vermont renewable power supply acquisition authority...
TRANSCRIPT
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Vermont Renewable Power Supply Acquisition Authority
Project UpdateOctober 2, 2003
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2© 2003 Lexecon Inc. All rights reserved.
Topics for Discussion• Bankruptcy Status
• Asset Profile
• Valuation Approach
• Market for Output
• Financing
• Risks and Benefits
• Next Steps
• Executive Session
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3© 2003 Lexecon Inc. All rights reserved.
Bankruptcy Process and Status• PG&E and six wholly-owned subsidiaries, including USGen New England,
filed for Chapter 11 protection on July 8, 2003.
• USGen NE’s petition is separate from the other subsidiaries.
• Some PG&E NEG entities have not filed.
• Based on discussions with PG&E’s Chief Executive and Restructuring Officer (Joe Bondi, Alvarez & Marsal) and the Company’s financial advisor (Lazard):
– A restructuring plan, including both ongoing enterprise and M&A alternatives, is under consideration.
– There is a good deal of uncertainty among creditors regarding their preferred path.– Lazard will conduct any asset sales; they hope to solicit interest in some/all assets in 30-45
days.– Interest in all and parts of USGen NE’s assets is expected (based on unsolicited interest).– Disposition of Bear Swamp, Salem Harbor, Brayton Point and Manchester Street will be
key issues.– Alvarez & Marsal and Lazard are aware of Vermont’s interests in the hydros.
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4© 2003 Lexecon Inc. All rights reserved.
USGen NE Assets
Facility Fuel LocationBrayton Point 1,599 Coal /Oil Somerset, MA
Salem Harbor 745 Coal /Oil Salem, MA
Bear Swamp 573 Hydro-Pumped Storage Monroe Bridge, MA
CT and Deerfield River Systems 573 Hydro VT, NH, MA
Manchester Street 495 Natural Gas Providence, RI
Total 3,985
Source: PG&E NEG Website.
Capacity
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5© 2003 Lexecon Inc. All rights reserved.
NHVT
COMERFORD – 164 MW
MOORE - 192MW
MCINDOES – 13MW
WILDER – 36MW
NHMA
BELLOWS FALLS – 41MW
SOMERSET
SEARSBURG – 4MW
HARRIMAN – 34MW
SHERMAN – 7MW
DEERFIELD 2, 3, 4, & 5 – 32MW
HYDRO ASSET OVERVIEW
VERNON – 22MW
CONNECTICUT RIVER FACILITIES
DEERFIELD RIVER FACILITIES
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6© 2003 Lexecon Inc. All rights reserved.
Hydroelectric Generation Profile
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
MooreComerfordMcIndoesWilderBellows FallsVernonSearsburgHarrimanShermanDfld #5Lower Dfld (#2-4)
Connecticut River Facilities
Deerfield RiverFacilities
Mon
thly
Ene
rgy
Qua
ntiti
es (M
Wh)
Janu
ary
Febr
uary
Mar
ch
April
May
June
July
Augu
st
Sept
embe
r
Oct
ober
Nov
embe
r
Dec
embe
r
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7© 2003 Lexecon Inc. All rights reserved.
Valuation Approach
Valuation based on“typical” industry buyer
Valuation based onVermont financing, cost structure, and market for output
Base case
Low case
High case
Lower market pricesDry hydro conditionsHigher capital and operating expenses
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8© 2003 Lexecon Inc. All rights reserved.
Base Case Modeling Assumptions for Hydroelectric Facilities(Modeling Period 2004-2013)
• Facility average water year monthly energy production projections:– 50+ years of CT and Drfld river flow gauge data used to define averages;– Values for CT river facilities, Harriman and Searsburg based on historical data
recorded by facility owners between 1978-1999.– Drfld facilities below Harriman based on recently collected flow data adjusted
to represent an average water year.
• Facility monthly minimum capacities based on operational constraints defined by re-licensing agreements (monthly minimum river flows).
• Oil and Gas Prices:– Starting prices based on ex post market data and FERC Form 423 filings;– Gas price forecast based on Nymex futures for first three years and EIA AEO
2003 thereafter. Oil price forecast based on AEO 2003.
• ISO New England inputs based on NEPOOL 2003 CELT Report:– 2004 unrestricted peak demand of 26,463 MW, 1.5% per annum growth;– 2004 energy consumption of 129,743GWh, 1.4% per annum growth;– Reserve margins range from 21-29% for the modeling period.
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9© 2003 Lexecon Inc. All rights reserved.
