KEY ELEMENTS OF A SUCCESSFUL CLEAN ENERGY PROJECT: Project Finance Scott Foster September 14, 2011
Hannon Armstrong Experience Transactions across the United States Hannon Armstrong Capital, LLC is a 31-year-old, Annapolis, Maryland based investment and merchant bank focused on providing financing for energy and infrastructure investments in the United States. Locations of representative transactions financed by Hannon Armstrong
Hannon Armstrong Business and Capabilities Vendor Finance Markets: Federal State & Local Commercial Fortune 100 Client Base Focus on Infrastructure Assets (energy, telecom, water) Use proprietary trusts to fund transactions on a principal basis (e.g. Hannie Mae) Investment Banking Debt and Equity Capital Raising; Project Finance Tax-Equity Advisory Merger and Acquisition Advisory Hannon Armstrong Securities, LLC is a FINRA broker-dealer Merchant Banking Principal investing in development stage opportunities where enterprise value can be built Years of development experience to add value to opportunities Financing arranged by Hannon Armstrong Securities, LLC Securities are offered by Hannon Armstrong Securities, LLC which is a registered broker dealer, a wholly owned subsidiary of Hannon Armstrong Capital, LLC and a Member of FINRA and SIPC.
Project Finance Overview The economic downturn has had a severe effect on financing Before crash, most projects could be completed with a rating Credit quality is now imperative for successful financing Banks constrained from lending, particularly long term Increased use of equity for projects Some projects cannot be leveraged Federal and state incentives critical drivers for projects Tax equity appetite beginning to return; pricing is expensive 1603 Cash Grant is set to expire on December 31, 2011
Project Finance Overview The Basics Project finance characteristics Cashflow driven Element of non-recourse debt Projects are capital intensive with certain requirements Investment grade developer and credit off-taker Projects need to be large enough to justify tax equity structure and achieve economies of scale Proven technologies Capital stack typically consists of: Debt (supported by credit off-taker revenue) Tax Equity (supported by tax incentives and depreciation benefits) Sponsor Equity Renewable Energy Credits (RECs) Other Incentives
Project Finance Overview Sources of Capital Over Investment Horizon Capital sources include both debt and equity markets EARLY STAGE EQUITY TAX EQUITY EXPECTED RISK / RETURN Investor Type: Balance Sheet Source of Return: Construction Financing/ Project Equity CONSTRUCTION LOAN Investor Type: Bank/Private Capital Source of Return: Permanent Financing Investor Type: Developer/Bank/ Corporation Source of Return: Tax Benefits (ITC/PTC/MACRS) SENIOR PROJECT DEBT Investor Type: Bank/ Life Ins Co/ Pension Fund Source of Return: Project Cashflow/ RECs Rate: Target IRR Rate: Floating Rate: ROE Rate: Fixed INVESTMENT HORIZON / TERM
Project Finance Overview Cost of Capital Scenarios Proj Equity 12 % 10% Project Equity 12 % 35% RATE Securitization 5 % Tax Equity 9 % 40% Tax Equity 9 % 40% Tax Equity 9 % 40% 100% Project Debt 6 % 60% Project Debt 6 % 50% Project Debt 6 % 25% 5.00% 7.20% 7.80% 9.30% Cost of Capital Cost of Capital Cost of Capital Cost of Capital
Project Finance Overview Renewable Energy Credit (REC) Markets What is a REC? A REC represents the right to claim attributes and benefits of renewable power 1 REC = 1 MWh Bought and sold through contractual arrangements Why are RECs Important? RECs are often critical for the success of RE projects - important source of project cashflow What is the Current State of the REC Markets? 2011 has seen oversaturated Solar REC markets in several states creating declining value for RECs Despite RPS standards or mandates in 37 states and D.C., still difficult to secure long-term SREC contracts in excess of 3 to 7 years Uncertainty of REC markets further accentuates the role of strong, long-term PPAs and tax incentives to generate project revenues to fund projects
Project Finance Overview Debt Market Project finance differs from securitzation in that the loan is based on the cashflows of the project, rather than the credit of the sponsor or off-take. The cost of capital in project finance tends to be greater than securitization. Participants: 15 to 20 major lending institutions Interest Cost: 5.00% to 6.50% Coverage: 1.20x to 1.50x Tenor: 7 to 15 years / up to max of contract term DS Reserve: 6 months Structure: Debt repaid from contractual cashflows
