted site control • Environmental permits • Transmission / interconnection agreement
IPP Trading Analysis – $/kW Trading Analysis – $AV/kW ($/kW) Median: 445/kW Source: Company filings, FactSet
California Gas Asset Precedent Analysis – $/kW Precedents Analysis – $/kW ($/kW) Northeast Median: $509/kW California Median: $658/kW Texas Median: $435/kW (1) (1) Northeast Texas • Transaction terminated
Illustrative Pricing Required to Support New Build Key Model Assumptions • 500 MW combined-cycle gas turbine plant • 40% capacity factor • 7,000 Btu/kWh heat rate • 1,300 $-kW total capital cost • Capacity pricing calculated assuming current forward energy prices held constant. • Energy pricing calculated assuming current forward capacity prices held constant.