Project Financing Processes

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Financing
Renewable Energy
Projects: Issues
and Opportunities
Peter Y. Flynn
Bostonia Partners
July, 2013
Presentation Overview
• Renewable Energy Financing Basics
• Key Drivers of Renewable Energy Economics
• Importance of Long Term Authority
• Financing & Contracting Options
• Discussion of Capital Stack and Developer Returns
• Critical Issues – Financing Perspective
• Conclusions
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Bostonia Introduction
•
Founded in 1998, Bostonia Partners is a full-service investment bank with primary
market focus in energy and real estate, and additional services in structured finance
and advisory – over $5B in Federal projects
•
Bostonia Global Securities, the broker/dealer affiliate, provides direct access to
investors and daily participation in the capital markets
•
Bostonia ranks 7th among all banks for domestic private placements in 2009 – 2012
Private Placement Market, League Table, 2009 - 2012 Summary
Rank
Domestic Traditionals 2009 - 2012, $M
Issuer
Count
Market
Share
1
BAML
22,660
163
26.33%
2
JP Morgan
16,023
105
18.62%
3
Wells Fargo
6,605
70
7.67%
4
Citi
6,469
45
7.52%
5
US Bank
3,371
37
3.92%
6
Bostonia
2,916
78
3.39%
7
RBS
2,659
23
3.09%
8
Mitsubishi
2,393
21
2.78%
9
KeyBanc
2,361
31
2.74%
10
Barclays
2,243
23
2.61%
11
Goldman Sachs
2,237
10
2.60%
12
Deutsche Bank
2,157
17
2.51%
13
Morgan Stanley
1,982
14
2.30%
14
Direct
1,844
9
2.14%
15
BNPP
1,521
9
1.77%
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Renewable Energy (RE) Financing Basics
•
Renewable Energy financing is “project finance”
•
•
•
Projects are capital intensive (low cash flows vs. high project costs) with
important requirements
•
•
•
•
Cash flow driven
Non-recourse
Investment grade developer and Power Purchase Agreement counterparty
Large projects required to justify tax equity structure / achieve economies of scale
Proven Technologies
Capital stack typically consist of various sources
•
•
•
Debt (supported by PPA revenue and contracted RECs)
Tax equity
Sponsor equity
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Key Drivers of RE Economics
• Generation Market with electricity prices to support Power Purchase
Agreement at “grid parity” with or without escalators
• Renewable Portfolio Standard – Renewable Energy Credits (RECs)
• Federal and State Tax Incentives
RPS Policies
Average Price per kWh
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The Importance of a Long-Term PPA
• PPAs efficient way to secure energy at an installation, and for developers and
financiers to raise capital for RE projects
• PPAs provide fixed long-term energy price certainty and protection against
rising energy costs
• Revenues generated from PPAs drive debt and equity returns; long term PPA
necessary to secure financing
• No initial outlay of capital to procure energy
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The Importance of Long-Term Authority
• Based on 10 MW Solar Project @ 2.50 / watt All-in Cost
ESPC w/ Tax
ESPC – no
incentives
Equity
Tax Equity – ITC
and Depreciation
Monetization
PPA – EUL
40%
Sponsor Equity
5%
Tax Equity - ITC
and Depreciation
Monetization
40%
Debt
100%
Debt
60%
4.5% yield
55%
4.5% Yield
• 8.5 cents / KWh
– 25 year PPA
Debt
5.75% Yield
• 9.5 cents / KWh
-- 25 year PPA
• 12.5 cents / KWh
– 25 year PPA
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The Importance of Long-Term Authority
• Based on 10 MW Solar Project @ 2.50 / watt All-in Cost
ESPC w/ Tax
ESPC – no
incentives
Equity
Tax Equity – ITC
and Depreciation
Monetization
PPA – EUL
40%
Sponsor Equity
5%
Tax Equity - ITC
and Depreciation
Monetization
40%
Debt
100%
Debt
60%
4.5% yield
55%
4.5% Yield
• 8.5 cents / KWh
– 25 year PPA
• 20 cents / KWh
– 10 year PPA
Debt
5.75% Yield
• 9.5 cents / KWh
- 25 year PPA
• 24 cents / KWh
– 10 year PPA
• 12.5 cents / KWh
– 25 year PPA
• 30 cents / KWh –
10 year PPA
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Financing and Contracting Options
PPA
UESC / ESPC
EUL
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Capital Stack Across Stages of Development
Development Stages of a Typical 10MW Project
$200,000
Shovel Ready
$26,250,000
COD
$28,700,000
$30,000,000
Tax Equity
$117,194
$25,000,000
Project Equity
$4,251,224
