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Financing Power Infrastructure in New England

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

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  1. 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

  2. Capital Markets Environment

  3. S&P 500 VIX Equity Markets and Volatility Indexed Price Chart and Volatility Index (VIX) Last 4 Years (%) Source: FactSet

  4. 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

  5. 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

  6. NE Supply / Demand Dynamics

  7. 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

  8. 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

  9. 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

  10. Financing New Power Infrastructure in NE

  11. 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)

  12. 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

  13. 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

  14. 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

  15. IPP Trading Analysis – $/kW Trading Analysis – $AV/kW ($/kW) Median: 445/kW Source: Company filings, FactSet

  16. 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

  17. 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.

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