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Kpmg english version

  1. 1. Commercial returns from UK offshore wind <ul><li>September 2011 </li></ul>
  2. 2. Key recent KPMG European credentials and thought leadership <ul><ul><ul><li>In 2010, KPMG demonstrated an excellent track record of closing renewables transactions, including two landmark offshore wind transactions </li></ul></ul></ul><ul><ul><ul><li>KPMG has also advised some of Europe’s largest utilities on their renewables and broader generation strategies in recent years </li></ul></ul></ul><ul><ul><ul><li>We have also demonstrated clear sector thought leadership: </li></ul></ul></ul>Selected renewable energy credentials Selected global power sector M&A credentials The winds of change : An insight into M&A in the renewable energy sector in 2009 Powering ahead : an outlook for renewable energy M&A 2010 Offshore wind farms in Europe: 2010 Survey United Kingdom CEE Ireland MENA Green Power 2011: the KPMG renewable energy M&A report Corporate Finance Advisor to one of the successful investors on its acquisition of a share from RWE € 1.8 billion 2010 Gwynt y Mor project 576MW Corporate Finance Advisor on the partner search for its offshore wind project, DanTysk (288 MW) € 1 billion 2010 Corporate Finance Advisor to acquire a 73MW portfolio of German operating onshore wind projects from DIF Value not disclosed 2011 EOS Holding Horizon Nuclear Power Acting as advisor in relation to plans for nuclear new build in the UK Value not disclosed Ongoing DECC CCS project Acting as financial advisor in relation to the Carbon Capture and Storage Demonstration Project £1 billion Ongoing Lead financial advisor to the Polish State Treasury in the disposal process of the State’s shares in Energa S.A. Ongoing Lead financial advisor to Viridian senior lenders on NIE sale and Viridian financial restructuring $2 billion Ongoing Financial advisor in respect of proposed transfer of Transmission Asset ownership from ESB Value not disclosed Ongoing Emirates Nuclear Energy Corp Acting as financial advisor on the development of a civil nuclear power programme $20.4 billion Ongoing Repsol Corporate Finance £50 million 2011 Advisor to Repsol on its acquisition of Seaenergy Renewables Limited Ampère Equity Fund Corporate Finance € 500m 2008 Lead advisor for the set up of the fund, to invest throughout Western Europe
  3. 3. Mechanisms for achieving returns from UK offshore wind There are increasing opportunities to enter the market <ul><li>Projects currently being developed are much larger than historically </li></ul><ul><ul><ul><li>In excess of £100 billion implied capital commitments, with utilities’ balance sheets inevitably under pressure </li></ul></ul></ul><ul><ul><ul><li>Market will become more fragmented </li></ul></ul></ul><ul><ul><ul><li>Utilities already looking for partners before construction or to sell stakes post-commissioning </li></ul></ul></ul><ul><ul><ul><li>M&A activity is set to increase </li></ul></ul></ul><ul><ul><li>Market shares of UK offshore wind projects in operation or construction </li></ul></ul><ul><ul><li>Market shares of all UK offshore wind projects, including pre-construction </li></ul></ul>Total 4.9 GW Total 47 GW Forecast UK offshore wind capex by developer (£ billion) Note: Uncommitted capex only (i.e. excludes projects currently under construction)
  4. 4. Mechanisms for achieving returns from UK offshore wind Specific opportunities to enter the market <ul><li>There are opportunities to partner with the utilities on UK projects: </li></ul><ul><ul><ul><li>DONG – has already partnered with investors on two projects. Will likely consider partners for further projects (e.g. ‘ Burbo ’) </li></ul></ul></ul><ul><ul><ul><li>RWE – opportunities for stakes in ‘ Gwynt y Mor ’ and ‘ Rhyl Flats ’ </li></ul></ul></ul><ul><ul><ul><li>Centrica – has already introduced partners for its offshore wind projects. Will consider partners for its next big construction project ‘ Race Bank ’ </li></ul></ul></ul><ul><li>Alternatively, there are opportunities to acquire projects from independent developers </li></ul><ul><ul><ul><li>Warwick Energy – has the nearest term UK construction project owned by an independent developer, ‘ Dudgeon East ’. A developer with a strong offshore wind track record (two operating projects delivered to date) </li></ul></ul></ul><ul><ul><ul><li>Mainstream – has two development opportunities in the UK, although they are further from start of construction. Also has a strong offshore wind track record; the team has delivered projects in UK and Ireland </li></ul></ul></ul>
