indian creek plant cim 6 21 13 - pentacles...
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Indian Creek Plant
Confidential Information Memorandum
June 2013
June 21, 2013
DISCLAIMER
This Confidential Investment Memorandum (“CIM”) has been prepared by Pentacles Electric, LLLP (“Pentacles” or “Seller”) for delivery, on a confidential basis, to a limited number of institutional lenders and investors (“Investor”) solely for use in considering whether to participate in the development and ownership (“Investment”) of a simple cycle natural gas fired power generating facility located in Morgan County, TN.
Neither Seller nor any affiliate assumes any responsibility for and none make any representation as to the adequacy, accuracy, or completeness of any information contained in this CIM. Each expressly disclaims any and all liability for such information, including, without limitation, any analysis, forward looking statements or representations, express or limited, contained herein or for any omission from such information. Nothing in this CIM should be construed as legal, financial, accounting, or tax advice. Each prospective Investor should consult its own professional advisors as to legal, investment, tax, accounting and related matters concerning an Investment.
The Investment described in this CIM has not been registered under the Securities Act of 1933, as amended (the “Act”), or under the securities laws of any state, in reliance upon exemptions from the registration requirements of such laws. The Investment is being offered only to accredited investors and must be purchased for investment purposes only and not with a view to further distribution. Furthermore, the Investment may not be sold or transferred unless subsequently registered under the Act and under relevant state securities laws, unless exemptions from registration are available. It is not anticipated that the Investment will be so registered.
By accepting delivery of this CIM, each recipient agrees (a) it will not copy or otherwise reproduce it, or distribute it to any other person or party (including any employee of the recipient other than an employee directly involved in reviewing or analyzing the Investment), in whole or in part, at any time without the prior written consent of Seller, (b) it will keep permanently confidential all information contained herein not already public and (c) it will use this CIM only for the purpose set forth.
Seller requests that this CIM, as well as all authorized copies, be returned to Seller by any recipient that chooses not to participate in the proposed transaction.
Table of Contents Executive Summary ...................................................................................................................................... 1
Project Team ................................................................................................................................................ 3
About Pentacles Electric, LLLP ..................................................................................................................... 4
Indian Creek Plant Summary ....................................................................................................................... 6
Site Description ......................................................................................................................................... 6
Equipment and Project Operating Information ........................................................................................ 7
Permitting Overview ................................................................................................................................. 7
Electric Transmission Interconnection ...................................................................................................... 8
Natural Gas Interconnection & Delivery Optionality ................................................................................ 9
Operations and Maintenance Plan ......................................................................................................... 12
Summary of Project Benefits .................................................................................................................. 12
Target Market Status ................................................................................................................................. 13
Overview ................................................................................................................................................. 13
Change in Market Dynamics ................................................................................................................... 13
Power Contracting Process ........................................................................................................................ 15
Power Purchase Agreement Transaction Structures .............................................................................. 15
Power Purchase Agreement Contracting Timeline ................................................................................. 15
Project Schedule ........................................................................................................................................ 16
Finance and Investment Opportunity ....................................................................................................... 17
Project Pro-‐forma Financials ..................................................................................................................... 18
Scenario 1 – Phase One: (1) Unit; Phase 2: (2) Units .............................................................................. 18
TVA – Long Term Bilateral Contract ........................................................................................................ 19
Table of Figures
1. Pentacles Companies ................................................................................................................................ 3
2. Indian Creek Project – Site Map ............................................................................................................... 6
3. Indian Creek Project – Geographic Location ............................................................................................. 6
4. Indian Creek Project – Electric Transmission Interconnection Point ........................................................ 8
5. Scheduled Coal Facility Retirements ....................................................................................................... 14
6. Map of Scheduled Coal Facility Retirements .......................................................................................... 15
7. Indian Creek Project Schedule ................................................................................................................ 16
List of Attachments (Located in Data Room)
A. Pentacles Experience List ...........................................................................................................................
B. Ecotek Company Information .....................................................................................................................
C. Ecotek Pre-‐Feed Engineering Scope ...........................................................................................................
D. NTE Solutions Qualifications Package ........................................................................................................
E. Wood Group Proposal ................................................................................................................................
F. Wood Group Draft O&M Contract ..............................................................................................................
G. Joseph Dickey CV ........................................................................................................................................
H. Warranty Deed on Site ...............................................................................................................................
I. Rolls Royce Proposal and Draft Contract .....................................................................................................
J. Air permit and Amendment ........................................................................................................................
K. PWR Solutions Transmission Report ...........................................................................................................
L. TVA Transmission Interconnection Application ..........................................................................................
M. System Impact Study Agreement – Full Executed .....................................................................................
N. TMD Energy Local Gas Production Report .................................................................................................
O. Citizens Gas Correspondence .....................................................................................................................
P. Enrema Correspondence ............................................................................................................................
Q. Vineland Energy/Ariana Energy Supply and Transportation Correspondence ..........................................
R. Local Gas Composition ...............................................................................................................................
S. Citizens-‐Pentacles Lease Agreement ..........................................................................................................
T. Citizens-‐Pentacles LOI to Extend Term of Lease .........................................................................................
U. Pentacles II – Pentacles Electric Assignment Agreement ...........................................................................
