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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 - PowerPoint PPT Presentation
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ANZ Investment BankRenewable Energy
• Sector: Wind
• Geographic Region: Ireland
• Speaker: Shane Bush ([email protected])
May, 2003
SEI Perspectivesfrom Abroad
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
Markets / SyndicationMarkets / Syndication
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
London / New YorkLondon / New York
Gary Griffiths Charlie Lachman Gary Griffiths Charlie Lachman
ANZIB Renewable Energy Team
London / New YorkLondon / New York
Shane Bush Richard Chinloy
Mark Clover Geoff Pack
Charlie Wilson Beth Waters
Paul Mason Ben Velezquez
Shane Bush Richard Chinloy
Mark Clover Geoff Pack
Charlie Wilson Beth Waters
Paul Mason Ben Velezquez
Structured FinanceStructured Finance
ANZ Renewable Energy Transactions
2002Desert Sky
Financing of an 150MW wind asset in Texas, US
Arranger
Str
uctu
red
Fin
an
ce
2002Zilkha Renewable
Energy
Valuation of an operating wind asset
and development portfolio business in UK /
Australia
HavocoFinancial Advisor
Port
folio V
alu
ati
on
2003Westbury Windfarms
Portfolio of wind assets in the UK with an
aggregate capacity of 35MW
Financial Advisor / Lead Arranger
Str
uctu
red
Fin
an
ce
2002Offshore Wind
Debt and Equity structuring advice for
an 108MW project offshore in UK
Financial Advisor
Str
uctu
rin
g &
Valu
ati
on
2003to be announced
Portfolio of wind assets in US with an aggregate
capacity of 230MW
Global energy company
Financial Advisor / Lead Arranger
Str
uctu
red
Fin
an
ce
2003Onshore Wind
Debt and Equity structuring advice for onshore projects in UK
Financial Advisor
Str
uctu
rin
g &
Valu
ati
on
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
Deals structured for distribution are successful
Terms
Credit effecting term and pricing
Better quantitative analysis effects term and cover ratios
Spreads widening25 - 50 basis points
Maturity reducingThe fifteen year norm is gone13 - 14 year tenors more common with structuring in back endBanks realize the equity value reduces post year ten
Sponsor guaranteesTrigger ratings are rising as addition risk becomes harder to accept
Market flex requiredUnderwriting risk highest in five years
ANZIB’s Methodology
Three critical areas - credit risk, project risk and quantitative analysis
• 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
Main credit issues lie with power purchaser
Credit Quality
Power purchaserRated utility attracts senior debt on typical termsSmaller projects may attract high yield debt without good credit off-takerLack of alternative off-takers mean power pricing needs to approach market pricing
SponsorLess concerns providing equity goes in up frontDebt equity ratios less important during operational phase but a focus during construction
Turbine supplierFew suppliers with the balance sheet to support large projectsLittle concern regarding contingent liabilities for older MW and below turbinesLarger turbines in combination with larger projects create more concern
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
Production uncertainty key to leverage calculation
• Dis tribution of P roduction Es tima te s
The gra ph s hows a norma lly-dis tribute d popula tion ofme a n production e s tima te s .
The P 90 s hows a me a n production which the trueme a n ha s a 90% cha nce of e xce e ding. It lie s 1.28s ta nda rd de via tions from this true me a n.
P 90 P 75
0.67 s d
1.28 s d 1 ye a rme a n
10 ye a rme a n
Me a n production e s tima te s ove r a1 ye a r pe riod ha ve highe rs ta nda rd de via tions tha n ove r a 10ye a r pe riod due to wind va ria bilityye a r-to-ye a r. The true me a ns ,howe ve r, will be the s a me in bothca s e s .
Trueme a n
Consequently, fixed price power purchase arrangements are needed to achieve adequateleverage. Price-production interplay risk is transferred to the offtaker ..
PPAs have many variables, both quantitative & qualitative, all of which can impact the debt structureand amount. The debt’s sensitivity to production, cost, inflation and interest rate risks can all be partiallyor largely driven by the PPA.
PRICE VARIABLES
Starting Price
% of Price Escalated
Grey vs Green Pricing
Price Step-Up or Step-Downs
PPA Term
B
CA
D
Example Fixed Price PPA Structures
Years
€/M
Wh
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?)
Quantitative Analysis
Operations expenditure key risk post warranty period
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
Quantitative Analysis
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
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
Project Risk
EPC contract not always required
Section 5
Options
Options
Options limited in current market
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
Section 6
Offshore Wind
Offshore Wind Resume
Financial Advisor to United Utilities
Financial advisor to Tractebel
Financial advisor to E - Connection
ServicesContract structureFinancial modellingDebt & equity structuringCapital raisingDrafting of bid packageProject finance arranging and underwritingMezzanine debt
Renewable Energy Team Members bring unique experience to ANZ Investment Bank
Offshore Wind ProjectsKey Differences with Onshore Wind
• Technology riskOffshore turbine models range from 2-5 MWSome aspects of 3MW+ models are step-changes not scale-ups of MW-class turbines100MW+ projects mean significant contingent liabilities for suppliers
• Construction environmentNew risksNew participants in the industry with offshore service companies entering the marketLonger construction period
• Operational environmentAccessibility due to weather constraints
Three ‘new’ risk areas
Offshore Wind Projects Challenges to successful financing
• Offshore specific risks allocated through tight contractual structureProject company must retain quantifiable exposure to risk to raise senior bank debtModular contractual structure as seen in onshore projects not applicableRisk sharing among project, EPC counter- party, turbine supplier and project
operatorHigher level of sponsor commitment will be required over operational life
• Project finance debt terms structured for syndicationRenewable energy project finance in Europe has been typically locally funded Larger projects mean larger bank groupsRegulatory risk significant issueFinance 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 ContractorsFully wrapped at fixed priceDate-certain deliveryLost revenue LDs to include potential loss of annual construction windowAssume a degree of accessibility riskOffshore experience and credit quality important
• Wind Turbine Supply AgreementFor 3MW+ models in particular, track record will be limited and therefore
management of technology risk required through this and the operating contract5 years with potential to extend in case of failureFixed price service agreementAccessibility folded into availability warranty to a certain extentUpside sharingContingent liabilities on manufacturers’ balance sheet may require additional support
Turbine supplier needs to stand behind reliability
Offshore Wind Projects Contractual Issues
• O&M ContractLong term contract possibly up to 10 yearsPrice-certain contractCovers both routine and non-routine maintenanceAccessibility and availability risk included to certain extentUpside-sharing
• Power Purchase AgreementDrop-dead dates (if included) to allow for missed construction windowEscalating price-structure desirableRegulatory risk beyond 2008 - 2010 difficultFully take-or-pay, with no / few penalties for e.g. low availability
• LeaseDecommissioning provisions begin after 15 years
Insufficient mitigation of operational weather risk will reduce leverage
Shane BushDirector & Head, Renewable Energy +44 20 7378 2813 [email protected]
Shane BushDirector & Head, Renewable Energy +44 20 7378 2813 [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.
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