Richard ORourke Global Energy MBA 2014 Project & Dissertation - - PowerPoint PPT Presentation

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Richard ORourke Global Energy MBA 2014 Project & Dissertation - - PowerPoint PPT Presentation

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STRUCTURED FINANCE & INDUSTRIAL COGENERATION FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS with PROJECT FINANCE (PF) & ASSET-BACKED SECURITIES (ABS) Richard ORourke Global Energy MBA 2014 Project &

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STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Global Energy MBA 2014 Project & Dissertation

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS with PROJECT FINANCE (PF) & ASSET-BACKED SECURITIES (ABS)

Richard O’Rourke

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SLIDE 2

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Research Question:

  • What are the equity returns for an investment in the

development of a portfolio (40) of cogeneration assets Project Financed by bank debt pre-construction and an Asset-Backed Security (ABS) post-construction? (cf Calpine strategy ~2000, SolarCity’s recent ABS issues)

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

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SLIDE 3

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Motivation:

  • International Energy Agency (IEA): to keep average global

temperatures below 2oC warming, the internationally agreed target, infrastructure investment needs to double from current levels to $500bn/yr by 2020 and double again to $1trn/yr after 2030.

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

source: CPI

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SLIDE 4

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Rationale:

  • To scale the level of

investment in EE and DG they require access to lower cost capital

  • Aggregating EE/DG

investments into portfolios provides the level of scale to attract institutional investors

  • The portfolio effect mitigates

counter-party credit risk

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

source: OECD

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SLIDE 5

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Rationale:

  • The UK remains behind its

European counterparts in the deployment of cogeneration

  • DECC forecasts an additional

2.8GWe will be installed by 2030 at an estimated cost of

  • ver £1.5bn

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

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SLIDE 6

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Approach:

  • Discounted Cash Flow (DCF) Model
  • An arbitrarily set number
  • f project finance (PF)

deals were modelled (40) using a standard PF approach

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

source: UNEP

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SLIDE 7

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Approach:

  • Discounted Cash Flow (DCF) Model
  • The model assumes

the bank debt is refinanced by the issue

  • f an Asset-Backed

Security (ABS) once construction is complete for the entire portfolio

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

source: Climate Bonds Initiative

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SLIDE 8

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Approach:

  • Discounted Cash Flow (DCF) Model
  • The core modules of the model are
  • ‘Off-Take Portfolio’ – defines the client

and engine parameters of the portfolio and associated cash flows

  • ‘Project Finance Portfolio’ – defines the

parameters of the bank debt and associated cash flows

  • ‘Asset-Backed Security’ – defines the

parameters of the ABS and associated cash flows

  • Stakeholders includes the ESCo, its clients,

the equity investors, the banks, and the ABS investors

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

← ← → ↓ ↑ ← ← ← ↓ ↑ → → → → ↓ ↑ ↓ ↑ ↓ ↑ ↓ ↑ ← ← Bank(s) ↓ ↑ → → ↓ ↑ ← ← ← → → → Off-Take Clients Off-Take Portfolio Project Finance Portfolio Asset- Backed Security Equity Investors ESCo Security Investors

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SLIDE 9

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Approach:

  • Discounted Cash Flow (DCF) Model
  • A temporal view of the

programme phases and stakeholders shows how they overlap and/or change over time

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

Securities investors Construct Securitise Equity Investors Debt Providers Off-take Clients

Senior A Subordinate

Programme Phases Portfolio Projects Stakeholders Develop Operate

Senior B

ESCo

Direction of time

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SLIDE 10

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Approach:

  • Cogeneration Portfolio
  • Many parameters of

the portfolio were selected randomly to reflect ‘real’ business development activity

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 Jan 2013 Jan 2017 Jan 2021 Jan 2025 Jan 2029 Jan 2033 Jan 2037 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 GWh Client # Lifetime Output (elec) HoT ESA Construction Complete Operation Start 1st Billing Date 1st Payment Date ESA Expires Last Payment Date

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SLIDE 11

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Approach:

  • Asset-Backed Security (ABS) Model
  • A sophisticated ABS model was constructed to accurately reflect its typical operation

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

Notional Amortisation Schedule Actual Amortisation Total Cashflow Available for Liabilities Triggers Swaps Fees Senior Loan - Interest Senior Loan - Principal Reserve Account Subordinate Loan - Interest Subordinate Loan - Principal Excess Released Integrity Checks Period x (includes Period x+1 Prepay, Default, Recovery) Period x+y

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SLIDE 12

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Assumptions:

  • A set of assumptions were selected to compare equity returns
  • Cost of Capital

(Low / High Scenarios)

  • Pre-construction

Bank Debt (70%) : 7% / 9% + LIBOR (1%) [DSCR: 1.2/1.4]

  • Post-construction

Bank Debt : 5% / 7% + LIBOR (1%) ABS (Senior: 80%): 2% / 4% + IL GILTS (0%) ABS (Sub: 20%) : 4% / 6% + IL GILTS (0%)

  • Business Development

(Low / High Scenarios)

  • ‘Less’ aggressive

40 engines/40 months

  • ‘More’ aggressive

40 engines/24 months FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

engine size ranged from 1.5 to 2.4 MWe

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SLIDE 13

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

IRR (pre-tax) Business Development Less Aggressive 40 projects, 40 months More Aggressive 40 projects < 24 months Cost of Capital Lower Cost Capital PF: Pre-C 8% Post 6% DSCR 1.2 ABS: Snr 2% Sub 4% Scenario 1

IRR: 26.3%

(Equity: £19.1m) Scenario 2

IRR: 29.7%

(Equity: £20.1m) Higher Cost Capital PF: Pre-C 10% Post 8% DSCR 1.4 ABS: Snr 4% Sub 6% Scenario 3