V. Draft Natural Gas Purchase Contract .........................................................................................................
W. State of Tennessee Grant Award for Water Infrastructure .......................................................................
X. Power Purchase Agreement Term Sheets ..................................................................................................
Y. Scenario 1 Pro-‐forma – Phase 1: 1 Unit; Phase 2: 3 Units ..........................................................................
Z: Scenario 2 Pro-‐forma – Phase 1: 2 Units; Phase 2: 2 Units ....................................................................
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Executive Summary:
Pentacles Electric, LLLP (“Pentacles”), organized in the state of Delaware in March 2011, is currently developing the Indian Creek Project, an electric generating facility directly adjacent to the Indian Creek Oil & Gas Field (the “Project”). The Indian Creek Oil and Gas Field spans Morgan, Scott, and Fentress Counties in Northeast Tennessee. Pentacles’ site is located 6 miles NNW of Sunbright, Tennessee in Morgan County. Pentacles is seeking an investment partner to fund further development and equity for the Project.
The Project will consist of four (4) gas fired Rolls Royce Trent 60 combustion turbine in simple cycle. The Project will be completed in two phases. The first phase of the Project will consist of one or two Trent 60 turbines, at the discretion of the Investor, with a total nominal capacity of 60 or 120 MW and with a target in-‐service date of early 2014. The second phase of the Project will include the addition of two or three Trent 60 turbines and will be timed to provide capacity in into the 2017/2018 PJM capacity market. The Project is to be constructed on a site owned by Pentacles. Development of the Project began in early 2011 and has been funded by Pentacles. Since Project inception, Pentacles has acquired ownership of the site and filed for and received its PSD air permit from the Tennessee Department of Environment and Conservation. The Project has filed for a TVA transmission interconnection in January 2013 (Queue 13-‐239). TVA is currently completing the System Impact Study. Pentacles expect to finalize negotiations and execute the Interconnection Agreement with TVA in the third quarter 2013.
The Project provides a unique commercial contracting structure allowing a counterparty to purchase capacity and associated energy from an efficient natural gas fired generator fueled with low cost, high btu local gas. The Project is situated adjacent to the Indian Creek Oil and Gas Field, which has the capacity to store 2.3 bcf of natural gas. The location of the Project provides access to plentiful low cost, high Btu fuel supply from local wells located in Morgan, Scott, and Fentress Counties in Tennessee and in wells in southern Kentucky (“Local Gas”). The Project will purchase Local Gas under 5 year contracts, containing automatic renewal provisions, with local suppliers. The Local Gas (heat content 1.250 MMBtu/mcf) is within the operating tolerances of the Trent 60 engines and it will provide substantial cost savings as compared to gas purchased from interstate pipelines. The Local Gas will be stored in the Indian Creek Field and withdrawn to fuel the Project. Currently Pentacles is in negotiations with suppliers for the daily supply of sufficient Local Gas to fuel both phases of the Project operating at a ~45% capacity factor. In addition, the Project has accessibility to low price local stripping gas (1.125 MMbtu/mcf) and interstate pipeline gas to provide backup sources of fuel, if necessary. Local Gas production is expected to increase over time as the Project revitalizes the market for this product. Local Gas is gathered through a collection system, owned and operated by Citizens Gas Utility District, and delivered to the Indian Creek Oil and Gas Field. The Local Gas is blended in
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the Indian Creek Oil and Gas Field with other gas streams, yielding the lowest cost delivered gas currently found in the TVA region. The ability of the field to store up to 2.3 bcf of gas provides operating flexibility and a significant hedge against natural gas price volatility associated with sourcing from interstate pipelines. The net result of this Local Gas benefit is a large supply of natural gas stored locally, under control of Pentacles and dedicated to the Project. The flexibility associated with the Project’s gas supply will provide the unique opportunity to burn natural gas at prices below Henry Hub with an associated “Natural Gas Re-‐Supply Option to Buyer” arbitrage against periods of high gas price. Please refer to the Natural Gas Availability, Interconnection & Delivery Optionality section herein for more details on the gas supply.
The Project Team is working to finalize the power purchase arrangements with a focus on counterparties participating in the PJM market. The first phase of the Project will rely on contracted energy revenues and revenues from the PJM incremental capacity auction and the second phase will relay on contracted energy revenues and PJM base residual capacity auction revenues. Term Sheets are being actively negotiated with counterparties for a minimum of four years on nominal energy sales from the Project, beginning in January 2014. Indicative offers have been received offering terms of up to 8 years.
It is anticipated that the first phase of the Project, at the discretion of the Investor, will be completed with 100% equity and that the second phase will be financed under a traditional project finance structure. It is anticipated that the project debt will be for a term of the construction period plus the term of the executed power purchase agreements.
Pentacles is seeking an investor (“Investor”) for the Project that will participate in funding the development costs going forward (estimated at $4.0 mm; Pentacles has invested $7.3 mm to date) and in funding the cash equity required for both the first and second phases. Pentacles will be a co-‐owner of the Project and remain as lead project developer with the Investor involved in the key decisions going forward. Pentacles is prepared to entertain any proposals that may better fit a potential investor’s expertise and investment criteria.
