LS Power Southwest Renewable Energy Conference: Financing Transmission Joseph Esteves Chief Financial Officer September 2009 Bringing Energy Forward

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Sharlene Wilkinson
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1 LS Power Southwest Renewable Energy Conference: Financing Transmission Joseph Esteves Chief Financial Officer September 2009

2 Table of Contents 1. Overview of LS Power Group 2. Description of LS Power transmission projects 3. Governmental programs supporting transmission development 4. Private financing of transmission projects 5. Conclusion 1

3 Overview of LS Power Group 2

4 LS Power LS Power is a power generation and transmission group Power Generation Over 20,000 MW of development, construction, or operations experience Active development of renewable and fossil generation resources Transmission Advanced development of Southwest Intertie Project and Wyoming-Colorado Intertie Project Designated to build 200+ miles of kv in Texas to support renewable resources Active development of transmission infrastructure Acquisition Over $4 billion in private equity capital dedicated to energy sector Acquired ~ 12,000 MW of power generation Functional Expertise Project Development Licensing & Environmental Regulatory & Transmission Power Marketing Project Finance Construction & Operations 3

5 Project Portfolio 4

6 Description of LS Power Transmission Projects 5

7 Southwest Intertie Project (SWIP) and Overland Intertie Project Project Description Southwest Intertie and Overland Intertie Projects: a 1,100-mile long 500 kv line running between southern Wyoming and southern Nevada; ~2,000 MW of transfer capability Benefits First connection between Nevada Power and Sierra Pacific Power High capacity factor renewable generation delivery Improves system reliability Potential for reserve sharing Status Idaho to Nevada Segment Real estate acquisition, major permit acquired or applied for, field studies and engineering and tower siting 95% complete Construction scheduled to commence in 4Q09 Target in service 2012 Southern Nevada Segment Applications filed with Bureau of Land Management and Public Utilities Commission of Nevada 4Q08 Target in service 2012 Wyoming to Idaho Segment Expected SF 299 filing with Bureau of Land Management 1Q09 Preliminary possible routes, cost/benefits and technology (AC vs. DC) underway Construction scheduled to commence in 2012 Target in service 2014 Nevada Proposed Thirtymile Harry Allen Idaho Midpoint Southwest Intertie Project El Dorado Overland Intertie Project The ROW routes shown on this diagram are for illustrative purposes only and may not depict the actual route that could eventually be selected. The substation locations may also be modified. 6

8 Cross Texas Project Description Texas PUC (ERCOT Docket No ) approved 2,300 miles of new 345 kv transmission to deliver 18,500 MW of renewable generation; Total estimated cost: $4.9 billion Texas PUC designated Cross Texas Transmission, LLC for approximately 250 miles of the CREZ lines Total ERCOT estimated cost: $400 million Texas Benefits Connects wind resources in the Texas Panhandle to load centers in east Texas Status Permitting and compliance filings 2009 Construction to commence as early as 2011 Commercial operations 2012 The ROW routes shown on this diagram are for illustrative purposes only and may not depict the actual route that could eventually be selected. The substation locations may also be modified. 7

9 Wyoming-Colorado Intertie Project (WCI) Project Description Wyoming-Colorado Intertie Project: a 180-mile long 345 kv line between east central Wyoming and central Colorado; ~850 MW of transfer capability Public-Private Partnership involving Wyoming Infrastructure Authority, Western Area Power Administration and LS Power Benefits High capacity factor Wyoming Wind generation delivery Geographic diversity Integrated line adds to reliability Component of High Plains Express Status AES s interests have been acquired by LS Power Phase 2 of the WECC Path Rating process underway Open Season Phase I Completed Open Season Phase II underway Target in service 2013 Colorado Laramie River Station Substation Pawnee Substation The ROW routes shown on this diagram are for illustrative purposes only and may not depict the actual route that could eventually be selected. The substation locations may also be modified. 8

10 Governmental programs supporting transmission development 9

11 DOE Loan Guarantee Program The Energy Policy Act of 2005 ( EPAct05 ) initially authorized DOE to issue loan guarantees for eligible projects that avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases and employ new or significantly improved technologies as compared to technologies in services in the United States at the time the guarantee is issued The American Recovery and Reinvestment Act of 2009 ( ARRA ) modified the EPAct05 to provide for $6.0Bn to pay upfront credit subsidy Generally assumed to provide support for $60-80Bn in new loan funding EPAct05 was further modified so that loan guarantees go to support standard renewable energy systems and new or upgraded electric transmission lines, no longer innovative technologies Projects must start construction by Sep. 30, 2011 Projects will be evaluated on several criteria including but not limited to: job creation viability of the project without guarantees availability of other Federal and State incentives, importance of project in meeting reliability needs effect of the project in meeting the environment (including climate change) and energy goals of the nation, a State or region of the United States 10

