Renewables Team

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					SEI Perspectives
from Abroad


ANZ Investment Bank
Renewable Energy
•   Sector: Wind
•   Geographic Region: Ireland
•   Speaker: Shane Bush (bushs@anz.com)

                                 May, 2003
Contents




1.   ANZ Investment Bank Renewable Energy Team
2.   Bankability of the Irish Wind Market Structure
3.   ANZ’s Approach to Structuring Non-Recourse Wind Debt
4.   Other Debt Options
5.   Offshore Wind
       Section 1

ANZ’s Renewable Energy Team
     ANZIB Renewable Energy Team

                  Structured Finance                          Markets / Syndication


                   London / New York                            London / New York

          Shane Bush          Richard Chinloy            Gary Griffiths   Charlie Lachman
          Mark Clover         Geoff Pack
          Charlie Wilson      Beth Waters
          Paul Mason          Ben Velezquez




   Principal regions        Western Europe North America
   Established markets      USA, UK, Ireland, Germany, Denmark, Italy, Spain, Portugal
   Emerging markets         Offshore wind, France, Benelux, Canada
   Principal technologies   Wind (onshore and offshore), CHP, methane capture, waste
                             management / waste to energy, bio-mass
   Products                 Project finance arranging and advisory, underwriting and
                             syndication, construction, mezzanine, tax based finance, corporate
                             finance and advisory
ANZ Renewable Energy Transactions

                                  2002                                              2002                                                2002
                                Desert Sky                                   Zilkha Renewable                                      Offshore Wind




                                                                                                     Structuring & Valuation
                                                                                  Energy
Structured Finance




                                                    Portfolio Valuation
                          Financing of an 150MW                               Valuation of an                                      Debt and Equity
                          wind asset in Texas, US                          operating wind asset                                 structuring advice for
                                                                             and development                                      an 108MW project
                                                                          portfolio business in UK                                  offshore in UK
                                                                                 / Australia


                                                                               Havoco
                                 Arranger                                    Financial Advisor                                    Financial Advisor



                                  2003                                            2003                                                  2003
                              Onshore Wind                                 Westbury Windfarms                                     to be announced
Structuring & Valuation




                                                                                                     Structured Finance
                                                    Structured Finance




                             Debt and Equity                              Portfolio of wind assets
                          structuring advice for                             in the UK with an                                 Portfolio of wind assets
                          onshore projects in UK                           aggregate capacity of                               in US with an aggregate
                                                                                   35MW                                           capacity of 230MW


                                                                                                                                Global energy company


                                                                          Financial Advisor / Lead                             Financial Advisor / Lead
                             Financial Advisor                                   Arranger                                             Arranger
Section 2

Bankability of Irish Wind Market Structure
RENEWABLE ENERGY POLICIES



Banks do not look for particular policies, but for the bankable
characteristics of those policies
     Long-term visibility & stability (10 years minimum)
     Understandable and quantifiable risks
     Limited market price risk in power purchase contracts (given banks
      experience of merchant power markets)
     No threat of regulatory change once policy is in place, full confidence in
      long-term drivers as stated by policy-makers / regulators
     Clear understanding of inter-play between renewable and other sector
      policies, particularly climate change & the EU’s proposed emissions trading
      system
     Clarification as to how deregulating electricity markets and the changing
      position of incumbent suppliers will affect offtake counterparty credit




                   Quantifiable Risk is Usually Bankable
IRISH MARKET
Current Market: AER rounds
     AER contracts are bankable - fixed price government risk
     However, confirmation of the viability of ESB PES’s public service
      obligation levy in an increasingly deregulated market required
     AER VI features with full indexation and accelerated upfront payments
      will improve debt terms available
     Installed capacity growth to-date has been constrained by:
        • Planning Permission
        • Grid Connections
        • Small-Scale of Projects / Availability of Small-Scale Finance

Future Market: New Policy Framework?
     Market-based Mechanism e.g. UK (RO) or Italy (Green Certificates)
     Fixed-Price Guaranteed Offtake e.g. Germany (REFIT) Law or Spain
      (Special Producer regime)
     Tender-and-Bid Government Contracts e.g. Ireland (AER)
     Fiscal Incentives e.g. US (Production Tax Credits)

                          Grandfathering Essential
BANK MARKET


Interest In Renewable Energy
     Telecoms markets down
     Conventional power markets down
     Asset run - off
     Growth potential
     Entrance of quality sponsors
     Pan European activity

Issues
     Regulatory risk
     Project size
     Balance sheet turmoil
     Larger projects require international syndicates - lack of policy knowledge