Total Project costs are currently estimated to be approximately $160 million, including EPC costs, development, contingency and financing fees. Total Project Costs are estimated to be $40 to $80 million for the first phase (one or two units respectively). Construction of the Project is targeted to begin in the third (3rd) quarter of 2013, with commercial operation of the first phase in early 2014.
It is estimated that the Investor will make a total cash equity investment in the range of $40 to $80 million to move the first phase forward, depending on whether the first phase includes one or two units. The equity in the first phase will be used to provide equity for the financing of the second phase. The financial models include a refinancing at the end of the initial debt term.
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Over a 20 year Project life the levered return is in the 18-‐20% range. Please refer to the Project Pro-‐Forma Financials section for more detailed presentation of the projected financials. The Investor will receive a priority distribution from the Project cash flows until it has realized a minimum return on its investment, after which the cash flows from the Project will split equally between the Investor and Pentacles. In addition to the cash equity, the Investor will be responsible for the Letter of Credit (“LC”) requirements under each PPA. The Project will enter in PPAs to support each phase and it is anticipated that approximately $7mm of LCs will be required to securitize the PPAs.
Project Team:
Project Developer and Owner Pentacles Electric, LLLP, a Miami based development company, is the Project developer and owner. Pentacles Electric, LLLP, although it has a similar ownership structure to Pentacles Energy, LLLP, is a separate entity from Pentacles Electric, LLLP. Pentacles Electric and Pentacles Energy have a contractual relationship through Pentacles II, LLP, as shown in Figure 1 below, for certain rights to gas storage and transportation. Pentacles’ principals have experience developing and operating energy projects internationally. Please refer to Attachment A for the Pentacles Principals’ Experience List.
Pentacles Companies FIGURE 1
To ensure success of the Project, Pentacles has assembled an experienced Project Team. Each member of the Project Team noted below has a proven history of successful power generation
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project development, engineering, construction and/or operations experience in their respective areas of expertise. The Project Team members are as follows:
Engineering Contractor Ecotek Group is the engineering contractor for the Project. Ecotek is an engineering firm, located in Panama, which has significant experience in designing simple cycle power generation facilities. Ecotek has a joint-‐venture arrangement with CB&I for projects in the U.S. Please refer to Attachment B for more information on Ecotek. Ecotek is under contract to complete and has commenced the Pre-‐Feed (conceptual) design of the Project. Upon securing the Investor and moving forward on the first phase, Ecotek will complete the detailed design. Please refer to Attachment C for a description and schedule for the Pre-‐Feed Design effort.
Construction Contractor The Wood Group will provide Construction Management Services. Pentacles and the Wood Group are currently engaged in contract negotiations. Under this contract, the Wood Group will provide construction pricing and schedule guarantees, with liquidated damages as appropriate.
Power Contracting and Engineering NTE Solutions is providing power contracting and commercial services. NTE Solutions is an infrastructure development and asset management services provider, with headquarters in St. Augustine, FL. Please refer to Attachment D for a statement of NTE Solutions qualifications.
Operating and Maintenance Services Wood Group GTS, the leading of provider of 3rd party O&M services on aero derivative gas turbines in the U.S., will be the O&M provider for the Project. Pentacles and the Wood Group are currently engaged in contract negotiations. Please refer to Attachment E for the Wood Group O&M proposal to Pentacles. Please refer to Attachment F for the draft O&M Contract.
Legal Mark Jendrek is providing legal representation, via his Knoxville, TN office.
About Pentacles Electric, LLLP: Pentacles is a Miami-‐based power development firm.
Alvaro Campins is the Chairman of the Board of Pentacles Electric. Since 1983, he has founded, started and owned several companies in Venezuela, USA, Dominican Republic, Panama, and the Bahamas; covering all areas of the energy business from oil production, refining and trading to natural gas and power generation. Mr. Campins has a degree in Economics from the Universidad Católica Andres Bello in Venezuela.
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Luis E. Gutierrez is Pentacles Electric’s Chief Financial Officer. Since 1996, he has held several positions in the financial industry, working for investment and commercial banks both in the USA and Venezuela. Mr. Gutierrez has a degree in Business Administration from the Universidad Metropolitana in Caracas, Venezuela.
Carlos Gamboa is Director of Pentacles Electric. He is the founder of Carib Petroleum Inc. and Oilnet Corporation. His international business experience has allowed him to acquire an in-‐depth understanding of oil marketing and trading, financial and banking negotiations, as well as superior management skills while living and working in several different locations in Europe, North and South America. Mr. Gamboa studied Economics & Business Administration at Tulsa University in Oklahoma.
Joseph Dickey is a Partner in Pentacles Electric’s Indian Creek Project. Joe, a former executive with Florida Power and Light and TVA, leads the power plant portion of the project. Mr. Dickey has considerable experience with building, operating and maintaining power plant over his career. Refer to Attachment G for Mr. Dickey’s CV. The principals of Pentacles Electric conceptualized and developed the Indian Creek Project to utilize the plentiful local high Btu gas and gas storage advantages that they control under contract with Pentacles II, LLC, a Tennessee corporation, and a wholly owned subsidiary of Pentacles Energy, LLLC, which owns the mineral rights to the Indian Creek Oil and Gas Field.
Based on their experience in the oil and gas industry, Pentacles has evaluated the fuel cost advantages of using Local Gas and determined its beneficial use for power generation, thus creating a market for the Local Gas.
