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Structuring Proxy Revenue Swaps in Wind Energy...
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Transcript of Structuring Proxy Revenue Swaps in Wind Energy...
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Presenting a live 90-minute webinar with interactive Q&A
Structuring Proxy Revenue Swaps
in Wind Energy Projects Leveraging a New Financial Product to Mitigate Energy Price Risk and Wind Resource Uncertainty
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, MAY 23, 2017
Robert Eberhardt, Partner, Chadbourne & Parke, New York
John J. Leonti, Partner, Troutman Sanders, New York and San Francisco
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Proxy Revenue Swaps in
Renewable Energy
Projects
Rob Eberhardt, Chadbourne & Parke LLP
John Leonti, Troutman Sanders LLP
Strafford CLE Webinar
May 23, 2017
What is a Proxy Revenue Swap?
• New risk management tool for the wind energy industry • Swap of fixed annual payment for floating revenues of a wind
project (driven by the hourly wind resource and power prices)
• Hedge providers are participants in weather risk market looking for weather-derived exposure not correlated with other financial markets
• Merchant power price risks and wind resource risks both
transferred in an integrated derivative contract
• Tenors of up to 10 years long enough to support project financing,
including tax equity
8
Proxy Revenue Swaps Signed in 2016
Project Market Sponsor Lender Tax Equity
Hedge Provider
Back-to-Back Price Hedge Provider
Calculation Agent
Bloom (KS)
SPP Capital Power Corp.
N/A Goldman Sachs
Allianz Risk Transfer / Nephila Capital
Microsoft Corporation
REsurety
Old Settler (TX)
ERCOT Apex Clean Energy
Deutsche Bank
JPMorgan (lead)
Allianz Risk Transfer / Nephila Capital
Confidential REsurety
Not Public (OK)
SPP Not Public
N/A N/A Allianz Risk Transfer / Nephila Capital
Confidential REsurety
9
Comparison of Offtake Contracts:
Price
Power Purchase Agreement
Fixed Volume Price Swap (“Bank Hedge”)
Corporate / “Virtual” PPA
Proxy Revenue Swap
Project’s Counterparty
Utility Commodities Merchant (Financial/Strategic)
Corporation Weather Risk Investor
Physical vs Financial
Physical Physical Financial Financial
Product Energy and RECs Energy plus potentially RECs
Energy and RECs Energy plus potentially RECs
Unit Price Fixed Fixed Fixed Effectively Varies by Volume
Settlement Point Project Node Trading Hub Project Node or Trading Hub
Trading Hub
Price Basis Risk No Yes (but includes Tracking Account)
Depends on Settlement Point / Shared Risk
Yes
Market Sales? No Yes Yes Yes
10
Comparison of Offtake Contracts:
Volume
Power Purchase Agreement
Fixed Volume Price Swap (“Bank Hedge”)
Corporate / “Virtual” PPA
Proxy Revenue Swap
Project’s Counterparty
Utility Commodities Merchant (Financial/Strategic)
Corporation Weather Risk Investor
Physical vs Financial
Physical Physical Financial Financial
Revenue Based on Wind Production?
Yes Yes Yes No
Revenue Based on Availability?
Yes Yes Yes Yes
Revenue Based on Efficiency?
