The Great Wind Reality Check: Getting Funded Steve Krebs Hilton University of Houston
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The Great Wind Reality Check: Getting Funded Steve Krebs Hilton University of Houston Houston, Texas November 15, 2005 Funding Follows the Cash Flow Equity investors and lenders seek quality cash flows. Quality cash flows produce stable margins, robust debt service coverages and leverage. Stable cash flows produced by appropriate structuring, risk identification and allocation. Due diligence and contractual structuring facilitate appropriate risk allocation. Project Risk Identification/Allocation Sound project structuring and financing requires evaluation & allocation of risks and rewards, including: Completion Operating Transmission Revenue These are not nearly exclusive. Completion Risk Risk project is not completed on time, on budget and capable of operating as expected Site control Turbine suppliers strike back Availability Down payments Delivery flexibility Cost increases Balance of plant agreement - no wrap of turbines Permits Possible delay - NIMBY Environmental and regulatory Interconnection upgrades Completion Risk (cont’d) Completion Risk Mitigants Tightly crafted TSA/BOP Proven contractor Fixed cost/scope/schedule Liquidated damages Performance bonds/retainage/LOCs/guarantees Proven design Permits Insurance/contingency amounts Sponsor guarantees/completion tests Operating Risk The risk that the project, once complete, will not perform as expected. Mitigated by: experienced creditworthy operator safety, security and environmental safeguards permits perform PPA and interconnection agreements incentives for good performance O&M reserves insurance Transmission Risk The risk that the power will not flow to the customer Who pays interconnection costs? Constraints on transmission Locational Marginal Pricing disproportionably affects wind generators Remote wind sites create access problems Imbalance penalties Wind intermittent Reactive and Voltage requirements Revenue Risk The risk that the project will not have adequate cash for debt service, costs and return to sponsors. PPA contracted volumes pricing creditworthiness Merchant uncontracted volumes Change in market model PTC in service by 12/31/07 RECs Change in law Power Purchase Agreement Issues Coordinate with other project/financing arrangements Completion requirements Commercial Operation Date - right to terminate/LDs Added turbine/tower/cost overruns Matches BOP/TSA/TWA Scheduling/Curtailment Default, damages for breach and termination Force majeure Financing Strong PPA yields financing includes less equity, more leverage, lower reserves, longer tenor, lower costs, easier distribution conditions. Financing Sources Use Complex Financing Structures Traditional Project Finance Tax Equity Some developers without PTC/tax attribute appetite Financial investors monetarize benefits Complicated tax/cash flow allocations Maintain business alignment Portfolio financings/Project bonds IPO Private Equity Investors not over merchant power bust. May require: Market studies for volumes and prices of power Cost/engineering/transmission/insurance studies Conclusion Getting wind projects funded can be challenging. Applying lessons learned will make sounder structures. Limited recourse financing will be available for wellstructured projects using PPAs. Successful projects align their business model with the capabilities and objectives of their participants. Even with experience, creative thinking and careful planning are required for successful financing and development. Questions Steve Krebs Partner and Head of Project Development and Finance Practice Baker Botts LLP One Shell Plaza 910 Louisiana Houston, Texas 77002 Telephone Fax E-mail 1-713-229.1467 1-713-229-7767 stephen.krebs@bakerbotts.com www.bakerbotts.com