The primary contacts for Pentacles are Alvaro Campins and Luis E. Gutierrez.
Pentacles Electric, LLLP
Alvaro Campins Chairman of the Board (786) 552-‐9931 [email protected] Luis E. Gutierrez Chief Financial Officer (786) 552-‐9931 [email protected]
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Indian Creek Project Summary: Site Description The Project’s 20 acre site, Figure 2 below, is owned by Pentacles Electric, LLLP and is located in Morgan County, TN, approximately 5 miles NNW of the City of Sunbright. Please refer to Attachment H for the Deed transferring ownership of the site to Pentacles Electric. Refer to the map Figure 3 below for site location. The geographic location of the Project’s site enables the sale of capacity and energy into either the TVA or PJM market. In addition, the site’s close proximity to gas supply, both local and pipeline, and electric transmission provides significant capital cost savings to the Project.
Indian Creek Project – Site Map
FIGURE 2
Indian Creek Project – Geographic Location
FIGURE 3
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Equipment and Project Operating Information The first phase of the Project will utilize one or two Rolls Royce Trent 60 combustion turbines, generating a nominal 60 or 120 MW of gas fired electricity. Commercial operation for the first phase is targeted for early 2014. The second phase will add two or three additional Trent 60 turbines, for a total of four for the Project. Each high efficiency Trent 60 combustion turbine (“CT”) will allow for a total of 52 MW (net summer 95˚F) and 63 MW (net winter 27˚F) of generation. The combustion turbines, generators and emissions controls equipment will be supplied by Rolls Royce in accordance with the proposal and draft contract in Attachment I hereto. The final contract with Rolls Royce is under negotiation. Under the terms of the equipment supply contract, Rolls Royce will provide industry standard performance and schedule guarantees and equipment warranties. The Project will also enter into a long term maintenance agreement with Rolls Royce for maintenance and operating support for the engines. The new combustion turbines and generators are currently in storage with Rolls Royce and available for immediate delivery.
The Project has the following key features:
207 MW (net) at 95⁰ F / 251 MW (net) at 27⁰ F (4) Rolls Royce Trent 60 aero-‐derivative combustion turbines Simple cycle generating technology Efficient aero-‐derivative CTs Fast startup, under 10 minutes – qualifies as spinning reserve Utilizes injection of water in the combustion system to reduce emissions and increase
output Located in Morgan County, Tennessee TVA Interconnection with transmission to PJM Commercial Operations – First phase targeted for January 2014; second phase targeted
for early 2017. The Project has received its PSD Air Permit
Permitting Overview The Tennessee Department of Environment and Conservation, under authority delegated from the US EPA, issued a PSD Air Permit, number 964445P, to the Project on June 1, 2011. The PSD Air Permit was amended on November 5, 2012 to extend the date to commence construction to November 30, 2013. The air permit includes multiple combustion turbines and multiple reciprocal engines, as can be seen in Figure 4 in the upper corner of the Site, construction on the foundations for four reciprocal engines has commenced. Please refer to Attachment J for the Air Permit and Amendment.
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Electric Transmission Interconnection The Project is located adjacent to a TVA 161 kV transmission line, which runs east to west from the TVA Huntsville substation to the TVA Jamestown substation. This line has sufficient capacity (up to 235 MW) to deliver energy generated from the Project without triggering any transmission system upgrades as confirmed in an injection study performed by PWR Solutions, Inc. Please refer to Attachment K for the PWR Solutions injection study. Pentacles submitted the Transmission Interconnection Request for four (4) Rolls Royce Trent 60 machines to TVA on January 24, 2013, queue number 13-‐239. Please refer to Attachment L for the TVA Transmission Interconnection Application. TVA and Pentacles have executed the System Impact Study Agreement. Please refer to Attachment M for the System Impact Study Agreement. The study is currently under way. Pentacles expects finalize and execute the Interconnect Agreement with TVA in the third quarter 2013. Please refer to the map in Figure 4 for Project site and proximity to the 161 KV TVA transmission lines.
Indian Creek Project – Electric Transmission Interconnection Point FIGURE 4
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Natural Gas Interconnection & Delivery Optionality The Project is located in an area containing significant quantities of locally produced high Btu natural gas (“Local Gas”). From 1970 through 2000, Local Gas production from Fentress, Morgan and Scott counties was at a rate of between 2,000 and 5,000 mcf per day. This production was sold through Citizens Gas Utility District to the interstate pipeline. As the gas prices rose in the early 2000s, Tennessee’s overall production grew from 4,409,125 mcf in 2000 to 41,313,582 mcf in 2008. In 2008, the Federal Energy Regulatory Authority imposed a maximum 1110 Btu/scf limit for pipeline gas. This effectively shut down the market for Local Gas and caused the production of Local Gas to drop off significantly, as the gas in this area averaged 1250 Btu. The high Btu gas fields were shut in. Citizens has worked with local well owners/operators to sell a small amount of Local Gas locally which has helped producers retain their leases.
The Local Gas is located in the southern end of the Appalachian Basin. Significant volumes of this high btu Local Gas are located in close proximity to the Project, in northeastern Tennessee and southeastern Kentucky. Pentacles is in discussions with large, medium and small producers for the supply of sufficient Local Gas to meet 100% of the Project’s fuel requirements for both phases. (Each Trent 60 will require approximately 4500 mcf/day to run at the capacity factors used in the models discussed in the Project Pro-‐forma Financials section of this CIM.)