12 Western Area Power Administration Section 402 of the previously mentioned ARRA grants authority to the Western Area Power Administration ( WAPA ) to borrow up to $3.25Bn to facilitate the development and construction of electric transmission lines in the region, with particular regard for the delivery of power generated by renewable energy sources WAPA has established the following principles for disbursement of funds under their borrowing authority: Is in public interest Will not adversely impact system operations or reliability Offers reasonable expectation that proceeds will be adequate to meet WAPA s repayment obligations Uses a public process to set rates Has necessary capability to obtain and deliver generation-related ancillary services Uses proceeds from the project to repay principal and interest of the loan from the Treasury To date, WAPA has executed a term sheet with Tonbridge Power Inc. for their Montana Alberta Tie Ltd. project ( MATL ) as well as a memorandum of understanding with LS Power group affiliate, Great Basin Transmission, LLC 11

13 Private financing of transmission projects 12

14 Examples of Privately Financed Transmission Projects Electric Transmission Texas ( ETT ) JV between AEP and MidAmerican formed to build transmission lines in ERCOT ETT receives revenues that allow for a recovery cost-of-service approach with a regulated rate of return on equity In December 2007, $250MM senior unsecured revolving credit facility raised for working capital and general corporate purposes, including transmission construction and acquisition Pricing of L+87.5bps for drawn portion of revolver, availability restricted to maintain 60/40 debt to equity structure Trans-Allegheny Interstate Line ( TrAIL ) 215 mile, 500kV transmission line through Pennsylvania, West Virginia, and Virginia, sponsored by Allegheny Energy, Inc. Entitled to earn return on equity of 12.7% as set by FERC per cost-of-service methodology as well as full recovery of costs Aug 2008: Raised $530MM senior secured construction facility with term of 7 years and pricing of L to 200 bps 13

15 Examples of Privately Financed Transmission Projects (continued) Path mile, 500kV line built upon an existing transmission corridor to relieve congestion between north to south capacity in California, developed by Trans-Elect and WAPA Tariff set by the FERC allows for full cost recovery of projects over the life of the asset and 13.5% return on equity based on a 50/50 debt to equity structure 2003: limited-recourse financing was raised primarily in the project bond market with $151 MM in 25 year/20 year bonds (with an additional $19.5MM in four year bank loans that was raised to cover potential cost overruns or completion delays) TransBay Cable 53 mile, 400MW 200kV cable that runs along San Francisco Bay to transfer existing energy resources from City of Pittsburg to San Francisco, projected in-service date of 2010 Developed as a Public-Private partnership between Babcock & Brown and Pittsburg Power Co. (municipal utility for City of Pittsburg) Similar to Path 15, Tariff set by the FERC allows for full cost recovery of projects over the life of the asset and 13.5% return on equity based on a 50/50 debt to equity structure 2007: Project level debt of $267MM with a term of construction + 30 years; there was also $188MM of subordinated debt raised for a shorter term. The bank debt received credit enhancement through utilization of a wrap from a monoline insurer Neptune Cable 65 mile, 660MW HVDC underwater transmission line connecting Sayreville, NJ and Long Island, NY with an in-service date of 2007 Selected in June 2004 RFP by Long Island Power Authority ( LIPA ) for 20 year firm transmission capacity purchase agreement Raised $550MM in private placement with 22 year term and pricing of T+175bps 14

16 Conventional Project Finance Options Project Bank markets Dramatic reduction in liquidity among lending banks Club deals vs Underwritings Flight to quality Significantly increased pricing Still can be the least expensive cost of capital for shorter tenors Well-suited for construction but not good match for transmission operating period Project Bond markets Structured project bonds typically lags acceptance of high quality issuers Access to BBB issues have started to appear, albeit with significant premiums Ultimate pricing driven by underlying credit spread plus premium for perceived illiquidity Tenor advantage in matching transmission operating periods Make-whole disadvantage Previous transmission projects have been well structured with either long term contracts (i.e. Neptune) or an approved cost-of-service methodology (i.e. TransBay) Many projects currently have a chicken and egg problem Difficult to finance without long term contracts Difficult to secure contracts without evidence of financeability 15

17 Conclusion Relatively few transmission projects have been financed privately Transmission projects have generally been well received in both the bank and bond markets; however they have also generally had the benefit of strong long term revenue contracts or the benefit of rate regulation There will be increased focus on contractual revenues due to tightness in credit markets. Any large transmission projects with non-trivial merchant risk will likely need external support or they may need to wait indefinitely until long term contracts can be secured Government financing/ partnerships may provide the support necessary to finance projects now 16

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