delvalle final 6.10.11
TRANSCRIPT
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New England Electricity Restructuring Roundtable June 10, 2011
Financing Power Infrastructure in New England
Mauricio Del Valle Morgan Stanley
Vice President, Global Power and Utilities
Capital Markets Environment
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Equity Markets and Volatility
Indexed Price Chart and Volatility Index (VIX)Last 4 Years (%)
S&P 500 VIX
Source: FactSet
0
30
60
90
120
150
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
0
20
40
60
80
100
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13
46
2 1
1114
2006 2007 2008 2009 2010 2011 YTD
Utility Debt Issuance By Year2006 – Present (U.S.)
26
31
3736
13
43
2006 2007 2008 2009 2010 2011 YTD
Investment Grade Debt Issuance ($MM)
High Yield Debt Issuance ($MM)
Source:Thomson Reuters, Bloomberg
Term Cost of Debt
BBB Index 5y – 30y 3.0% – 6.0%
Term Cost of Debt
BB Index 5y – 12y 4.5% – 6.0%
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Project Finance Market Update
354.6289.9
320.5278.4
0.0
100.0
200.0
300.0
400.0
2007 2008 2009 2010
Global Project Finance Volume(Debt and Equity) ($Bn)
31%
18%
4%6%8% 33%
29%
14%
4%
11%
42%
Sectors(Debt and Equity)
Regions(Debt and Equity)
MiningTelecom
Industrial
Oil & Gas
Infrastructure
EnergyLatin America and Caribbean
Middle East and Africa
North America
Europe
Asia Pacific
Source:Project Finance Magazine, Dealogic
Volume Volume
NE Supply / Demand Dynamics
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ISO – NE Fuel Mix Composition
2010 Capacity Fuel Mix 2010 Generation Fuel Mix
Capacity vs. Generation
22%
13%
9%
8%
23%
22%
3%
OthersCoal
Hydro
Nuclear
Oil
Natural Gas
Gas / Oil
34%11%
6%5%
12%
30%
Others
Coal
Hydro
Nuclear
Oil
Natural Gas
Gas / Oil
Wood / Refuse
Source:ISO – NE
<1%1%
Installed Capacity: 30,380 MW Total Generation: 126,403 GWh
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ISO – NE Capacity Auction Results
Results of First Five Capacity Auctions
Source:ISO – NE
34,07737,283 36,996 37,501 36,918
1,772
4,755 5,031 5,3743,718
10,000
20,000
30,000
40,000
50,000
FCA 1 FCA 2 FCA 3 FCA 4 FCA 5
1.50
2.50
3.50
4.50
5.50
Total Cleared Capacity (MW) Excess Supply (MW) Floor Price ($/kW-month)
(MW) (USD)
(1)
(1) Represents preliminary results
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ISO – NE Capacity Auction Results
ISO – NE Reserve Margins
Source:Ventyx Advisors
Reserve Margin (%)
0
5
10
15
20
25
30
35
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Projected Reserved Margin (includes only operating capacity, capacity under construction, and expected retirements)
Target Reserve Margin
Financing New Power Infrastructure in NE
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What Is Needed to Finance New Power Infrastructure?
Capital Availability
(Debt and Equity)
Policy Support
(Regulatory / Environmental,
Tax Credits)
Adequate Investor Returns
(Power Supply and Demand / Energy and
Capacity Pricing)
Project Viability
(Permitting / Interconnection)
Adequate Documentation
(Engineer’sReport, etc. )
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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
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Key Characteristics for Successful Project Finance
Equity PerspectiveLender’s Perspective
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
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
Source:Jefferies Equity Research
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Financing Solar and Wind Projects
SolarWind
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
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
Key Items
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IPP Trading Analysis – $/kW
Trading Analysis – $AV/kW
330
410
480
570
0
100
200
300
400
500
600
Calpine NRG Dynegy GenOn
($/kW)
Median: 445/kW
Source:Company filings, FactSet
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424352 335 336
830
332
651 665683
594 602
509
422475 501
0
100
200
300
400
500
600
700
800
900
LS P
ower /
Capit
al Pow
er
Brick
Power
/ C
apital P
ower
Hedge
Funds /
ECP
Dyneg
y / N
RG
Bosto
n Gen /
CEG
BG Gro
up /
ECP
Pepco
/ C
alpine
Stark
/ Exe
lon
PSEG / W
ayza
ta
PSEG / H
igh P
lains
CEG / H
igh P
lains
Calpine
/ R
aybu
rn
Navaso
ta /
CEG
Sempr
a / Occ
identa
l
Dyneg
y / N
RG
Gas Asset Precedent Analysis – $/kW
Precedents Analysis – $/kW($/kW)
TexasNortheast California
Texas Median:$435/kW
Northeast Median:$509/kW
California Median:$658/kW
(1) (1)
(1) Transaction terminated
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Illustrative Pricing Required to Support New Build
(1) Capacity pricing calculated assuming current forward energy prices held constant.(2) Energy pricing calculated assuming current forward capacity prices held constant.
Illustrative Pricing Needed to Attract New Investment
Current Forecasted Pricing Range
Pricing Needed to Achieve Target Returns
Capacity Pricing (1) ~ 3 area ($/kW-month) 9 – 12 ($/kW-month)
Energy Pricing (2) 50 – 60 ($/MWh) 75 – 85 ($/MWh)
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