Does the Northeast Need Additional Gas Infrastructure and if There is a Need, Can the Infrastructure be Financed, Constructed and Built?

Transcription

1 Does the Northeast Need Additional Gas Infrastructure and if There is a Need, Can the Infrastructure be Financed, Constructed and Built? Valerie Green, Pierce Atwood LLP (Moderator) Boris Brevnov, Liberty Energy Trust James Daly, Eversource Energy Brian Schwabenbauer, TRC Michael Jacobs, Union of Concerned Scientists October 4, 2018 Boston, MA

2 State of the Energy Infrastructure Time for the Boston Tea Party? Our ships, freight trains, industrial transportation equipment, and power generation run on oil, while the country exports clean, efficient natural gas to overseas countries. Like the Boston Tea Party of old, the US is acting as a colonial state, effectively subsidizing other countries displacement of oil with its natural gas. Time line Tea Act of Parliament 1773 Whale Oil becomes largest fuel oil source 18 th century US drilled oil, Pennsylvania 1859 US becomes net importer 1945 Commercial shale production begins 2005 US becomes a net energy exporter 2022? 1

3 State of the Infrastructure and Environmental Impact Winter cold spike, along with an unplanned outages at Pilgrim, caused a large spike in demand for heavy oil burning electric generation. Pollution spiked across all major categories. 657% Increase in NOX 140% Increase in CO2 2721% Increase in SO2 Source NE ISO, SIemens 2 2

4 Renewable Generation Impact: Gas Plant decrease in utilization Source: NE ISO 3 3

5 Bloomberg New Energy Finance: Gas Plant installed capacity remains stable over time 4

6 Zero emission storage is a goal, but economics and resiliency requirements continue to favor gas as a storage medium 5

7 In addition to equity, Liberty has a wide variety of financing options and partners to provide capital for projects Private Activity Bonds (PABs) Payment in Lieu of Taxes (PILOT) 4(a)(2) Private Placement 144A / Reg S Bank Loan Investors: Mainly Life insurance companies in Primary buyers are retail investors, Primary buyers are retail investors, U.S. and some large European large bond funds, property and large bond funds, property and accounts Life Insurance companies (core Commercial bank lenders with project casualty insurance companies, and casualty insurance companies, and demand), Qualified Institutional Buyers crossover buyers that generally buy crossover buyers that generally buy Flexible marketing process, can precircle investors ahead of more formal finance lending programs ( QIBs ), and asset managers taxable bonds taxable bonds marketing Industrial applications, including Eligible Uses: seaports, intercity rail, transit, solid waste disposal, toll roads, airports, Related infrastructure water and wastewater treatment and Any Any Any low income housing Specific authorizations (special cases) Tax Status: Tax-Exempt (subject to the AMT) Tax-Exempt (not subject to the AMT) Taxable Taxable Taxable Maturity: Bridge Loans: month tenor As long as 40 years (with amortizing General preference for bullet maturity designed to backstop capital markets Longer maximum maturity Strong Longer maximum maturity Strong structures) up to 15-year Weighted (5 s, 10 s, 30 s) but will accommodate issuance market demand for 30 year and longer market demand for 30 year and longer Average Life ( WAL ) amortizers maturities maturities Term Loans or Mini-Perms : typically Greatest depth inside 30 years; some Certain private accounts would go to 3-7 years, deepest liquidity in the investors would go to years shorter tenors Pricing: Fixed rate Fixed rate Fixed rate Fixed rate Floating rate LIBOR (can swap to fixed) Delay Draws: Typically fully funded at close Typically fully funded at close Rate lock up to 9 months and spread lock up to 18 months No, fully funded at close Flexible to address delayed draw Disclosure Requirements: Advantages: Key Considerations: Formal disclosure required of all information pertinent to potential investors, including risk factors of the project Continuing disclosure requirements for ongoing communication to investors Lower interest rate cost Market acceptance of low and noninvestment grade project finance credits Longer maximum maturity Strong market demand for 30 year and longer maturities Tax-exempt bonds are typically callable at par beginning in ten years Market demands continuing disclosure of project status Restrictions on use of proceeds (e.g. reserve size limits) Restrictions on earnings rates for proceeds Formal disclosure required of all information pertinent to potential investors, including risk factors of the project Continuing disclosure requirements for ongoing communication to investors Lower interest rate cost Market acceptance of low and noninvestment grade project finance credits Longer maximum maturity Strong market demand for 30 year and longer maturities Tax-exempt bonds are typically callable at par beginning in ten years Tax analysis required to determine PILOT eligibility Market demands continuing disclosure of project status Restrictions on use of proceeds (e.g. reserve size limits) Restrictions on earnings rates for proceeds Bank Book style, periodic financial disclosures typically required Legal documents typically include a Note Purchase Agreement and Intercreditor Agreement, if applicable Marketing more limited to ~100 accounts on basis of information memorandum and data room Buy-and-hold investors less sensitive to market conditions/volatility. Limited disclosure streamlines documentation Allows for delayed drawdowns Investors do not charge premiums for reduced liquidity, structural complexity, or amortization Efficient marketing format for complex structures/ credits due to diligence period and access to consultants/counsel More limited investor base Asset managers and bond funds are traditionally not part of the investor universe due to the lack of secondary market liquidity More formal disclosure Not reviewed by the SEC, legal disclosure required (risk factors and 10(b)5 legal opinion); Documents to investor include Offering Memorandum, Indenture and Intercreditor Agreement, if applicable Marketing more broad to +5,000 accounts Access to broader investor base, where large 144A/Reg S accounts can drive significant demand and leverage over pricing and terms Ability to support amortizers and bullets Shorter execution period, particularly for more conventional projects (given limited diligence periods and access to consultants/counsel) Ideal for simpler, operational credits of large size Broader disclosure and 10(b)5 opinion required Pricing typically more sensitive to short-term market technicals/liquidity vs. 4(a)(2) or project bank market Premium required for amortized structures No delayed-draw feature; potential negative carry Bank Book style Not reviewed by the SEC, risk factors not required Fastest execution achievable for simpler, operational credits Low cost of unfunded commitment Pre-payable without call premium No ratings required Relatively short tenors Tighter maintenance covenants and more cumbersome documentation Heavily reliant upon relationships with banks 6 6

