Transcript Renewables Team

SEI Perspectives
from Abroad
ANZ Investment Bank
Renewable Energy
•
Sector: Wind
•
Geographic Region: Ireland
•
Speaker: Shane Bush ([email protected])
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
Mark Clover
Geoff Pack
Charlie Wilson
Beth Waters
Paul Mason
Ben Velezquez
Gary Griffiths
Charlie Lachman

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
Portfolio Valuation
Financing of an 150MW
wind asset in Texas, US
2002
Zilkha Renewable
Energy
Valuation of an
operating wind asset
and development
portfolio business in UK
/ Australia
Havoco
2002
Offshore Wind
Debt and Equity
structuring advice for
an 108MW project
offshore in UK
Financial Advisor
Financial Advisor
2003
Onshore Wind
2003
Westbury Windfarms
2003
to be announced
Debt and Equity
structuring advice for
onshore projects in UK
Financial Advisor
Portfolio of wind assets
in the UK with an
aggregate capacity of
35MW
Financial Advisor / Lead
Arranger
Structured Finance
Arranger
Structured Finance
Structuring & Valuation
Structured Finance
2002
Desert Sky
Structuring & Valuation
ANZ Renewable Energy Transactions
Portfolio of wind assets
in US with an aggregate
capacity of 230MW
Global energy company
Financial Advisor / Lead
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
0 .6 7 s d
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 ,
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 ye a r
mean
1 .2 8 s d
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
s ta n d a rd d e v ia tio n s fro m th is tru e m e a n .
1 0 ye a r
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
..
PRICE VARIABLES
Example Fixed Price PPA Structures
Starting Price
€/MWh
B
D
C
A
% of Price Escalated
Grey vs Green Pricing
Price Step-Up or StepDowns
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 [email protected]
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.