IRR: 23.7%

(Equity: £17.3) Scenario 4

IRR: 25.1%

(Equity: £19.2m)

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SLIDE 14

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

  • Present Value (PV) of ABS Notes

based on different levels of quarterly contribution (excluding inflation adjustment)

  • Effectively it’s the value of the

mortgage that can be borrowed for the interest rate on the note based on different levels of fixed quarterly payments

  • The model uses £2.0m for the

scenarios explored

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

£1.80m £1.90m £2.00m £2.10m £2.20m £0.0 £10.0 £20.0 £30.0 £40.0 £50.0 £60.0 £70.0 £80.0 £90.0 (£ millions) Quarterly Payment 2.0% Senior 4.0% Sub 4.0% Senior 6.0% Sub

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SLIDE 15

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

£0.0 £1.0 £2.0 £3.0 £4.0 £5.0 £6.0 £7.0 £8.0 £9.0 £10.0 £ millions

Scenario 1

Construction Cost Debt Drawdown CFADS Repayments ABS

~£65m raised

  • n sale of ABS

depending on market conditions

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SLIDE 16

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

  • Business Development Risk
  • ‘Less’ Aggressive Scenario

‘More’ Aggressive Scenario

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

£0.0 £10.0 £20.0 £30.0 £40.0 £50.0 £60.0 £70.0 £80.0 £90.0 £100.0 £0.0 £1.0 £2.0 £3.0 £4.0 £5.0 £6.0 £7.0 £8.0 £9.0 £10.0

cumulative £ millions £ millions

Construction Cost Cum Debt Drawdown Cum Construction Cost £0.0 £10.0 £20.0 £30.0 £40.0 £50.0 £60.0 £70.0 £80.0 £90.0 £100.0 £0.0 £1.0 £2.0 £3.0 £4.0 £5.0 £6.0 £7.0 £8.0 £9.0 £10.0

cumulative £ millions £ millions

Construction Cost Cum Debt Drawdown Cum Construction Cost

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SLIDE 17

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

  • Business Development Risk
  • Both scenarios very aggressive in light of market data
  • Although, projects below funded at much higher cost of capital

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

4 19

  • 2

13

  • 7 -7

6 3 2

  • 1

14

  • 3

9 23 27 9

  • 50

50 100 150 200 250 300 350 400

  • 100

200 300 400 500 600 700 800 900 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 # sites (lines) MWe installed (area) MWe installed New units # sites UK CHP installations in the 1 to 9.9 MWe range, source: DUKES 7.1

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SLIDE 18

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

  • Default Risk
  • Returns above assume perfect portfolio performance
  • How badly are equity returns affected by client defaults?
  • Further work required to develop appropriate default models
  • Simple model defaults 15% of clients randomly mid-way through contract
  • Equity returns reduce by <10% (IRR remains >15%)

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

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SLIDE 19

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

  • Default Risk

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

£0.0 £0.5 £1.0 £1.5 £2.0 £2.5 £3.0 £3.5

£ millions

CFADS under a 15% default scenario

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SLIDE 20

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

  • Refinancing Risk
  • In order to manage construction risk, the ABS is not issued until all the

assets in the portfolio are operational

  • However, this creates a refinancing risk for the pre-construction funders
  • This risk will be born primarily by the equity investors
  • How sensitive are equity returns to the ABS issue price?
  • UK Govt Index-Linked Gilts currently trade at negative yields

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

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SLIDE 21

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Results:

  • Refinancing Risk
  • The greater the yield demanded by

the ABS investors, the lower the equity returns

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

27.5% 26.3% 26.1% 24.8% 23.5% (1.0%) 0.0% 1.0% 2.0% 3.0% 4.0% (2.0%) (1.0%) 0.0% 1.0% 2.0% 3.0% Sub Note Yields Snr Note Yields

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SLIDE 22

STRUCTURED FINANCE & INDUSTRIAL COGENERATION

Conclusion:

  • Equity Returns are attractive for scenarios modelled
  • >15% IRR
  • The scale of investment is likely attractive to institutional investors
  • >£30m ($50m)
  • However:
  • Business Development risk is very high in current market
  • Appropriate Default Model needs to be developed
  • a simple default model of 15% of clients reduces equity returns by <10%
  • Refinancing Risk appears modest
  • given favourable current market pricing for Index-Linked Bonds
  • however, the default model will have a large bearing on pricing

FINANCING ENERGY EFFICIENCY (EE) & DISTRIBUTED GENERATION (DG) PORTFOLIOS

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SLIDE 23

Richard O’Rourke

Technology & Start-ups

(Energy / IT)

  • BSc Industrial Chemistry (1996)
  • General Semiconductor R&D
  • Taipei: Power electronics
  • EPFL: Swiss Polytechnic University
  • Lausanne: Fuel cells (batteries)
  • KineMatik
  • Ireland/US: R&D management software
  • ExerGen Biosciences
  • New York: Next-gen search software
  • REDT
  • Dublin/London: Battery technology

Energy & Green Infrastructure Finance

  • UCC: MEngSc Sustainable Energy (2007)
  • LSE: MSc Environmental Policy (2008)
  • EnerNOC
  • London: Smart Grid
  • MITIE Asset Management
  • London: Energy Project Development (ESCo)
  • Warwick Global Energy MBA (2014)
  • Kinetik NRG
  • Dublin/London/NY: Strategy & Fundraising,

Product Management & Business Development

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SLIDE 24

Richard O’Rourke

  • richard@kinetik-nrg.com
  • +353 (85) 211 8174
  • +44 (75) 7769 8755
  • Skype: richardsorourke
  • www.linkedin.com/in/rsorourke
  • @rsorourke