Fuel Price Assumptions
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Nom
inal
$ /
mm
Btu
Natural Gas FO2 FO6
Compound Annual Grow th Rate: Natural Gas 3.72% FO2 2.60% FO6 2.25%
Oil and Gas Price Chart
200420042004
200520052005
200620062006
200720072007
200820082008
200920092009
201020102010
201120112011
201220122012
201320132013
Compound Annual Growth Rate: Natural Gas 3.72% FO2 2.60% FO6 2.25%
Natural Gas
FO2
FO6
Nominal $ / mmBtu
5.0736666667
5.6508333333
4.3308333333
4.5748333333
5.62
4.31
4.6276666667
5.81
4.46
5.05
5.68
4.47
5.4237
5.857216
4.549119
5.7653931
6.0481612416
4.7515547955
6.1805014032
6.2906925074
4.8689181989
6.4672766683
6.5586760082
5.0339745259
6.7880535911
6.7961000797
5.1487491451
7.0493936543
7.1182352235
5.2903397466
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10© 2003 Lexecon Inc. All rights reserved.
Average Annual ISO New England Energy
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$/M
Wh
Note: Years 200, 2001, and 2002 represent actual ISO New England spot market energy prices.Years 2004 – 2013 represent estimated MA Hub spot market energy prices obtained from modeling analysis.
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11© 2003 Lexecon Inc. All rights reserved.
Expense Assumptions• Operating and Maintenance Expenses
– CT River: Per USGen, February 2002 study by PA Consulting– Deerfield River: 1996 FERC Form 1, inflated– 5% added for profit of O&M service vendor in Vermont-as-Buyer case
• A&G Expenses: $250,000 / year (50% of VPPSA administrative expenses), inflated
• Energy Management Expenses: $750,000 / year, inflated (midpoint of Calpine indicative bid)
• Property Taxes: Actual payments by USGenNE for most recent fiscal year, inflated, except in the case of Comerford, McIndoes, Vernon and Deerfield 5 which are estimated proportionally using taxes paid by Moore (for the CT River) and Deerfield 2-4 (for the Deerfield River)
• Depreciation: 20-year MACRS
• Income Tax Rate– Corporate Buyer: 35% Federal; applicable State rates– VT-as-Buyer: State rates only
• Capital Expenditures– CT River: Per USGen, February 2002 study by PA Consulting; FMF Enhancement Fund included per FERC
relicensing settlement– Deerfield River: Assumed same $/kW as McIndoes; also includes estimated capital expenditures required
by FERC relicensing settlement
• Economic life of the plants: Through 2053
• Inflation: 2.5%
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12© 2003 Lexecon Inc. All rights reserved.
Market for the Output
0
500
1,000
1,500
2,000
2,500
NE Municipals VT Peak Demand US Gen Hydros
PeabodyBraintree
ChicopeeNorwoodHudson
LittletonMadison
VPPSA
BED
NEPOOL Peak – 26,463 MW
Sum
mer
Pea
k C
apac
ity (M
W)
Reading
CMEEC
MMWEC
GMP
CVPS
Chart1
NE MunicipalsNE MunicipalsNE MunicipalsNE MunicipalsNE MunicipalsNE MunicipalsNE MunicipalsNE MunicipalsNE MunicipalsNE MunicipalsNE Municipals
VT Peak DemandVT Peak DemandVT Peak DemandVT Peak DemandVT Peak DemandVT Peak DemandVT Peak DemandVT Peak DemandVT Peak DemandVT Peak DemandVT Peak Demand
US Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen HydrosUS Gen Hydros
Peabody
Braintree
Chicopee
Norwood
Hudson
Littleton
Madison
VPPSA
BED
631
351
138.89
103.3
82.9
79.7
68.13
54.9
38.5
36.63
150
0
397
348
92.1290175102
55.16
545
For Graph
631
351
631351139103838068553937150
NE Municipals3973489255
VT Peak Demand545
US Gen Hydros
NE Municipalities
MunicipalityStateSummer Peak (MW)Winter Peak (MW)Revenue (millions)
Massachusetts Municipal Wholesale Electric Co.MA631276
Connecticut Municipal Electric Energy Coop.CT351278112
Reading Municipal Light Dept.MA13911461
Peabody Municipal Light PlantMA1038645
Braintree Electric Light Dept.MA837135
Chicopee Electric Light Dept.MA808133
Norwood Municipal Light Dept.MA685226
Hudson Light & Power Dept.MA555129
North Attleboro Electric Dept.MA544224
Littleton Electric Dept.MA393218
Madison Electric Works Dept.ME373715
South Hadley Electric Light Dept.MA262616
26463
Ashburnham4.59
Belmont26.49
Boylston5.2
Concord34.52
Croton11.28Groton11.28
Danvers66.01
Georgetown
Hingham33.88
Holden18.66
Holyoke64.2
Hull10.49
Ipswich18.53
Mansfield19.8
Marblehead27.92
Merrimac5.53
Middleton20.68
N. Attleboro47.54
Paxton3.5
Rowley7.75
Shrewsbury42.65
S. Hadley26.03
Sterling8.73
Templeton9.33
Wakefield38.05
W. Boylston10.08
Westfield69.72
TOTAL631
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13© 2003 Lexecon Inc. All rights reserved.
