Non-Merchant Independent Power Projects: An Excellent Source of Yield and Duration for a De-risking Strategy

Transcription

1 Non-Merchant Independent Power Projects: An Excellent Source of Yield and Duration for a De-risking Strategy Louis Bélanger, CFA, FRM Managing Director, Stonebridge Infrastructure Debt Fund The Stonebridge Advantage Agenda The presentation will focus on senior debt financing opportunities for pension plan on nonmerchant independent power producer ( IPP )projects - Non-merchant IPP defined - IPP project financing market overview - Opportunity for pension plans - Financing metrics for various generating assets - Important underwriting considerations

2 Non-Merchant Independent Power Projects Non-merchant power defined - Non-merchant power refers to those generation projects with no exposure to the spot price of electricity - Most provincially-owned electric utilities in Canada buy electricity from IPPs under 20 to 40 year power purchase agreements ( PPAs ) - Exception: Alberta - IPPs cover all types of renewable and non-renewable energy generation - Provincial utilities call for power from IPPs under RFP s, standard offer or feed-in tariff - programs - IPP projects range from a few millions to $1.0 billion + - < $10.0 million: small wind farm in Nova Scotia - $10.0 million to $20.0 million: Small run-of-the-river hydro in BC - $500.0 million +: Large gas plant in Ontario Sources of Financing for IPPs Bank Market Capital Market Institutional Market Lenders Largely banks Widely distributed bond offering Life insurance companies Certain pension funds Transaction Size $100 million - $1.0 billion $150 -$500 million $10 - $300 million Rate Structure Floating rate (stepped margin) / Base rate swap Term Construction + [3-7] years Fixed rate Up to 40 years (post construction) Fixed rate Construction years Amortization Profile Longer than loan term Fully amortized over loan term Credit Ratting Required No Yes No

3 Opportunity - Private placement market - $ million - $ million - Non-merchant IPP financing deemed investment grade (internal rating of BBB or higher) in Canada - No price / volume risk in PPA - Off-taker is a Provincial Crown agency - Evidenced by OSFI treatment of lifeco investments for MCCSR purposes (BBB charge) - Market currently dominated by lifecos - Fixed rate loans match term of PPA (construction + 20 to 40 years) - Good match for plan liabilities - Duration: 9.00 to years - Yields exceeds that of social infrastructure market (see next 2 slides). Why? - liquidity, external rating, bond index, regulatory capital, ease of execution Opportunity Sample social infrastructure transactions ranging from May 2012 to September 2012 Transaction Description S&P/DBRS/ Moody s Deal Size Pricing Buyers Capital City Link GP 34 year bonds for Edmonton s Anthony Henday NE extension. Hochtief / Meridiam / ACS. ~/A /~ $535,000, over curve (22.5 years) n/a 407 East Development 33 year bond for Ontario owned 407 extension project. SNC Lavalin. A /A (low)/~ $120,406, over curve (21 years) 21 PowerStream 30 financing for local electricity distribution company owned by Barrie, A/A/~ $200,000,000 Markham, Vaughan over CAN 2041 n/a ABC Schools Partnership 31 year bonds for 12 new Alberta schools. Hochtief/Concert. A /~/~ $87,203, over curve (18.17 yrs.) < 10 Aéroports de Montréal 30 year bond issue from the Montréal airport authority. ~/A (high)/a1 $250,000, over CAN 2041 > 40

4 Opportunity Sample IPP transactions ranging from May 2012 to September 2012 Transaction Description S&P/DBRS/ Moody s Deal Size Pricing Buyers St.Clair Holdings 20 year bond financing on 2 operating Ontario solar farms totalling 40 MW. ~/BBB/~ $171,789, over curve (9.12 years) n/a Enerfin Energy Kwoeik Creek 21 year bonds for 100 MW wind farm in Québec. 39 year bonds for a 49.9 MW run ofthe river hydro project in BC developed by Innergex. Not rated. $250,000,000 Not rated. $168,000,000 ~+282 over curve (15 years) ~+280 over CAN lifecos 3 lifecos Fairmont Wind L.P.* year bond for a 4.0 MW wind farm in Antigonish, NS. Not rated. $8,400, over curve (11.8 years) 1 lifeco Gesner Wind Power L.P.* year bond for a 10 MW wind farm in Chatham, ON. Not rated. $13,000, over curve (12 years) 1 lifeco * Originated by Stonebridge Investment Risks: IPP vs. Social Infrastructure From a senior lender s point of view, investment risks in IPP transactions compare favourably with those of social infrastructure transactions Risk IPP Social Infra Risk Mitigation Project Development X X Construction Operations Sponsor support, experienced contractors, contract terms Qualified operator, maintenance reserve, warranty support Resource Availability Independent study, sensitivity analysis debt sizing criteria, reserves Technology Proven technology Revenue X X Availability based revenue contract