Tax Equity
$11,719,393
$20,000,000
Project Equity
$2,860,064
$15,000,000
Construction Loan
$21,887,500
$10,000,000
85% of EPC
Cost
$5,000,000
Term Debt
$14,091,612
Project Equity
$200,000
$Early Development (Cash)
Construction Stage (Cash)
Placed in Service (Cash)
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Operating Returns of the Project Owner
Owner’s Economics
Year
Sponsor Tax
Benefit Allocation
Sponsor Cash
Investment /
Refundings
Sponsor Project
Cash
Total Sponsor
Share
Sponsor Running
IRR
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1%
1%
1%
1%
1%
1%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
(2,860,064)
(1,171,939)
-
425,368
467,119
464,144
461,168
458,190
689,598
686,614
683,624
680,628
230,568
890,760
892,046
893,185
894,172
895,001
895,666
896,161
896,480
896,617
921,564
(2,860,064)
425,368
467,119
464,144
461,168
(713,749)
689,598
686,614
683,624
680,628
230,568
890,760
892,046
893,185
894,172
895,001
895,666
896,161
896,480
896,617
921,564
0.0%
-85.1%
-51.5%
-29.4%
-15.8%
0.0%
-13.8%
-3.4%
2.1%
5.7%
6.6%
9.2%
11.0%
12.3%
13.3%
14.1%
14.7%
15.1%
15.5%
15.8%
16.1%
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Assumptions
•
Development Assumptions:
•
•
•
•
•
•
•
Project Size: 10MW
EPC Cost per Watt: $2.50
Additional Development Costs: Interconnection, Site Work, Legal Fees, Financing Fees,
Construction Interest, Independent Engineer
PPA Price: $0.10/KwH
SREC Price: $150/MwH x 9 years
Operations Expenses: O&M, Insurance, Property Tax, Administration
Financing Assumptions:
•
•
•
•
•
85% Construction Loan to EPC Cost
10 Year Senior Loan, LIBOR swap + 350bps at a 1.35x Debt Service Coverage Ratio (48% of
Capital Stack)
10 Year Debt Service and O&M working capital facility
Tax Equity investment for 99% of benefits (ITC + MACRS Depreciation) and 2% preferred cash
return over 5 years (40% of Capital Stack). Buyout is sized to approximately 10% of initial
investment.
Long Term Equity 20 year hurdle rate of 15% IRR (12% of Capital Stack)
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Critical Issues – Government
Government Risk
• Due diligence/pre-procurement work by agency/installation
• Project selection, size and technologies sought
• Essentiality of the installation
• Track record of the Agency and facility/installation
• Every project needs a “champion”
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Critical Issues – Developer/Contractor
Developer/Contractor Risk
• Experience with technology
• Track record for on-time, on-budget performance
• Guarantees for construction and operation
• Financial Strength to cover delays
• Experience with Federal procurement
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Conclusions
•
•
•
Long-term contracting authority is essential for financing
•
Efficient way to raise capital and keep energy pricing low
•
ESPC is an important tool for meeting Federal energy goals and achieving energy security
RE projects are complex with steep learning curves
•
Important to assemble the team early – including the financing
•
Projects need a “champion” at the installation
•
Work with a public/private mentality and remain adaptive and flexible
Markets, incentives, and technologies drive projects
•
Important to understand federal and state incentives, standards, and energy prices in order to determine
complete revenue picture
•
Important to determine what technologies are best suited to specific geographic conditions
Proprietary Information Of Energy 2013
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Contact Information
Peter Y. Flynn
Executive Vice President
617.226.8103 Direct
617.437.0150 Main
[email protected]
This information has been prepared solely for information purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument
or to participate in any trading strategy. No representation or warranty can be given with respect to the accuracy or completeness of the information, or that any future
offer of securities, if any, will conform to the terms hereof. Bostonia disclaims any and all liability relating to this information, including without limitation, any express
or implied representations or warranties for, statements contained in, and omissions from, this information.
Proprietary Information Of Energy 2013
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