Presenting a live 90-minute webinar with interactive Q&A Structuring Proxy Revenue Swaps in Wind Energy Projects Leveraging a New Financial Product to Mitigate Energy Price Risk and Wind Resource Uncertainty TUESDAY, MAY 23, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Robert Eberhardt, Partner, Chadbourne & Parke , New York John J. Leonti, Partner, Troutman Sanders , New York and San Francisco The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Proxy Revenue Swaps in Renewable Energy Projects Rob Eberhardt, Chadbourne & Parke LLP John Leonti, Troutman Sanders LLP Strafford CLE Webinar May 23, 2017
Agenda Proxy Revenue Swap Basics Sample Calculation Commercial Issues Legal Issues
Proxy Revenue Swap Basics 7
What is a Proxy Revenue Swap? • New risk management tool for the wind energy industry • Swap of fixed annual payment for floating revenues of a wind project (driven by the hourly wind resource and power prices) • Hedge providers are participants in weather risk market looking for weather-derived exposure not correlated with other financial markets • Merchant power price risks and wind resource risks both transferred in an integrated derivative contract • Tenors of up to 10 years long enough to support project financing, including tax equity 8
Proxy Revenue Swaps Signed in 2016 Project Market Sponsor Lender Tax Hedge Back-to-Back Calculation Equity Provider Price Hedge Agent Provider Bloom SPP Capital N/A Goldman Allianz Risk Microsoft REsurety (KS) Power Sachs Transfer / Corporation Corp. Nephila Capital Old ERCOT Apex Deutsche JPMorgan Allianz Risk Confidential REsurety Settler Clean Bank (lead) Transfer / (TX) Energy Nephila Capital Not SPP Not N/A N/A Allianz Risk Confidential REsurety Public Public Transfer / (OK) Nephila Capital 9
Comparison of Offtake Contracts: Price Power Purchase Fixed Volume Price Corporate / Proxy Revenue Agreement Swap (“Bank Hedge”) “Virtual” PPA Swap Project’s Utility Commodities Corporation Weather Risk Counterparty Merchant Investor (Financial/Strategic) Physical vs Physical Physical Financial Financial Financial Product Energy and RECs Energy plus Energy and RECs Energy plus potentially RECs potentially RECs Unit Price Fixed Fixed Fixed Effectively Varies by Volume Settlement Point Project Node Trading Hub Project Node or Trading Hub Trading Hub Price Basis Risk No Yes (but includes Depends on Yes Tracking Account) Settlement Point / Shared Risk Market Sales? No Yes Yes Yes 10
Comparison of Offtake Contracts: Volume Power Purchase Fixed Volume Price Corporate / Proxy Revenue Agreement Swap (“Bank Hedge”) “Virtual” PPA Swap Project’s Utility Commodities Corporation Weather Risk Counterparty Merchant Investor (Financial/Strategic) Physical vs Physical Physical Financial Financial Financial Revenue Based Yes Yes Yes No on Wind Production? Revenue Based Yes Yes Yes Yes on Availability? Revenue Based Yes Yes Yes Yes on Efficiency? Fixed Delivery None Hourly Delivery None None Obligations Obligations (P99) Minimum Annual Minimum None Annual Minimum None Delivery Production Availability Obligations 11
Sample Calculation 12
Assumptions and Data Assumptions Fixed in Contract at Closing Data Collected for Each Settlement Interval Fixed Payment (in $) Detailed (10 minute) Turbine-Specific Wind Data from Project SCADA Number of Wind Turbines in Project (e.g. 100) Wind Data from Permanent Met Towner Power Curve Other Meteorological Data Project Operational Efficiency (e.g. 90%) Market Prices at Hub Published by ISO Contracted Fraction Production Data (both Turbine-Specific and at Project Meter) 13