TMD Energy prepared a report, dated April 25, 2013, which provides a local production outlook for Scott, Fentress and Morgan Counties. Please refer the Attachment N for the complete report. The following is a summary:
• Wells that were shut in producing 2,000 mcf/day are still tied into gathering lines and ready to be turned on with very little work. In addition, there are some 3,000 abandoned Mississippian Lime wells that have Chattanooga shale potential. As the gas market develops, these wells can be deepened less than 100 feet and stimulated. Early tests of this technique showed potential of sustained production of 30 mcf per day from each of these once abandoned wells. If all these wells were stimulated, this area could produce 90,000 mcf per day. Price will dictate the speed with which these wells are stimulated.
• Nearly every well now producing gas in the area is producing naturally, as there has been little or no financial incentive to spend funds to increase production.
• As the gas market develops, operators will drill horizontal Chattanooga Shale wells in the Fentress, Morgan, and Scott County area. The horizontal wells drilled in the shale to the east of the Project area were the major factor increasing Tennessee annual production in the 2000’s.
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• Many of the shut in wells had been producing for 20-‐30 years, with some local wells producing for nearly 60 years. Local producers believe, that with the development of the market, volumes will significantly increase as only a small portion of the potentially productive area has been drilled.
Refer to Attachments O and P for correspondence with Citizens Gas and Enrema, respectively, discussing the potential for additional gas supply of 5500+mcf/day, and transportation in the local area. In addition, Pentacles is in discussion with Vineland Energy/Ariana Energy regarding additional Local Gas supply (~800 mcf/day) and transportation. Please refer to Attachment Q for correspondence with Vineland/Ariana.
The Local Gas (heat content 1.250 MMBtu/mcf average) is within the operating tolerances of the Rolls Royce Trent 60 engines and will be burned by the Project. Please refer to Attachment R for the gas composition of the Local Gas.
The Local Gas, priced at a discount to Henry Hub coupled with transportation savings, provides substantial natural gas cost savings compared natural gas purchased from interstate pipelines. Local Gas production is expected to increase over time as the Project revitalizes the market for this product. This Local Gas is being gathered through a collection system, owned and operated by Citizens Gas Utility District, and delivered to the Indian Creek Oil and Gas Field, yielding the lowest cost delivered gas currently found in the TVA region. The gas field has a storage capacity of 2.3 bcf. The net result of this process is a large supply of natural gas stored locally under control of Pentacles and dedicated to the Project. The ability to store the gas locally provides a valuable flexibility in fuel supply, damping fuel price volatility. This flexibility is included in the power purchase agreements currently under discussion. The flexibility associated with the Project’s gas supply will provide the unique opportunity to burn natural gas at prices below Henry Hub with an associated “Natural Gas Re-‐Supply Option to Buyer” arbitrage against periods of high gas price. This arbitrage opportunity will allow the Project to burn natural gas from the Indian Creek Oil and Gas Field at zero cost when burned and replace with low cost equivalent volumes of natural gas at a later date within an approved time period.
Pentacles II, LLC has entered into a 10 year agreement with Citizens Gas for: i) lease of the storage rights to the field; and ii) transportation for Local Gas delivered to the Indian Creek Field (the “Citizens Agreement”). Please refer to Attachment S for the Agreement. Pentacles and Citizens have entered into an LOI to extend the term of the Agreement for a 20 year period commencing on and contingent upon financial closing of the Project. Please refer to Attachment T for the LOI. Pentacles II, LLC has assigned the benefits of the Citizens Agreement to Pentacles Electric, LLLP. Please refer to Attachment U for the Assignment Agreement.
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LOCAL GAS: Local Gas will be sourced from producers in Morgan, Scott and Fentress Counties and in southern Kentucky. The gas will be transported to the Indian Creek Field by Citizens Gas Utility District and, potentially, Vineland/Ariana. Pentacles is currently in negotiations with several publically traded energy companies, as listed below, a large regional production/transportation company (Vineland Energy/Ariana Energy), and local well owners, for the supply of Local Gas. The Project will enter into Natural Gas Purchase Contracts with the producers for supply of the Local Gas commodity. The Natural Gas Purchase Contracts under discussion will have terms of 5 years with automatic renewal and provide Pentacles with right of first refusals rights to all of the gas produced by the producer at pricing indexed to Henry Hub. Pentacles is also discussion the requirement of a minimum quantity guarantee with the larger, financially secure, suppliers, which, at the discretion of the Investor, can be included in the gas supply contract and secured by a parent guarantee or LoC from the Investor. m Please refer to Attachment V for the draft Natural Gas Purchase Contract currently under negotiation with local producers.
Pentacles is currently in negotiations with the following publically traded energy companies for the purchase and transportation of Local Gas:
• Atlas Energy, LP – www.atlasenergy.com = NYSE: ATLS • Consol Energy – www.consolenergy.com – NYSE: CNX • Delta Natural Gas Company – www.deltagas,com – NASDAQ: DGAS • Miller Energy Resources – www.millerenergyresources.com – NYSE: MILL
Local Gas:
• Quantity: 9,000+ mcf/day first phase; 20,000+ mcf/day second phase. Negotiations are currently underway to secure these quantities.