Yes Yes Yes Yes
Fixed Delivery Obligations
None Hourly Delivery Obligations (P99)
None None
Minimum Delivery Obligations
Annual Minimum Production
None Annual Minimum Availability
None
11
Assumptions and Data
Assumptions Fixed in Contract at Closing Data Collected for Each Settlement Interval
Fixed Payment (in $) Detailed (10 minute) Turbine-Specific Wind Data from Project SCADA
Number of Wind Turbines in Project (e.g. 100) Wind Data from Permanent Met Towner
Power Curve Other Meteorological Data
Project Operational Efficiency (e.g. 90%) Market Prices at Hub Published by ISO
Contracted Fraction Production Data (both Turbine-Specific and at Project Meter)
13
Power Curve
Wind Speed (m/s)
Output (kw)
0 0
4 100
6 300
8 900
10 1800
14 2500
16 2500
20 2500
24 2500
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Wind Data
DATE TIME WTG 1 WTG 2 WTG 3 … WTG 49 WTG 50
01.01.2018 0:00 15.5 16.5 16.1 … 16.6 15.2
01.01.2018 0:10 15.5 16.5 16.2 … 16.7 15.2
01.01.2018 0:20 15.7 16.6 16.2 … 16.7 15.1
01.01.2018 0:30 15.6 16.6 16.1 … 16.7 15
01.01.2018 0:40 15.7 16.7 16 … 16.7 15.1
… … … … … … … …
01.01.2018 23:40 10.1 12.4 14.4 … 10.2 11.6
01.01.2018 23:50 10.2 12.2 14.2 … 10.3 11.7
01.02.2018 0:00 10.2 12.2 14.3 … 10.3 11.7
… … … … … … … …
04.30.2018 23:20 16.4 17.9 16.2 … 18.3 17.1
04.30.2018 23:30 16.5 17.8 16.4 … 18.3 17
04.30.2018 23:40 16.6 17.9 16.4 … 18.4 16.9
04.30.2018 23:50 16.6 18 16.4 … 18.4 16.9
15
Proxy Revenue Calculation
• Power Curve-Derived Generation: Energy (in MWh) for a wind turbine during a Calculation Interval (e.g. 10 minute period) estimated based on:
Power Curve and Measured Wind Speed at Turbine
• Proxy Generation: Sum for all wind turbines during each Calculation Interval of:
Power Curve-Derived Generation x Expected Operational Efficiency
• Proxy Revenue: Sum for each Calculation Interval during the Settlement Period (e.g. 3 months) of:
Proxy Generation x Day-Ahead Hub Energy Price
16
Two-Way Settlement
Wind
Project
Hedge
Provider Settlement Amount
If Proxy Revenue > Fixed Payment High winds, high prices, or a combination during settlement period
Wind
Project
Hedge
Provider Settlement Amount
If Proxy Revenue < Fixed Payment Low winds, low prices, or a combination during settlement period
17
Project Receives Merchant Revenues
Wind
Project
Hedge
Provider Settlement Amount
Market
Merchant
Revenue
18
The Calculation Agent
• Responsible for Preparing Settlement Reports
• Performs Specified Power Curve Adjustments
• Assesses Data Quality and Excludes Invalid Data
• Proposes Calculation Methods for Unspecified Circumstances
• Identifies Operational Losses (e.g., Availability, Performance,
Operational Losses)
19
Fees
• Upfront Structuring Fee to Hedge Provider
• Annual Fee to Hedge Provider
• Service Fees for Calculation and Reporting Services
21
Hedge Provider Credit Support
• Critical for Project Financing
• Public Credit Ratings (S&P, Moody’s, Fitch, A.M. Best)
• Possibility of Downgrade Protection
22
Project Credit Support
• Cash or Letter of Credit of Fixed Amounts
• Issuing Bank Downgrade Protection
• Parent Guarantees
• Possibility of Liens on Project Assets
• Negative Covenants
23
Adjustments and Partial Termination
• As-Built Conditions Inconsistent With Assumptions
• Casualty / Condemnation
• Wake Impacts of Neighboring Projects
24
Documentation
• ISDA Documentation
• Confirmation
• Master Agreement
• Schedule
• Credit Support Annex
• Departures from ISDA Master Agreement Standard Terms, e.g.
• Cure Periods
• Cross-Acceleration (not Cross-Default)
• No Credit Event Upon Merger
• Calculation Services Agreement with Calculation Agent
26
Project Company Covenants
• Customary Limits for Special-Purpose Project Companies, e.g.
• Indebtedness and Liens
• Other Commodity Hedges
• Asset Sales
• Investments
• Insurance / Casualty Events
• Operation and Maintenance of Anemometers on Permanent Met
Towers and Each Nacelle
• Replace Unreliable Anemometers
27
Additional Termination Events
• Failure to Achieve Commercial Operations by Guaranteed Date
• Breach of Negative Covenants (No Cure)
• Abandonment
28
Bankruptcy Issues
• Parties Agree that Safe Harbor Provisions Apply
• Termination / Liquidation Permitted
• Setoffs / Netting Permitted
• Certain Pre-Petition Transfers Not Subject to Avoidance
29
Dodd-Frank Requirements
• Commercial End-User Exception to Mandatory Clearing /
Exchange-Trading Requirements
• Real-Time Reporting Rules (CFTC Rules Part 43)
• Swap Data Reporting (SDR) Rules (CFTC Rules Part 45)
• Who is the Reporting Party? (Often the Project Company.)
• Possibility of Reporting Service Agreement
30
Thank You
Rob Eberhardt
Chadbourne & Parke LLP
John Leonti
Troutman Sanders LLP
31