Power Curve Wind Speed Output (kw) (m/s) 0 0 4 100 6 300 8 900 10 1800 14 2500 16 2500 20 2500 24 2500 14
Wind Data DATE TIME WTG 1 WTG 2 WTG 3 … WTG 49 WTG 50 01.01.2018 0:00 15.5 16.5 16.1 … 16.6 15.2 01.01.2018 0:10 15.5 16.5 16.2 … 16.7 15.2 01.01.2018 0:20 15.7 16.6 16.2 … 16.7 15.1 01.01.2018 0:30 15.6 16.6 16.1 … 16.7 15 01.01.2018 0:40 15.7 16.7 16 … 16.7 15.1 … … … … … … … … 01.01.2018 23:40 10.1 12.4 14.4 … 10.2 11.6 01.01.2018 23:50 10.2 12.2 14.2 … 10.3 11.7 01.02.2018 0:00 10.2 12.2 14.3 … 10.3 11.7 … … … … … … … … 04.30.2018 23:20 16.4 17.9 16.2 … 18.3 17.1 04.30.2018 23:30 16.5 17.8 16.4 … 18.3 17 04.30.2018 23:40 16.6 17.9 16.4 … 18.4 16.9 04.30.2018 23:50 16.6 18 16.4 … 18.4 16.9 15
Proxy Revenue Calculation • Power Curve-Derived Generation : Energy (in MWh) for a wind turbine during a Calculation Interval (e.g. 10 minute period) estimated based on: Power Curve and Measured Wind Speed at Turbine • Proxy Generation : Sum for all wind turbines during each Calculation Interval of: Power Curve-Derived Generation x Expected Operational Efficiency • Proxy Revenue : Sum for each Calculation Interval during the Settlement Period (e.g. 3 months) of: Proxy Generation x Day-Ahead Hub Energy Price 16
Two-Way Settlement If Proxy Revenue > Fixed Payment Hedge Wind Settlement Amount High winds, Provider Project high prices, or a combination during settlement period If Proxy Revenue < Fixed Payment Hedge Wind Settlement Amount Low winds, Provider Project low prices, or a combination during settlement period 17
Project Receives Merchant Revenues Hedge Wind Settlement Amount Provider Project Merchant Revenue Market 18
The Calculation Agent • Responsible for Preparing Settlement Reports • Performs Specified Power Curve Adjustments • Assesses Data Quality and Excludes Invalid Data • Proposes Calculation Methods for Unspecified Circumstances • Identifies Operational Losses (e.g., Availability, Performance, Operational Losses) 19
Commercial Issues 20
Fees • Upfront Structuring Fee to Hedge Provider • Annual Fee to Hedge Provider • Service Fees for Calculation and Reporting Services 21
Hedge Provider Credit Support • Critical for Project Financing • Public Credit Ratings (S&P, Moody’s, Fitch, A.M. Best) • Possibility of Downgrade Protection 22
Project Credit Support • Cash or Letter of Credit of Fixed Amounts • Issuing Bank Downgrade Protection • Parent Guarantees • Possibility of Liens on Project Assets • Negative Covenants 23
Adjustments and Partial Termination • As-Built Conditions Inconsistent With Assumptions • Casualty / Condemnation • Wake Impacts of Neighboring Projects 24
Legal Issues 25
Documentation • ISDA Documentation • Confirmation • Master Agreement • Schedule • Credit Support Annex • Departures from ISDA Master Agreement Standard Terms, e.g. • Cure Periods • Cross-Acceleration (not Cross-Default) • No Credit Event Upon Merger • Calculation Services Agreement with Calculation Agent 26
Project Company Covenants • Customary Limits for Special-Purpose Project Companies, e.g. • Indebtedness and Liens • Other Commodity Hedges • Asset Sales • Investments • Insurance / Casualty Events • Operation and Maintenance of Anemometers on Permanent Met Towers and Each Nacelle • Replace Unreliable Anemometers 27
Additional Termination Events • Failure to Achieve Commercial Operations by Guaranteed Date • Breach of Negative Covenants (No Cure) • Abandonment 28
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