merchant plant funding assistance product potential roles for bank participation february 2000
TRANSCRIPT
Merchant Plant Funding Assistance ProductPotential Roles for Bank Participation
February 2000
©1999 BR-9120227-22
Confidential
Preface
Merchant generators face significant financial hurdles
– Low credit ratings
– High coverage requirements
– Low leverage ratios
This is particularly true for mid-merit and peaking units
The financial community seems fixated on intrinsic value
– Profits from energy sales dominate the analysis
– Minimal consideration for extrinsic value (optionality)
Possible reasons for this include:
– No familiarity with underlying commodity markets
– Lack of conviction around modeled future price lines
– Uncertainty with collateral valuations
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Enron’s PerspectiveUnlike other lenders, Enron can:
– Manage the commodity price risk position
– Take possession of and operate the collateral to our best commercial advantage
– Be more creative with debtor restructurings
This represents an obvious commercial opportunity for Enron to earn fees assisting merchant generators to access lower cost of capital
– Absorb and manage merchant price line risk
Concept is only valuable to merchant generators if we can accomplish an investment grade rating or at a minimum higher leverage at project level
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Basic Business Deal
Enron will enter into commodity price risk management contracts with a Project LLC designed to provide a minimum amount of commodity revenues sufficient to meet at least 1.0x debt service
– On a par amount of bonds we will specify in advance
Payments owed Enron under any contract will be secured by a second mortgage
– Subordinate only to senior bonds
– Exercisable after fairly short cure period
Enron’s ultimate hammer over equity is the mortgage
In essence, Enron has sold equity the right to put the project to Enron
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Contract FeaturesThe two contracts require performance regardless of the operable status of the power plant
The two contracts are not linked to each other as to performance
Each of the two contracts can be terminated due to non-performance
Payments required under the two contracts will exactly offset each other
The two contracts are non-invasive on plant operations
– Financial only, no physical elements
– No effect on dispatch of plant, no consumption of environmental permit capacity, or influence on the marketing of capacity, energy and ancillary services
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Basic Price Risk Management Contracts
EPMIFinancial - Buy Contract
EPMIFinancial - Sell Contract
Project
$ Fixed
$ Formula e-
$ Formula e-
$ Fixed
$ Formula e- The positive difference, if any, between a market based index and a strike price = fuel price * heat rate + VOM.
Revenues:
Energy, capacity, ancillaries
Insurance proceeds, LD pmts. And all other
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O & M
Equity
EPMIFin - Sell
EPMIFin - Buy
$ formula e-
$ Fixed = D/S
$ Fixed $ formula e-
Basic Credit Structure
• Credit Contribution is from inserting contracts on either side of debt service in the flow of funds• As long as $ formula e- is paid under financial-buy contract, EPMI makes fixed payment which equals debt service • $ Fixed payment under financial-sell contract becomes the equivalent of debt service to the project• Expected result is an investment grade rating
Fin - Sell
D/S
Revenues
Project LLC
©1999 BR-9120227-88
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Basic Deal Structure
• EPMI financial-buy is directly with the trustee to make contracts bankrupt remote • EPMI financial-sell is with the LLC• Reimbursement agreement obligates LLC to repay monies owed to Enron under STET• Secured by a second mortgage as the assets of the LLC
LLCTrustee
EPMI Fin Sell
ENRONBaa2/BBB+
EPMIFin. Buy
guaranteeguarantee
$ FixedReimbursementAgreement
e-
e-$ Fixed e-
$ Proceeds
Bondholders
$ Proceeds
$ D/S
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Expanded Deal Structure withEnron as Project Lender
• Potential for credit duration mismatch between 20-year term of either loan and a 5-year insurance company wrap
• The insurance wrap will likely evergreen every five years• Funding loan must accommodate springing credit and interest rate change if
insurance wrap doesn’t evergreen
LLC/Trustee
EPMI
EnronSPV
InsuranceCo.
Capital/BankMarkets
5-yearwrap
$ FundingLoan
20-year$ Proj.-Loan
20-year
Ins. Co. ratingBBB+/Baa2
$ D/S$ D/S
$ Fixed$ Fixede-
Fin
Selle-
Fin
Buy
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Example: Simple Cycle Plant Costing $500/kW
• Equity cost: $500/kW• Represents equity risk basis
• ENA loan: $375/kW• Outstanding balance in any one year represents Enron’s risk basis• Mortgage style amortization schedule
$/kW Outstanding Debt Curve
$-
$100
$200
$300
$400
$500
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Date
$/kW DEBT
$500/kw equals equity risk basis
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Predicting the psychology of equity
Highly unlikely that equitywill exercise put earlyin its life…equity has toomuch invested.
At very least, equity will refinancewhen residual value is in excess ofpar amount of bonds outstanding
• Enron has sold equity a put on the underlying project putting Enron into essentially a creditor position• Enron’s security features, restrictive covenants and mortgage motivates equity to refinance ASAP• As soon as equity can achieve higher leverage/term than outstanding Enron loan, equity will refinance
$/kW Outstanding Debt Curve
$-
$100
$200
$300
$400
$5002
00
0
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
Date
$/k
W
DEBT
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Potential Bank Roles
1 Basic deal structure: sell to Enron a put to the bank of the outstanding senior project debt that Enron may have to purchase to control bankruptcy process and exercise our collateral rights– Room to negotiate x% of debt that can be put (relates to loan
to value ratios), interest rate adjusters, or start and end dates of option exercise
2 Expanded deal structure: extend funding loan to the Enron SPV that incorporates springing interest rate and credit features
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Basic Deal StructureEvent map leading to put of bonds to bank
LLCTrustee
EPMI Fin Sell
ENRONBaa2/BBB+
EPMIFin. Buy
guaranteeguarantee
$ FixedReimbursementAgreement
e-
e-$ Fixed e-
SeniorBondholders
$ Proceeds
Bank
$ Proceeds
$ D/S
EPMI buysbonds
EPMI putsbonds
1. LLC defaults under EPMI Financial-sell2. EPMI terminates Financial-sell
• Causes MTM to be owed to EPMI• Creates 2nd secured obligation under reimbursement agreement
3. Project LLC goes into bankruptcy4. EPMI buys Sr. bonds to control process5. EPMI takes control of asset through bankruptcy6. EPMI puts bonds to bank
• Restructuring opportunity• Reactivates mortgage to bank
©1999 BR-9120227-1414
ConfidentialExpanded Deal Structure
Credit and interest rate springs to Enron levels if insurance securing debt doesn’t evergreen
• The springing rates will be set and known at closing• The springing option dates will occur 3-times over life of the debt
corresponding to years 5,10 and 15
Closing 5 10 15 20 years
Insurance supported credit spread
%Credit
Spread
ENE 15-year
ENE 10-year
ENE 5-year
InitialInsurance
Period
EvergreenInsurance
Period
EvergreenInsurance
Period
EvergreenInsurance
Period