Project Finance Overview Tax Equity Market Participants: Corporations and major financial institutions Expected Return: 7.0% to 12.0% after tax Horizon: 6 to 10 years Timing: Takes out construction loan at completion Structure: Partnership flip or lease Trends Investors desire high quality clean/green projects Cash grant extended, but time is now running out Projects must begin construction in 2011 Project must be completed by 2013 (wind), 2014 (other), and 2017 (solar) Expiration of grant will bring more tax credit buyers to the marketplace who can take advantage of the Investment Tax Credit (ITC)
Project Finance Overview Conclusions Structures and contracts are critical components for all parties Creditworthy developers and off-takers are crucial to a successful financing Most projects continue to rely on federal tax benefits and state incentives / RECs
CASE STUDIES
CASE STUDY Utility Scale Geothermal Power Plant in Salton Sea Area The Situation: EnergySource LLC had a 30-year PPA with a utility off-taker for a utility-scale geothermal power plant, but lacked the capital required for construction. The Problem: The Project Finance market had not seen a triple-flash geothermal transaction in 20 years and to make matters worse, there was no EPC wrap on the project. The Solution: Hannon Armstrong advised EnergySource how to create a synthetic EPC structure and reacquainted the lenders on the merits of base-load geothermal power plants. As a result, Hannon Armstrong successfully arranged approximately $400 million in construction loans and project equity for the company. The Benefit: EnergySource was able to begin construction of its geothermal power plant, bringing hundreds of jobs to Imperial County, CA, and was able to finance the development of its project portfolio.
CASE STUDY The Situation: Savannah River Site is a former nuclear weapons manufacturing facility with ongoing nuclear cleanup operations requiring the use of high pressure steam for vitrification. The Problem: With a 1950s era coal-fired steam plant and funding constraints, SRS was not leading by example in the area of clean technology development and commercialization, despite more energy efficient technology and abundant renewable resources in the area. The Solution: Through an Energy Savings Performance million to enable its client to install a biomass cogeneration facility capable of producing 240,000 pph of steam and 20 MWs of electricity, along with other energy upgrades. The Benefit: SRS has reduced its greenhouse gas emissions by 100,000 tons per year by replacing substantial fossil fuel use with local biomass, all while reducing ongoing operating costs.
CASE STUDY Design, Construction, and Financing of Chiller Plant at Howard University Hospital The Situation: Trauma Center has become one of the most comprehensive health care facilities in the Washington, D.C. metropolitan area. The Problem: plant. The undersized system did not keep the hospital at a comfortable permit a purchase of new equipment. The Solution: offer a comprehensive solution. Under the resulting public-private partnership, Hannon Armstrong took title to the existing chiller plant. Howard entered a long term service contract with Hannon Armstrong for the purchase of chilled water. Once the new chiller plant is completed, Honeywell will operate it on behalf of Hannon Armstrong. The Benefit: In the short term, Howard benefited financially from the sale of its existing equipment to Hannon Armstrong, and shifted operating risk for the aging facility to Honeywell. In the long term, Howard benefits from affordable, new, properly-sized chiller plant for its first rate hospital facilities.
CASE STUDY Innovative Structuring to Lower the Cost of Power for the United States Coast Guard in Puerto Rico The Situation: The United States Coast Guard Sector San Juan is responsible for all Coast Guard missions in the Eastern Caribbean area, and operates multiple housing, operations and other facilities in Puerto Rico. The Problem: USCG has a large electricity requirement for their facilities supplied by Puerto Rico Electric Power Authority, primarily a light fuel oil burning utility. The high and rising cost of LFO has lead to the USCG paying a high cost for electricity. The Solution: USCG selected Schneider Electric Buildings Americas, Inc. to install 3 MW of solar PV on over 200 buildings at three sites as well as replacing 600,000 SF of roofing with cool roofs to provide electricity savings and support for the PV systems. Hannon Armstrong was selected to be the owner of the PV system and sell the associated power to USCG due its innovative Renewable Energy Services Agreement under a traditional ESPC. This structure was the first-ofits-kind and allows the USCG to receive the maximum benefits from federal tax credits and other local incentives. The Benefit: By early 2012, USCG will be supplied with over 4,000,000 kwhs annually of solar energy, generated and consumed on-site.
Scott Foster Hannon Armstrong Capital, L.L.C. 1997 Annapolis Exchange Suite 520 Annapolis, MD 21401 410.571.6173 sfoster@hannonarmstrong.com www.hannonarmstrong.com