• Btu Content: 1.250 MMBtu/mcf average • Commodity Fuel Cost (on$/mcf basis) = (Henry Hub $/mcf * 85%) • Commodity Fuel Price (on $/MMBtu basis) = (Henry Hub $/mcf * 85%)*(1.000/ 1.250
MMBtu/mcf) • Transportation Costs: $0.15/mcf + 2% loss • Commodity Price + Transportation Cost yields cost of gas at the burner tip of the
Project, at a price significantly less than the price of delivered interstate pipeline gas. Local Stripping Gas (if needed):
• Quantity: 7,000 mcf/day currently available • Btu Content: 1.125 MMBtu/mcf average • Commodity Fuel Cost (on$/mcf basis) = Henry Hub $/mcf
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• Commodity Fuel Price (on $/MMBtu basis): (Henry Hub $/mcf) / 1.125 MMBtu/mcf • Transportation Costs: $0.15/mcf + 2% loss • Commodity Price + Transportation Cost yields cost of gas at the burner tip of the
Project, at a price significantly less than the price of delivered interstate pipeline gas. Pipeline Gas (if needed):
• Commodity Fuel Cost: = Henry Hub • Transportation Costs: $0.50/mcf + 2% loss. Negotiations with Delta may provide
pipeline gas with a discounted transportation charge, representing an upside to the Investor. Negotiations with Delta are currently under way.
• Commodity Price + Transportation Cost yields cost of gas at the burner tip of the Project.
• Pipeline: East Tennessee Pipeline, owned by Duke Energy Operations and Maintenance Plan Pentacles intends to engage the Wood Group to provide operations and maintenance (“O&M”) services for the Project. Pentacles and the Wood Group are currently engaged in contract negotiations for the O&M Services. The Wood Group was selected to provide these O&M services based on the following:
1. Their significant aero-‐derivative gas turbine O&M capabilities and experience; specifically with Rolls Royce Trent 60 machines.
2. Their experience with operation of new technologies and management of OEM, engineering and construction activities
3. Their industry leading environmental, health and safety, regulatory compliance and quality management systems.
4. Their track record of integrating and implementing construction management, commissioning and O&M activities successfully.
Consistent with market practice, Pentacles, as Project Owner, will continue in a project administration role to monitor the work performed by the O&M provider and perform certain other administrative services.
Summary of Project Benefits • Commercial Operation Date: first phase: Early 2014; second phase – early 2017.
Short construction time Site Owned by Pentacles
• Low cost, abundant, high Btu Local Gas availability
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On-‐Site Local Gas storage capacity Local access to East Tennessee Gas Pipeline for alternate/additional gas supply
• Favorable Heat Rate and MW Output Latest state-‐of-‐the-‐art aero-‐derivative CT technology Water injection for increased output and decreased emissions Low power production cost providing dispatch benefits
• Access to both PJM and TVA markets Independent transmission study confirmed transmission capacity exists (no additional
$$) • Low-‐cost 161 kV Transmission Interconnection
Property adjacent to existing 161 kV circuit Connection to 161 kV Huntsville to Jamestown
• Favorable Air Permit PSD Air Permit issued (Air Permit No. 964445p) Mode/method of Project operations will not be restricted by Air Permit conditions
• Favorable Water Services The site is permitted for wells of sufficient capacity to meet the daily operating
requirement, including engine cooling, of 400 kgd. In addition, Pentacles has received a Federal Grant for $1,000,000 and State funding for
$200,000 to build an additional water supply system to the property and storage tank, if needed or beneficial to the community. Please refer to Attachment W for the State of Tennessee Grant award.
• Local Benefits Favorable tax environment Labor costs reasonable High labor productivity
• Public Benefit Value Economically depressed area with no market for high Btu gas (TN to provide income tax
benefits and local governments to provide tax benefits to stimulate economic development).
Favorable reputation of Project in local and regional communities
Target Market Status: Overview The Project provides counterparties (“Buyers”) who enter into a power purchase agreement with a number of long-‐term economic and commercial advantages not found in other development projects. These advantages include: i) abundant low priced gas; ii) gas storage
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capability and iii) overall Project design. Uninterrupted supply, enabled via the storage capacity, is an advantage uniquely inherent to the Project and very rare in this particular region. The term sheets issued to potential Buyers describe the “take now/replace later” option to use Project gas as an arbitrage against period of high natural gas price. This feature is unique to the Project and brings significant value to the Buyer. In addition, the Project will have one of the lowest dispatch price signals among natural gas fired CT generating stations in the area due to favorable heat rate, low cost operation, and the least expensive fuel in its market; resulting in dispatch costs that rival combined cycle costs. These long-‐term economic and commercial advantages are summarized below. Please refer to Attachment X for the Term Sheets which have been issued to potential Buyers. Change in Market Dynamics
The TVA and PJM markets have over 5 GW of coal capacity slated for retirement in the next three to five years. The cessation of operation of these facilities creates opportunities for new generators, such as the Project, to the fill the void created by the reduction in generating capacity. A list showing scheduled coal retirements for facilities serving the PJM and TVA markets is provided in Figure 5 below. Please refer to Figure 6 for a map showing the location of the scheduled coal retirements in relation to the location of the Indian Creek Project.
