Investment Environment for Energy September 2015 Overview of the - PowerPoint PPT Presentation

Creating the Investment Environment for Energy September 2015

Overview of the RBC Group & RBC Capital Markets Leading global energy and infrastructure team with over 70 dedicated professionals – ranked 2 nd in the UK & 5th globally for Infrastructure M&A Advisory in 2014 (2) Top 15 Aa3 AA - Notable Recent Infrastructure Transactions (Negative) (Negative) Global investment and commercial bank Moody’s S&P Acquisition of a 40% Construction of the Sale of Bord Gáis Energy Acquisition of Finnish stake in Thames Tideway Assets by a consortium Eurostar from the UK Tunnel (TTT) project led by First State government Investments and Borealis Infrastructure 19.0% 78,000 16m+ £4,200,000,000 £585,100,000 € 1,100,000,000 € 2,550,000,000 EV Sole Financial Advisor to Lead financial Advisor to Mandated Lead Arranger CDPQ and Hermes Financial Advisor to Consortium and MLA & Bookrunner Infrastructure Bord Gáis Éireann Return on common equity Employees Clients worldwide 2015 2015 2014 2014 (2014) Global Banks Ranked by Market Capitalisation (1) 350 300 250 (US$bn) 200 150 100 50 0 A2 (S) A3 (S) Baa1 (S) Baa1 (S) A1 (S) Aa2 (S) A2 (S) A3 (P) A3 (S) Baa1 (P) Aa3 (N) A1 (S) Aa1 (N) A1 (S) A1 (S) Aa2 (S) Baa3 (S) Aa2 (S) Ba1 (S) Aa2 (N) Moody ’s A+ (N) A (N) A- (N) A- (N) A (S) AA- (S) A (S) BBB+ (S) A- (N) BBB+ (S) AA- (N) A (S) AA- (N) A+ (S) A+ (N) AA- (S) BBB (S) AA- (S) BBB- (S) A+ (N) S&P Sources: (1) Bloomberg as of 15-Sep 2015; (2) Infranews Note: Excluding Chinese Banks 1 RBC Capital Markets

Energy: The Investment Backdrop in Europe  New energy policy and advances in technology are transforming power generation landscape  The investment backdrop reflects: o Evolving market and regulatory conditions; o Environmental controls on the level of emissions; and o Financial incentives to invest in low carbon generation  Eurozone crisis significantly impacted European utilities with aggregate market caps falling by more than € 330bn since 2007 and putting balance sheets under pressure  Large investment opportunities for financial investors therefore exist  However the interplay between markets, and EU and national level energy policy is complex, and makes the investment environment uncertain 2 RBC Capital Markets

Attracting Low Cost Capital into the Energy Sector  Pension, infrastructure and sovereign wealth funds attracted to opportunities in renewable energy sector, transmission, distribution and midstream energy infrastructure  Huge volumes of equity chase infrastructure deals: o 750 infrastructure deals completed globally in 2014 valued at $439bn (1) o Over $100bn of equity dry powder still available (1)  Competitive and liquid debt market available to support these buyers and sustained low interest rate environment has led to attractive valuations for yield based assets  Emergence of renewable yield co’s in the UK and Spain driven by public market investor demand  But investors pursue all assets classes within the infrastructure space so energy sector needs to provide competitive investment environment with… o Stability and Predictability of revenues and cost; and o Supportive regulatory and political environments (1) Source: Prequin 3 RBC Capital Markets

The General Drivers of Financial Investors’ Risk Appetite Low – Medium Medium – High Risk Low Medium Infrastructure Funds / Pension Funds / Infrastructure Funds / PE PE Firms / Hybrid Funds Pension Funds / Type of Investors Sovereign Wealth Funds Sovereign Wealth Funds  Exposed to  Unregulated but with Competition and/or  Often regulated  Unregulated Business Drivers Market Dynamics, subsidy support some contracting More volatility in  May have relatively   Mature Long Term  Heavy development earnings short operating track Operating Asset focus Operating vs. record or mix of  May consider new Limited development Increased earnings Development Risk   operating and little build or greenfield with risk volatility development suitable risk mitigates  Inflation linked Mainly cash yield and Mix of cash yield and   revenues and strong  Mainly capital growth Returns Nature some capital growth capital growth cash yield High leverage (close  Moderate to high Lower leverage   to regulated asset  Moderate leverage Leverage leverage structure base) Expected Equity IRR  7 - 9%  9 - 11%  10 - 12%  >12% Range (Levered)  Solar  Wind  Pipelines Water Utilities  Conventional  Examples generation  Biomass  Storage assets Distribution and  transmission network 4 RBC Capital Markets

Selected Recent Energy Deals (UK / Ireland) Transaction Sector EV Equity Value Acquirers Wind £502m £246m (49%) (Stake in wind portfolio) Wind £103m Undisclosed (PNE wind portfolio) UK Solar Portfolio Solar £81m Undisclosed (c.100MW) Water £187m £100m UK Government Pipeline Midstream £82m Undisclosed and Storage System Wind £176m £91m (51.6%) (Stake in Wind portfolio) Gas £895m £562m (62.8%) Transmission Wind £2,576m £644m (25.0%) Conventional € 1.1bn Undisclosed Generation & Renewables 5 RBC Capital Markets

The Investment Environment: Challenges for Conventional Generation  Mid to longer term requirements for new facilities clear, but price signals currently insufficient for investment  Capacity overhang from recessionary fall in demand and low coal prices resulted in low spark spreads and fall in output  Spark spreads expected to recover as demand picks up and plants close under LCCD  But continuing uncertainty regarding impact of renewables on prices and load factors  Capacity mechanisms offer some greater certainty – but 2014 UK auction was at a clearing price below the annual fixed costs of most existing plant on the system  Economic viability will require securing earnings from spark spreads and system balancing services  Unlikely to see financial investors lead the way 6 RBC Capital Markets

The Investment Environment: Challenges for Renewables  In the past renewables were seen as an ‘invest and forget’ class of assets - the upfront capital outlay opened up a long term and (fairly) dependable cash flow  Many projects now face growing power market risks due to changing support mechanisms, regulatory uncertainty or stage of life  Feed in tariffs most attractive to investors as address key aspects of market risk  Trend towards top-up tariffs remove some of this protection: o Exposing the generator to balancing risk o Introducing a basis risk on the generator’s ability to sell its output at the market reference price used for the top-up tariff o Removing volume certainty during periods of negative market prices  Renewables remain a significant area of focus for investment due to the scale of opportunity but risks are not straightforward to assess and may have an impact on recent high valuations 7 RBC Capital Markets

Challenge for the Next Decade  Capital will be attracted to certainty and Governments need to decide how much support they will provide and to which technologies  Further evidence is needed on the potential to reduce the long run marginal costs for newer technologies such as offshore wind to make investors more confident they will reach their return thresholds  Early stage technology is still challenging for investors and need government support – some of GIB’s initiatives have been useful providing support to certain sectors  As generation technologies reach a certain maturity, the next decade should be focused on the demand side: o Consumption reduction through improved insulation, new lighting technology, more efficient appliances o Demand control to match generation patterns: large battery technologies, smart meters, electric cars, etc. 8 RBC Capital Markets