                 Significant interest but knowledge lacking
Section 3

Project Finance
Terms

Credit effecting term and pricing

Better quantitative analysis effects term and cover ratios

Spreads widening
       25 - 50 basis points

Maturity reducing
       The fifteen year norm is gone
       13 - 14 year tenors more common with structuring in back end
       Banks realize the equity value reduces post year ten

Sponsor guarantees
       Trigger ratings are rising as addition risk becomes harder to accept

Market flex required
       Underwriting risk highest in five years




                Deals structured for distribution are successful
ANZIB’s Methodology

• Credit of sponsor and key project participants
     Power purchaser
     Sponsor
     Turbine supplier

• Quantitative analysis
       Production uncertainty
       Power purchase agreement
       Operating margin
       Economic risks

• Project risk
       Construction risk
       Proven or non proven technology
       Project life
       Availability and power curve
       Real estate
       Transmission issues


   Three critical areas - credit risk, project risk and quantitative analysis
Credit Quality



Power purchaser
       Rated utility attracts senior debt on typical terms
       Smaller projects may attract high yield debt without good credit off-taker
       Lack of alternative off-takers mean power pricing needs to approach market pricing

Sponsor
       Less concerns providing equity goes in up front
       Debt equity ratios less important during operational phase but a focus during construction

Turbine supplier
       Few suppliers with the balance sheet to support large projects
       Little concern regarding contingent liabilities for older MW and below turbines
       Larger turbines in combination with larger projects create more concern




                  Main credit issues lie with power purchaser
Quantitative Analysis




Quantitative analysis effects term and cover ratios
     Term - Project life; term of principal contracts
     Cover ratios - Cash flow volatility and its evolution throughout the life of the project

Debt service cover ratio and loan term considerations
       Project life 20yrs
       Cover ratios vary according to production uncertainty
       During first five years key issue for cover ratio is wind risk
       During latter years key issue for cover ratio is wind risk and operating costs

Break-even analysis key
     Production / availability
     Operating costs
     Inflation
      Quantitative Analysis
• D is trib u tio n o f P ro d u c tio n E s tim a te s
                                                                                  M e a n p ro d u c tio n e s tim a te s o v e r a
                                                                                  1 y e a r p e rio d h a v e h ig h e r
                                                                                  s ta n d a rd d e v ia tio n s th a n o v e r a 1 0
                                                                                  y e a r p e rio d d u e to w in d v a ria b ility
                                                                                  y e a r-to -y e a r. T h e tru e m e a n s ,
                             0 .6 7 s d                                           h o w e v e r, w ill b e th e s a m e in b o th
                                                                                  ca s e s .
                             1 .2 8 s d                                                                                1 ye a r
                                                                                                                       mean
          P 90           P 75          T ru e
                                       mean

 T h e g ra p h s h o w s a n o rm a lly -d is trib u te d p o p u la tio n o f
 m e a n p ro d u c tio n e s tim a te s .
 T h e P 9 0 s h o w s a m e a n p ro d u c tio n w h ic h th e tru e
 m e a n h a s a 9 0 % c h a n c e o f e x c e e d in g . It lie s 1 .2 8                        1 0 ye a r
 s ta n d a rd d e v ia tio n s fro m th is tru e m e a n .                                      mean



                            Production uncertainty key to leverage calculation
         Quantitative Analysis


     Consequently, fixed price power purchase arrangements are needed to achieve adequate
     leverage. Price-production interplay risk is transferred to the offtaker ..

             Example Fixed Price PPA Structures                                   PRICE VARIABLES
                                                                                      Starting Price
                                                                        B         % of Price Escalated
€/ MWh




                                                                        D
                                                                        C        Grey vs Green Pricing
                                                                        A        Price Step-Up or Step-
                                                                                         Downs
                                                                                        PPA Term
                                    Years
     PPAs have many variables, both quantitative & qualitative, all of which can impact the debt structure
     and amount. The debt’s sensitivity to production, cost, inflation and interest rate risks can all be partial
     or largely driven by the PPA.
Quantitative Analysis




Operating Margin
 Operations risk increases with time
 Service agreements available during the warranty period
 Post warranty period - most debt still outstanding
 Little track record of modern turbines running for 20 years
 Gearboxes and other major components may require replacement
 Operating margin profile over time important (e.g. escalating PPA?)