Plant Name & Unit Utility or TransZone
Capacity (MWs)
Projected Deactivation
Date PJM
Big Sandy 1 AEP 280 6/1/2015 Clinch River 3 AEP 230 6/1/2015 Glen Lyn 5 AEP 90 6/1/2015 Glen Lyn 6 AEP 235 6/1/2015 Kanawha River 1 AEP 200 6/1/2015 Kanawha River 2 AEP 200 6/1/2015 Sporn 1 AEP 145 6/1/2015 Sporn 2 AEP 145 6/1/2015 Sporn 3 AEP 145 6/1/2015 Sporn 4 AEP 145 6/1/2015 Tanner Creek 1 AEP 145 6/1/2015 Tanner Creek 2 AEP 145 6/1/2015 Tanner Creek 3 AEP 198 6/1/2015 Walter C Beckjord 2 DEOK 94 4/1/2015 Walter C Beckjord 3 DEOK 128 4/1/2015
TVA John Sevier TVA 800 2015 Johnsonville 1-‐6 (7-‐10) TVA 1485 Total 2015 (2017)
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Other
Cane Run Louisville Gas & Electric 645 2016
Green River Kentucky Utilities 189 2016
Scheduled Coal Facility Retirements
FIGURE 5
Map of Scheduled Coal Facility Retirements
FIGURE 6
Power Contracting Process:
The first phase of the Project will rely on contracted energy revenues and PJM incremental capacity auction revenues, and the second phase will relay on contracted energy revenues and PJM base residual capacity auction revenues. Pentacles NTE Solutions, on behalf of Pentacles, is conducting the power contracting process and will continue to serve as the commercial team Project lead throughout the contracting process. This section outlines the transaction structures solicited through the RFP and the timeframe for executing offtake agreements. Power Purchase Agreement Transaction Structures: Pentacles has solicited bids for the following Power Purchase Agreement (“PPA”) transaction structures from a wide variety of creditworthy market participants.
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Physical PPA Unit contingent capacity and/or energy supply from Project. Associated natural gas supply provided by Project with cost pass through to Buyer. “Take now/Replace Later” capability. Physical delivery at TVA / PJM South Interface or at Project busbar on the TVA
Transmission System. Project will hold firm TVA transmission if delivery at PJM South Interface is required. Dispatch parameters commensurate with Project operating flexibility. Term 7 to 10 years from Commercial Operation Date.
Financially Settled Heat Rate Call Option Financially settled daily Heat Rate Call Option Power Settle – PJM Day-‐Ahead index Strike – Gas Cost * Project Heat Rate + VOME + Start Cost + Start Fuel “Take now/Replace Later” capability included in financial provisions of gas cost settle. Term 7 to 10 years from Commercial Operation Date.
PJM ICAP PJM ICAP – Anticipated RTO designation Contract quantity will include full output of the Project
Ancillary Services Buyer retains rights to all applicable ancillary services
Credit Support To be negotiated between the parties
Power Purchase Agreement Contracting Timeline The power contracting portion of the development process is underway with the execution of binding power purchase agreements to support the first phase of the Project. Detailed discussions are underway with potential Buyers to support this schedule. Project Schedule:
The Project has completed a number of major milestones and is on-‐schedule for ground breaking in 2013, and thus early 2014 Commercial Operation. The Project schedule including completed and anticipated Project milestones is shown below in Figure 7. Note that the schedule is subject to change during development, though changes are expected to be minor.
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Indian Creek Project Schedule FIGURE 7
Finance and Investment Opportunity: Pentacles plans to finance the Project by bringing in an Investor, financing the first phase with equity and, together, seeking one or more third-‐party project finance lenders to provide construction and term financing for the second phase. Pentacles is seeking an Investor that will participate in funding development costs going forward (estimated at $4.0 million), and in funding the cash equity required for the first and second phases of the Project. It is assumed that the total equity required for the Project (including both the first and second phases) is approximately $60 million, assuming a 50:50 D/E ratio. Pentacles will be a co-‐owner in the Project and will remain as lead project developer with the Investor involved in the key decisions going forward. Pentacles is prepared to entertain any proposals that may better fit a potential investor’s expertise and investment criteria.
Total Project costs are currently estimated to be approximately $160 million, including estimated EPC costs, plus development, contingency and financing fees. Construction of the first phase of the Project is targeted to begin in the third (3rd) quarter of 2013, with commercial operation in early 2014.
In addition to an equity partner, Pentacles is also interested in exploring partnering with a strategic investor who can bring skills such as project management, power plant development, engineering or industry relations to the Project.
The financial model for the Project is based on completing the first phase with 100% equity and the second phase with third party construction financing that rolls over to 8 year term financing upon commercial operation of the second phase of the Project, with a 50:50 D/E ratio. The 8
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year term financing is anticipated to coincide with the expected term of Power Purchase Agreements entered into by the Project. Likewise, revenue included in the financials is representative of expected revenue from Power Purchase Agreements currently under negotiation. Pentacles expects to extend existing or enter in new PPAs to support a refinancing at the end of the debt term. As set forth in the financial model, Pentacles projects a pretax internal rate of return of approximately 18% to 20% on a levered basis. The Investor will receive a priority distribution from the Project cash flows until it has realized a minimum return on its investment, after which the cash flows from the Project will split equally between the Investor and Pentacles. Actual returns will depend, amongst other things, on the final amount of leverage utilized, debt cost and the equity split agreed upon with the Investor.