Vermont Supply and Demand Profile
0
200
400
600
800
1,000
1,200
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Other
Duke
Millstone
BED GT
CV Thermal
VT SPP
McNeil
CVPS Hydro
Berlin
Stonybrook
HQ
VT Yankee
Long
Ter
m C
ontr
acts
and
Ow
ned
Gen
erat
ion
(MW
)
Load with 15% Planning Margin
Vermont Chart
2004200420042004200420042004200420042004200420042004
2005200520052005200520052005200520052005200520052005
2006200620062006200620062006200620062006200620062006
2007200720072007200720072007200720072007200720072007
2008200820082008200820082008200820082008200820082008
2009200920092009200920092009200920092009200920092009
2010201020102010201020102010201020102010201020102010
2011201120112011201120112011201120112011201120112011
2012201220122012201220122012201220122012201220122012
2013201320132013201320132013201320132013201320132013
2014201420142014201420142014201420142014201420142014
2015201520152015201520152015201520152015201520152015
2016201620162016201620162016201620162016201620162016
Load with 15% Planning Margin
VT Yankee
HQ
Stonybrook
Berlin
CVPS Hydro
McNeil
VT SPP
CV Thermal
BED GT
Millstone
Duke
Other
1026.1323701368
286.6642386667
287.467
59.03
44.7
40.72
35.54
31.4
27.79
23.6
19.82
20
199.005
1031.4498177135
286.6642386667
287.467
59.03
44.7
40.72
35.54
31.1906666667
27.79
23.6
19.82
20
199.005
1030.5148114727
286.6642386667
287.467
59.03
44.7
40.72
35.54
30.144
27.79
23.6
19.82
0
190.545
1036.0964475204
286.6642386667
287.467
59.03
44.7
40.72
35.54
30.144
27.79
23.6
19.82
0
190.11
1043.4337021266
286.6642386667
287.467
59.03
44.7
40.72
35.54
29.7312
27.79
23.6
19.82
0
168.4
1052.4883520952
286.6642386667
287.467
59.03
44.7
40.72
35.54
27.9072
27.79
23.6
19.82
0
155.74
1059.8603368008
286.6642386667
287.467
46.3
44.7
40.72
35.54
27.9072
27.79
23.6
19.82
0
145.75
1067.255522925
286.6642386667
287.467
46.3
44.7
40.72
35.54
27.9072
27.79
23.6
19.82
0
145.75
1077.5183902533
165.6214128889
282.9068333333
46.3
44.7
40.72
35.54
26.5632
27.79
23.6
19.82
0
145.75
1082.9591566653
0
257.036
46.3
0
40.72
35.54
17.76
27.79
23.6
19.82
0
144.31
1088.9049784044
0
257.036
46.3
0
40.72
35.54
17.0784
27.79
23.6
19.82
0
144.31
1096.5703200687
0
241.6606666667
46.3
0
40.72
35.54
17.0304
27.79
23.6
19.82
0
144.31
1103.6934070998
0
25.695
46.3
0
40.72
26.5
15.6864
27.79
23.6
19.82
0
144.31
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14© 2003 Lexecon Inc. All rights reserved.
Vermont Utility Perspectives• Baseload supply needs generally satisfied until 2010
• Some peaking and energy needs prior to then
• Hydro’s considered a large resource in relation to VT supply profile
• Open to the potential for replacing HQ or VT Yankee
• Support economic development uses as long as customers not cherry-picked
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Options for Financial Structure
1. Tax Exempt Government Entity
2. Taxable Government Entity
3. Public / Private Partnership
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16© 2003 Lexecon Inc. All rights reserved.
Options Considered for FinancingMarket for OutputType of Financing Considerations
Tax ExemptRevenue
Bond
Taxable Revenue
Bond
- Smaller market+ No contract term limits
3. Spot, IOU and Municipal Contracts in VT, NE (?) (no volume cap used)
+ Larger market- Contracts with IOUs must be
< 3 years- Difficult to finance
4. Spot, IOU and Municipal Contracts in VT, NE (volume cap used)
+ No market limitations- Takes volume cap from other
VT uses for at least 2 years
2. All output allocated to VT utilities
- “Tax” on retail use collected by utility
- Too much power for needs
5. Spot, IOU and Municipal Contracts in VT, NE
+ No market limitations- Higher financing costs - Contracts required to finance
6. Private partner offtake; contracted back to VT utilities as needed
+ No market limitations- Higher financing costs
1. Municipals in VT, NE (?)
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Financing Costs – Vermont as Buyer
8.75% 6.50%
11.00% 7.25%
Taxable Tax-Exempt
MostlyContracted
MostlyMerchant
Gross Base Case
$100 Moral Obligation – Less 0.25%
7.00% Net Base Case
• Financing Assumption: 100% tax-exempt; new VT Authority purchases facilitiesand sells power in the day-ahead ISO-NE market untilcontracts of 3-year duration or shorter can be obtained.