8 Massachusetts has the need and the opportunities to lead 7 7

9 Pierce Atwood Annual Energy Infrastructure Symposium James Daly Vice President Energy Supply October 4, 2018 Safety First and Always

10 New England s Vulnerability to High Gas and Electricity Prices 2013/14 Polar Vortex increased electricity costs by $3.2Bn 2017/18 winter cold snap increased electricity costs by $1.7Bn Spot prices drive forward market prices Retail electricity rates are about $1Bn/Year higher on average $100 $80 $60 $40 $20 New England vs Marcellus Gas Prices ($/MMBtu) $3.2B Incremental Costs $1.7B $2.5B $0 March-2013 March-2014 March-2015 March-2016 March-2017 March-2018 New England Natural Gas Price Marcellus Natural Gas Price Cold snap makes New England the world s priciest gas market Bloomberg yet nearby production areas remained one of the lowest cost gas markets Safety First and Always 2

11 Reliability at Risk Fuel-security risk is the foremost challenge to a reliable power grid in New England ISO-NE, Jan. 18, 2018 ISO-NE: Operational Fuel Security Analysis Despite aggressive renewable energy goals Region faces severe threats to reliability by of 23 of the scenarios evaluated resulted in emergency actions 19 of 23 of the scenarios evaluated resulted in rolling blackouts Mystic Power Plant Reliability Agreement Region s fuel security threats leads to Exelon announcing it will retire one of the largest power plants in New England absent a cost-of-service contract ISO-NE will charge electric customers hundreds of millions for this cost-ofservice contract Strategy is likely to be repeated with 1/3 of New England s generating capacity retiring No Long Term Solution In Sight 3 Safety First and Always

12 Environmental Impact of Cold Snap The incremental emissions from the lack of natural gas during the cold snap is an environmental disaster for meeting New England s GHG goals. +6MM - MA EEA Secretary, Matthew Beaton Jan. 24, MW 1 Million Tons of Additional Greenhouse Gas Emissions The incremental emissions from increased oil and coalfired power plants nearly exceeding annual emissions limits in 13 days Safety First and Always Equivalent to 6 Million Additional Vehicles The incremental emissions from the cold snap are equivalent to doubling the number of vehicles on our roads Negated the Benefits of 75% of the Solar Power in MA The additional greenhouse gas emissions during the cold snap offset the annual benefits of more than 1,500 MW solar power 4

13 Natural Gas Complementing Renewables Renewables will meet an increasing portion of our energy needs while natural gas responds to the fluctuations in renewable output and meets winter peak demand Natural Gas Backstops the Variable Output of Natural Gas Meets Winter Renewables Demand Until Storage Is Available At Scale Actual Output vs Plant Capacity (MWs) Winter Peak Demand (MWs) Plant Capacity Natural gas-fired power required Hourly Demand Peak power demand 6-7 PM Sunset at 4:31 PM Actual solar power generated DAYLIGHT HOURS Source: ISO-NE Safety First and Always AUGUST DAYLIGHT HOURS Source: National Renewable Energy Laboratory; randomly selected August day Solar power cannot resolve the region s winter peak demand 5

14 Paradox of Policies Clean Energy Resources Fluctuating wholesale prices are insufficient to support investment Investors require long-term, stable pricing commitments Cost are declining future prices will be lower cost than today s resources State policies support longterm fixed commitments Reliability Resources Fluctuating wholesale prices are insufficient to support investment Investors require long-term, stable pricing Costs are increasing future prices likely higher than today Policies don t support longterm commitments Safety First and Always 6

15 Risks to Gas Pipe Investment for Generators Mike Jacobs Union of Concerned Scientists October 4

16 Legal Framework 40 years of competition amongst generation State authority in policy Tension between state and federal authorities 2

17 Renewables in 2024 (ISO v States) State RPS laws require ~15% increase by State contracts for offshore wind currently 1430 MW. 3

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19 Wind is greater in winter Windfarms are more productive in winter Annual capacity factor is 48 49%, but 50 60%+ winter The capacity credit of offshore wind in the NYISO and ISO NE markets is significantly higher in winter than in summer; Physics of heavier cold air; extreme cold described by ISO: winds were frequently stronger than average, which caused extended periods of wind chill temperatures. 5

20 Estimating the Value of Offshore Wind Along the U.S. Eastern Coast. LBNL

21 Second Annual Energy Infrastructure Symposium October 4, 2018 Boston, MA