          Operations expenditure key risk post warranty period
Quantitative Analysis




   Economic Risk
    Inflation: hedged through escalating PPAs & cover ratio profile
    Interest rates: typically hedged through SWAPs but with options to enjoy
     short-term low cost financing environment




                Inflation risk is real in long term financing
Project Risks




Technology Risk
 Proven technology or not proven? Rate of change of turbine capacity high
 Existing fleet often limited as new turbine models are rolled out
 Warranties are essential components of the turbine supply
 Life of equipment - GL / DNV classification
 Banks engineer




                Turbines up to 1.0 - 1.5MW considered proven
Project Risks


Warranty Overview
 Credit of warranty counter-party increasingly important as contingent liabilities
  grow
 Financing will look in detail at warranty provisions and no standardisation
 Warranty terms range from two years to fifteen years
 Typically cover power curve and availability (95% - 97%)
 Availability is key to long term project performance
 Power curve lower risk and difficult to test
 Offset of availability and power curve
 Extendable in case of serial under performance or parts failure
 Serial failures




                    Warranty important for large turbines
Project Risk




 Construction
 Considered low and commissioning risk also low
 Modular nature of the construction
 Short construction periods
 Independence of turbine supply and balance of plant
 Separation of turbine and balance of plant wraps is possible
 Liquidated damages need to be seamless with warranty
 Subsidy deadlines or PPA drop-dead dates increase delay risks




                     EPC contract not always required
Section 5

Options
Options




Leasing
     Monetisation of tax benefits

Mezzanine debt
     Lends itself to wind projects

Further extension of loan term
     Bank market considers the maximum term for wind debt is about 15yrs
     Institutional investors
     Bonds




                          Options limited in current market
Section 6

Offshore Wind
   Offshore Wind Resume



    Financial Advisor to United Utilities
    Financial advisor to Tractebel
    Financial advisor to E - Connection
    Services
           Contract structure
           Financial modelling
           Debt & equity structuring
           Capital raising
           Drafting of bid package
           Project finance arranging and underwriting
           Mezzanine debt




Renewable Energy Team Members bring unique experience to ANZ Investment Bank
Offshore Wind Projects
Key Differences with Onshore Wind



• Technology risk
    Offshore turbine models range from 2-5 MW
    Some aspects of 3MW+ models are step-changes not scale-ups of MW-class turbines
    100MW+ projects mean significant contingent liabilities for suppliers

• Construction environment
    New risks
    New participants in the industry with offshore service companies entering the market
    Longer construction period

• Operational environment
    Accessibility due to weather constraints




                               Three ‘new’ risk areas
Offshore Wind Projects
Challenges to successful financing




• Offshore specific risks allocated through tight contractual structure
       Project company must retain quantifiable exposure to risk to raise senior bank debt
       Modular contractual structure as seen in onshore projects not applicable
       Risk sharing among project, EPC counter- party, turbine supplier and project operator
       Higher level of sponsor commitment will be required over operational life

• Project finance debt terms structured for syndication
       Renewable energy project finance in Europe has been typically locally funded
       Larger projects mean larger bank groups
       Regulatory risk significant issue
       Finance available but lower leverage than for onshore projects due to high capex and
        additional risks




     Key to securing project finance for offshore wind is risk allocation
Offshore Wind Projects
Contractual Issues


• EPC Contractors
      Fully wrapped at fixed price
      Date-certain delivery
      Lost revenue LDs to include potential loss of annual construction window
      Assume a degree of accessibility risk
      Offshore experience and credit quality important


• Wind Turbine Supply Agreement
    For 3MW+ models in particular, track record will be limited and therefore management
     of technology risk required through this and the operating contract
    5 years with potential to extend in case of failure
    Fixed price service agreement
    Accessibility folded into availability warranty to a certain extent
    Upside sharing
    Contingent liabilities on manufacturers’ balance sheet may require additional support



               Turbine supplier needs to stand behind reliability
Offshore Wind Projects
Contractual Issues


• O&M Contract
      Long term contract possibly up to 10 years
      Price-certain contract
      Covers both routine and non-routine maintenance
      Accessibility and availability risk included to certain extent
      Upside-sharing

• Power Purchase Agreement
      Drop-dead dates (if included) to allow for missed construction window
      Escalating price-structure desirable
      Regulatory risk beyond 2008 - 2010 difficult
      Fully take-or-pay, with no / few penalties for e.g. low availability

• Lease
    Decommissioning provisions begin after 15 years




  Insufficient mitigation of operational weather risk will reduce leverage
                                                      Renewable Energy

                                 Shane Bush
                                 Director & Head, Renewable Energy
                                  +44 20 7378 2813
                                 y bushs@anz.com




Disclaimer

Issued by Australia and New Zealand Banking Group Limited (“ANZ”). ANZ is incorporated with limited liability (A.B.N. 11 005 357 522) in the
Commonwealth of Australia, and is regulated in the conduct of investment business in the UK by the Financial Services Authority (“FSA”).

While the information in this document has been compiled by ANZ in good faith from sources believed to be reliable, no representation or
warranty, express or implied, is made or given as to its accuracy, completeness or correctness.
ANZ, its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect,
consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of the contents
of and/or omissions from this document.

				
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