Note: Bond insurance may be a source of incremental interest cost savings. The Base Case does not include bond insurance.
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18© 2003 Lexecon Inc. All rights reserved.
Moral Obligation Bonds• If a pre-established project reserve fund is depleted, the State agrees to
approach the legislature for replenishment funds
• Potential for full notch of credit improvement, translating into an approximate 0.5% interest expense savings, or up to a $2.5 million annual savings on a $500 million purchase
• VT has over $500 million in moral obligation programs in place, primarily serving the Bond Bank
• No legal commitment to approve funding, but a disapproval would have negative credit implications for the State
• Should be used as an interest expense savings tool, not a transaction enabler
• Base Case assumes $100 million of moral obligation, creating a savings of 0.25%.
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Financing Costs – Taxable Buyer• 12.3% used in Base Case
• Assumptions– 50% Debt / Equity (Source: Standard & Poor’s ratings criteria)– 18% Cost of Equity (Lexecon estimate)– 11% Cost of Debt (Lehman estimate)
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Primary Risks• Market price risk
– Risk of price decline in New England power market– Scenario analysis will quantify this risk
• Marketing and Operating Risk– Inability to fulfill contracted power supplies– Mechanical failure causes power loss and cost of repair
• FERC License Renewal Risk– 80% of MW are under license until 2037 and 2042– FERC license expires 2018 for the remaining 20% (lower CT)– License renewals may contain flow restriction and/or required capital additions
• State ownership risks– Reduction in State credit rating if MO or GO is used– Operational suboptimization
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Public Benefits• Potential for financial benefit
– Potential for cash generation to fund State programs– Economic Development potential to sell power at below-market rates or
stable long-term rates
• Environmental / watershed control
• Price hedge for participating utilities and their customers –operating expenses and financing costs are relatively fixed
• Pride of ownership
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Considerations• Not confident of contracts by time of transaction
– Single resource in VT where load is satisfied– Cannot load-follow for a specific load– Utility POLR market requires a portfolio of resources
• Vermont’s supply needs are met until 2008– Real needs are 2012 and beyond– Realistic potential to utilize 50% of the resources for VT load
• Greatest potential is realized if assets are blended into a larger supply portfolio– Private wholesaler with other resources in the region (Constellation, FPL, Calpine)– Combined ownership with other supply agencies (MMWEC, CMEEC, VPSSA)
• Financing will be a challenge– Lack of contracts out-of-the-box– State reluctant to place taxpayers at risk (GO or MO) or forego other programs (volume cap)– Best tax-exempt options have requirements we are not confident can be fulfilled– Cannot be financed at fair market value without equity or State credit support
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23© 2003 Lexecon Inc. All rights reserved.
Considerations (continued)• Assets are encumbered
– Bankruptcy process does not ensure availability– If available, part of larger integrated asset portfolio– Auction will be competitive with an uncertain outcome
• Uncertain public benefit– Bulk of power exported for at least the next 10 years– Economic development contracts are a positive, but require time and flexibility to develop the
opportunities– Watershed and environmental management are under existing authorities
• Potential economic benefits are substantial– At fair market value, significant benefits could be derived– But financing limitations constrain the ability to capture benefits– Potential for public benefit in a carefully structured transaction with a private partner
• Execution would be complex– Bankruptcy– Private partner involvement– Legal and bond issues– Public approval process
Vermont Renewable Power Supply Acquisition Authority��Project UpdateTopics for DiscussionBankruptcy Process and StatusUSGen NE AssetsSlide Number 5Hydroelectric Generation ProfileValuation ApproachBase Case Modeling Assumptions for Hydroelectric Facilities�(Modeling Period 2004-2013)Fuel Price AssumptionsAverage Annual ISO New England EnergyExpense AssumptionsMarket for the OutputVermont Supply and Demand ProfileVermont Utility PerspectivesOptions for Financial StructureOptions Considered for FinancingFinancing Costs – Vermont as BuyerMoral Obligation BondsFinancing Costs – Taxable BuyerPrimary RisksPublic BenefitsConsiderationsConsiderations (continued)