5 Opportunity Ideal asset class for defined benefit plans: Yield enhancement relative to comparable public bonds Long-term investment asset High quality, stable cash flows Superior collateral and investment characteristics relative to comparable public bonds How can small to mid-size pension funds access these investments? Direct Investment Dedicated Fund Proven expertise limited Willingness to commit resources limited Back office support X Typical Financing Structure Similar to social infrastructure bonds (P3 bonds): - The borrower is a non-recourse special purpose vehicle ( SPV ) - Financing term that matches the term of the PPA (20 40 years) - Engineering Procurement Contract ( EPC ) preferable but not always the case - Cost overruns support can be provided by one or more of the following: letter of credit, budgeted contingencies, profit retention and/or corporate guarantees - Lenders require an independent engineer review of the project prior to closing - Satisfactory environmental assessment - Credit rating optional Advantages for the borrower: - Same lenders provides the construction funds and the long-term funds at a fixed rate - Reduces structuring fees for the borrower - Provides certainty on the cost of funds for the entire term

6 Typical Financing Structure Covenants - Debt sizing mechanism based on pro forma DSCR - Negative pledge - Distribution restriction - Reserve accounts: debt service, major maintenance - No change in control, ownership, or sale of assets without prior lenders approval - Annual audited and quarterly in-house statements - Annual management plan and budget Security - First fixed and floating charge on all project assets - Assignment of material contracts (PPA, EPC, etc.) - Step in rights - Subgard or traditional bonding (50% performance and 50% labor & material) - Assignment of insurance proceeds - Cost overruns guarantee - Pledge of owner s shares in the SPV Financing Metrics Hydroelectricity - 80% to 90% debt financed - Term of up to: construction years based on typical PPAs - Minimum P50 pro-forma DSCR 1.40x 1.60x - Debt service reserve sized according to IE s hydrology study (3-6 months) Solar, wind - 75% to 85% debt financed - Term of up to: construction years based on typical PPAs - Minimum P50 pro-forma DSCR 1.40x 1.70x - Wind: minimum P95 pro forma DSCR > 1.00x (~ 1.20x for solar) - Debt service reserve sized according to IE s resource study (3-6 months) - Technology has to be proven (i.e. no pioneer risk) unless strong guarantees are provided by manufacturers

7 Financing Metrics Gas, gas co-gen, gas district energy - 70% to 80% debt financed - Pro-forma DSCR 1.40x 1.70x - PPA must pass gas risk through to the utility as much as possible - Cash sweeps if DSCR is below a specified threshold - Steam contracts should be of reasonable length and with creditworthy counterparties if lenders are to rely on those revenues for debt service Biomass, landfill gas and other alternatives: - 65% to 75% debt financed - Pro-forma DSCR 1.75x 2.00x + - Floating rate tranche ideal as cash flows can be swept to repay debt faster - Fuel supply contract must mitigate quantity and price risk over the term of the financing - Term may be shorter than PPA given technology risk - 6 to 12 months of debt service reserve may be required Underwriting Considerations Owners and Sponsors - Previous experience e - Technical and financial capabilities Expert Reports - Independent engineer (resource study and technical, budget and construction schedule reviews) - Insurance consultant - Lender s counsel Contractual Structure - Construction (EPC vs. piecemeal) - O&M contract - PPA - Access (land lease, easements, rights-of-way, water license, etc.)

8 Underwriting Considerations Security & Covenants - As described in this presentation Reporting - Quarterly in-house / annual audited statements - Annual operating and maintenance plan - Periodic IE review of maintenance plan and reserve adequacy