  5. 5. Mechanisms for achieving commercial returns from UK offshore wind Transaction values have shown large variations <ul><li>Recent pre-construction transactions have ranged from £0 to just under £200,000/MW </li></ul><ul><ul><ul><li>Differences in part reflect very different project economics </li></ul></ul></ul><ul><ul><ul><li>Market turmoil of past three years has also had an important effect </li></ul></ul></ul><ul><ul><ul><li>There are still a low number of investors in offshore wind beyond the main utilities </li></ul></ul></ul>Round One transactions Round Two transactions Walney £176k/MW Gwynt y Mor £0k/MW Sea Energy £33k/MW <ul><ul><ul><li>Development values of £33,000 to £67,000 per MW </li></ul></ul></ul><ul><ul><ul><li>Many of these projects had received their construction permits </li></ul></ul></ul><ul><ul><ul><li>Projects mainly in construction, therefore may include an element of capex </li></ul></ul></ul>
  6. 6. Mechanisms for achieving commercial returns from UK offshore wind Current offshore wind structures to manage capital and ratings Balance sheet financing External financing (3 options) UJV - per London Array Holdco financing - per Walney <ul><ul><li>Split of project assets / revenues </li></ul></ul><ul><ul><li>Complex and inflexible structure </li></ul></ul><ul><ul><li>More simple structure </li></ul></ul><ul><ul><li>Except for PPAs </li></ul></ul><ul><ul><li>Simple approach </li></ul></ul><ul><ul><li>Little structuring </li></ul></ul>Utility Investor Project 49% 51% Internal funding Utility trading co Utility Investor Project 49% 51% PPA ‘A’ PPA ‘B’ External debt PPA ‘A’ Under options 2 & 3, a part project financing can only be achieved if: <ul><ul><li>Minority protection and strong governance </li></ul></ul><ul><ul><li>Sponsors aligned and agreed approach </li></ul></ul>Per DanTysk License Holder Utility Investor Investor SPV External debt 49% 51% UJV (Joint operating agreement External debt Utility Investor Project 49% 51% Project financing - per Lincs <ul><ul><li>Simplest for external lenders </li></ul></ul><ul><ul><li>Negative for utility rating </li></ul></ul>All structures can achieve similar results – except a conventional project financing 1 2 3 <ul><ul><li>Few junior balance sheet investors </li></ul></ul>For all three options, the utility would have to accept project contracts that reflect lender requirements Full consolidation Full consolidation Full consolidation Proportional consolidation Negative from credit ratings perspective, as project debt included in corporate gearing calculation Proportional consolidation of project, therefore no ‘leveraging up’ Subject to ‘stand behind the project test – i.e. would step into partner’s position
  7. 7. Expectations for commercial returns from UK offshore wind Projects are heavily supported by UK government subsidy <ul><li>Currently over 60% of the project revenues come from Government subsidy </li></ul><ul><ul><ul><li>Subsidy has increased in recent years as projects have been further from shore and thus more expensive to build </li></ul></ul></ul><ul><ul><ul><li>Current Green Certificate mechanism to be replaced by feed in tariff </li></ul></ul></ul>Construction period Development period Operational period Illustrative split of revenues Illustrative split of operating costs
  8. 8. Expectations for commercial returns from UK offshore wind Key investment assumptions <ul><li>Relatively small number of factors have large impact on commercial returns </li></ul><ul><ul><li>Revenue </li></ul></ul><ul><ul><ul><li>Project-specific, P50 output - typically 3,250-3,500 MWh / MW installed (c.35%-40% load factor) </li></ul></ul></ul><ul><ul><ul><li>Future power prices in line with current one year forward prices (c.£55/MWh), inflating at RPI + 0.5% </li></ul></ul></ul><ul><ul><ul><li>2 ROCs (Green Certificates) per MWh produced, adding c.£85-90/MWh </li></ul></ul></ul><ul><ul><ul><li>Power Purchase Agreement at 90% market price for wholesale power, ROCs and LECs </li></ul></ul></ul><ul><ul><li>Costs </li></ul></ul><ul><ul><ul><li>Capex of just under £3 million per MW installed (excludes cost of offshore transmission assets) </li></ul></ul></ul><ul><ul><ul><li>Opex of £125k per MW installed </li></ul></ul></ul><ul><ul><li>Timing </li></ul></ul><ul><ul><ul><li>20 year operating life, following 4 year development timeframe and 3 year construction period </li></ul></ul></ul>
  9. 9. Expectations for commercial returns from UK offshore wind Project economics are most influenced by revenue and capex <ul><li>Typical whole life project IRRs range from 10% to 14% </li></ul><ul><ul><ul><li>Revenue assumptions have the largest impact on economics </li></ul></ul></ul><ul><ul><ul><li>Capex is far more important than opex </li></ul></ul></ul><ul><ul><ul><li>Capex has increased in recent years. However there will be pressure to reduce costs; to ensure political acceptability of support </li></ul></ul></ul>Revenue Costs Timing OFTO Sensitivity analysis based on an illustrative base-case project Illustrative IRR of 12.4%
  10. 10. Thank you <ul><li>Presentation by Adrian Scholtz </li></ul><ul><li>Director, KPMG Corporate Finance </li></ul><ul><li>E-mail: [email_address] </li></ul><ul><li>Telephone: +44 (0) 207 311 4230 </li></ul>
  11. 11. <ul><li>The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. </li></ul><ul><li>© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. </li></ul><ul><li>The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). </li></ul>