Financing in the Canadian Power Sector
Michael Badham, Partner
September 20, 2004
2 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
The Canadian Economy ProfileKey Economic Indicators / Drivers
Real GDP
Source: Statistics Canada Source: Government of Ontario
Ontario GDP by Industry, 2003 (in $1997)
Source: Government of Ontario Source: Statistics Canada
Canadian Inflation
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1999 2000 2001 2002 2003
($ m
illio
ns)
Canada Quebec Ontario BC/Alberta
1.90%
21.12%
4.94%
2.30%
3.79%
4.38%
12.25%
21.95%
7.62%
4.17%
5.37%
5.10%5.11% Primary
Manufacturing
Construction
Utilities
Transportation & Warehousing
Information & Culture
Wholesale & Retail Trade
Finance, Insurance & Real Estate
Professional & Administrative Services
Education
Health Care & Social Services
Public Administration
Other Services
15%
0%
3%
6%
9%
12%
1974 20021978 1982 1986 1990 1994 1998
TARGET LEVEL
Ontario EconomyReal growth, 2003 1.3%Nominal GDP, 2003 ($ millions) 493,416 % of Canada 40.6Personal Income ($ millions) 381,005 % of Canada 41.1Personal Income Per Capital ($) Ontario 31,133 Canada 29,341CPI Inflation 2003 2.7%Unemployment Rate 2003 7.0%
Ontario Total Trade 2003 ($ millions)Exports 308,903Imports 269,745Trade Balance 39,158
3 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
Opportunity in the Power Supply Market
• By 2014 demand could reach 32,000 MW.
• Total capacity connected to the grid is 30,501 MW.
• Accessible capacity is 27,500 MW. Typical demand is 25,000 MW.
• Goal: Refurbish, rebuild, or conserve 25,000 MW of generating capacity by 2020.
• Commitment: Eliminate coal generated electivity by 2007.
• Target: By 2010, 10% (+2,000 MW) of power will come from renewable, non-hydro sources.
• Need: To met demand and replace coal, 11,600 MW in new generation capacity by 2014.
Energy Production in OntarioBy Fuel Type
Nuclear, 46%
Hydro, 24%
Coal, 22%
Gas, 7% Other, 1%
Source: IMO
Source: IMO
Ontario Opportunity Through 2014
0
8,000
16,000
24,000
32,000
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
(Cap
aci
ty -
MW
)
Nuclear Hydro Gas Non-Hydro Renewable New Renewable Coal
11,600 MW2,000 MW
Demand
4 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
Government Supply
Objective: To build non-hydro renewable energy of over 2000 MW by 2010
Capacity: RFI for 2,500 MW recently released
Opportunities
Bruce Nuclear Plant
Objective: Start-up Units A 3&4
Capacity: 750 MW X 2
Cost: $1.5 b - $2.0 b
Opportunity: Niagara Falls Hydro Plant
Objective: Additional Diversion Tunnel
Capacity: 100 – 200 MW
Cost: +$300 mm
Government Supply
Objective: To provide +300 MW of non-hydro renewable energy
Capacity: RFP (Closed August 2004)
5 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
The Value Environment
ProjectFinancingPartnerDundee
Advisory PartnerDeloitte / FMC
EngineeringPartnerAecon
Public PartnerGovernment of Ontario
6 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
The Trend Towards Private Public Partnerships
Source: The Canadian Council for Public-Private Partnerships
1996 1997 1998 ... 2003 2004
Ministry/ Department
Crown Corporation
Special Operating Agency
Privatization
Design/Build/ Operate
Design/Build/ Finance/Operate
Contract Out
Design/Build
Confederation Bridge
NAV Canada
Hwy 407
Sea to Sky Hwy
GTAA
Bruce Power LP
Deg
ree o
f R
isk T
ran
sfe
r to
Pri
vate
Secto
r
PrivateDebt/Equity
High
Low
7 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
The Deal Maker – Risk Transfer
Form
Risk Transfer (Government toPrivate Sector)
High
Ministry /Department
CrownCorporation
Design / Build
ContractOut
Design/Build/Operate
Design/Build/Finance/Operate
Privatization
IncrementallyAssumed Risks
Policy Risk &Approval Risk
RegulatoryRisk
RevenueRisk
CreditRisk
General Market& Economic Risk
Optimal Structures
Total Project Finance Risk
Low
8 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
Determining the Investment Opportunity
RiskTransfer
• User / Service Fees• Ancillary Charges
Revenue Inflow
• Operating Costs• Capital Costs• Financing Costs• Taxation Costs
Cash Outflows
Technical
Inputs
• Construction• Development• Advisory• Engineering• Other
•Debt Service
•Equity Return
• IRR Target
Financing
Government
PublicSector
Funding
PrivateSector
Funding
Bidder
ROI
9 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
Considering Public Sector Value for Money
Retained Cost/ Revenues
Raw Costs/Revenues
Risks and EfficienciesCompetitive Neutrality
Public Delivery
Risks• Opportunity Cost Risk• Efficiency Risk• Credit Rating Risk• Quality Risk• Rate Setting
• Higher Financing Costs
• Rate of Return
Cost
Costs under private delivery must be less to warrant use of private financing
Retained Cost/ Revenues
Raw Costs/Revenues
Private Delivery
10 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
Opportunity Assessment
Project Planning Go / No Go Decision Transaction Process Contract Execution Implementation
Bid Assessment Bid / No Bid Decision Bid Development Contract Negotiations Post Transaction Development
Public Sector Considerations Private Sector Considerations
• Private sector wants opportunities that:• Have a clearly articulated need• Commitment from public sector to
work with private sector and a strong ‘champion’ of the project
• Credible processes in place• Clear performance standards
• Implementation of any procurement process must consider public sector issues around
• Transparency and fairness of process• Public opinion / mood• ‘Bidabilty’ and bid costs• Requirements and realities of capital
markets
Success Factors
11 Financing in the Canadian Power Sector © 2004 Deloitte & Touche LLP and affiliated entities.
An Action Plan for Canadian P3 Opportunities
Ontario BC Alberta Quebec
Establish Canadian presence to monitor developments in key
market places
Assess needs in comparison to skill sets
and capabilities – i.e. determine partnering
needs
Engineering Finance Advisory Supply
Confirms interest Leads to ‘front-end’
policy development
Present opportunities to selected provincial
governments in areas of need
Be proactive –do not wait for the opportunities to come to you.
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© 2004 Deloitte & Touche LLP and affiliated entities.