In addition to participating in development and equity funding, the Investor will be responsible for the Letter of Credit (“LC”) requirements under each PPA. The Project will enter in PPAs prior to financial close and it is anticipated that approximately $7mm of LCs will be required to securitize the PPAs.
Project Pro-‐forma Financials: Pentacles has modeled the Project in two phases, as described above, under two different scenarios. Both scenarios are based on power purchase agreement transactions sold into the PJM Capacity and Energy markets. Summaries of both of these model scenarios are provided in the following subsections.
Scenario 1 – Phase One: (1) unit; Phase 2: (3) units This scenario assumes the two phased approach with the first phase including one Trent 60 combustion turbine unit and the second phase adding an additional three units. Under this scenario the sale of capacity and energy is into the PJM market. The sale of energy is assumed to with a PJM market participant for an initial eight year (8) year term with a secondary transaction for an additional (12) year period following expiration of the first contracts. The option premium shown is reflective of a physical or financial daily heat rate call option with firm transmission for delivery to the TVA/PJM South Interface. It also assumes the sale of capacity into the PJM Incremental Auctions prior to the Planning Year 2017/2018, after which the capacity will be bid into the PJM Base Residual Auction.
The model incorporates the equipment, construction, and financing costs required for commercial operation for the first phase of the Project in June 2014 and second phase in June 2017, with total project cost equaling approximately $163 million. Following commercial operation, each phase of the Project is expected to have a load factor of 47%. In Year 1 of
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operation, Pentacles is projecting an option premium of $5.71/kW-‐mo., which, when combined with VOM charges and fuel charges, results in $12.5 million in total revenues. A snapshot summary of the revenues, expenses, and cash flows associated with the Project’s first ten (10) years of operation under this type of market transaction are presented below. For a more detailed version of this model, please refer for Attachment Y.
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Revenue $12.5 $13.3 $14.0 $66.6 $69.4 $78.1 $82.2 $83.2 $86.1 $88.8 Expenses $11.2 $11.6 $11.8 $43.1 $44.7 $46.3 $48.3 $50.4 $52.7 $53.9 Cash Flow $1.3 $1.7 $2.2 $23.5 $24.7 $31.8 $33.9 $32.8 $33.4 $34.9
These results are based on the following major assumptions: Financing:
Phase 1: all equity; Phase 2” 67:33 D:E ratio; Total Project 50:50 D:E ratio 6% interest rate on debt; 7 year term $16.1 million refinancing at end of initial debt term
Capacity Sale:
Participation in the PJM Incremental Auctions prior to the May/June 2017 PJM Base Residual Auction
Participation in the PJM Base Residual Auction for Planning Year 2017/2018 and beyond.
Energy Sale:
8 year initial PJM Energy Sale 12 year secondary PJM Energy Sale
Scenario 2 – Phase One: (2) units; Phase 2: (2) units This scenario assumes the two phased approach with the first phase including two Trent 60 combustion turbine units and the second phase adding an additional two units. Under this scenario the sale of capacity and energy is into the PJM market. The sale of energy is assumed to be with a PJM market participant for an initial eight year (8) year term with a secondary transaction for an additional (12) year period following expiration of the first contracts. The option premium shown is reflective of a physical or financial daily heat rate call option with firm transmission for delivery to the TVA/PJM South Interface. It also assumes the sale of capacity into the PJM Incremental Auctions prior to the Planning Year 2017/2018, after which the capacity will be bid into the PJM Base Residual Auction.
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The model incorporates the equipment, construction, and financing costs required for commercial operation for the first phase of the Project in June 2014 and second phase in June 2017, with total project cost equaling approximately $163 million. Following commercial operation, each phase of the Project is expected to have a load factor of 47%. In Year 1 of operation, Pentacles is projecting an option premium of $5.71/kW-‐mo., which, when combined with VOM charges and fuel charges, results in $25.0 million in total revenues. A snapshot summary of the revenues, expenses, and cash flows associated with the Project’s first ten (10) years of operation under this type of market transaction are presented below. For a more detailed version of this model, please refer for Attachment Z.
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Revenue $25.0 $26.6 $28.0 $66.6 $69.4 $78.1 $82.2 $83.2 $86.1 $88.8 Expenses $20.5 $21.2 $21.6 $43.1 $44.7 $46.3 $48.3 $50.4 $52.7 $53.9 Cash Flow $4.5 $5.4 $6.4 $23.5 $24.7 $31.8 $33.9 $32.8 $33.4 $34.9
These results are based on the following major assumptions: Financing:
Phase 1: all equity; Phase 2” 100% debt; Total Project 50:50 D:E ratio 6% interest rate on debt; 7 year term $16.5 million refinancing at end of initial debt term
Capacity Sale:
Participation in the PJM Incremental Auctions prior to the May/June 2017 PJM Base Residual Auction
Participation in the PJM Auction for 2017/2018 and beyond. Energy Sale:
8 year initial PJM Energy Sale 12 year secondary PJM Energy Sale