Risk, return and valuation of wind farms through the project - PowerPoint PPT Presentation

Draft for discussion purposes only Risk, return and valuation of wind farms through the project lifecycle Megan Raynal All Energy Conference,11 October 2017

Draft for discussion purposes only Risks, Returns and Valuation Over the last two years there has been a surge in interest and investment in the renewable energy sector due to the 2020 RET target, forecast high energy prices for the next few years and innovative funding provided by organisations such as the Clean energy finance corporation. More investors are interested in renewable energy. There are now many small scale investors, as well as large investors. In addition, existing investors are moving into different stages in the project lifecycle. For example, institutional investors are moving into construction stage projects, whereas historically they more commonly focused on brownfields projects. As investment increases, margins and IRRs are getting tighter across many assets. It is therefore important to understand drivers of risk and return across the project lifecycle. This presentation will look at three stages in the project lifecycle: 1. greenfields/development 2. construction/seasoning 3. brownfields/operational

Draft for discussion purposes only Types of Value There are two kinds of value – market value and special value. Market Value Special Value Special value does take into account the specific circumstances of the International Valuation Standards Council (“IVSC”) definition: buyer or seller, and may include a strategic premium or discount. “Market Value is the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.” The concept of market value does not consider the circumstances of any specific buyer or seller, and does not include any strategic premium that may be placed on the business or asset by a particular buyer or seller. Special value on the other hand, does take into account the specific circumstances of the buyer or seller, and may include a strategic premium or discount. The difference between market value and special value is important to know because some wind farm transactions represent special value, not market value,. For example, buyers want to obtain certainty of power supply, or they want to test or showcase new technology, and so they may be prepared to pay more than market value. The concepts of market and special value are relevant when we look at the different stages of the project, because at each stage there may be different investors with different goals. Bearing this in mind, lets have a look at who invests at each stage. 3

Draft for discussion purposes only Contracts and counterparties impact risk and reward Greenfields & Construction On many projects, the Engineering Procurement and Construction (“EPC”) Contractor is often the equity investor at the greenfi elds and construction stages. EPC Contractors typically sell down once construction is complete so they don’t tie up capital. In addition to EPC contractors, institutions such as super funds are becoming increasingly involved in equity investment at the construction stage. At the greenfields stage, equity investors, particularly EPC contractors, may have specific strategic reasons to invest, outside of financial returns, so the value paid may reflect special value, not market value. Equity Agreement Finance Agreements Equity investors Project Company Lenders Connection Power Purchase Engineer, Operation & Agreement Agreement ("PPA")/ Procure & Maintenance Offtake Agreement Construct ("O&M") EPC Contractor O&M Contractor Network Offtaker Distributor Tripartite Agreements Source: Construction, operation, regulatory and bankability issues for utility scale renewable energy projects, PwC, Feb 2016

Draft for discussion purposes only Contracts and counterparties impact risk and reward Brownfields/operations At the brownfields stage, equity investors are more commonly institutional investors who are looking for financial reward and focus on market value. The operations and maintenance contractor and/or offtaker may also be an equity investor, particularly if their main business is operating energy generation facilities. For most equity investors and lenders, long term Purchase Price Agreements (“PPAs”) make the investment more attractive. It is mainly operators that prefer merchant risk. Now we have looked at contracts and counterparties, lets have a look at the key valuation considerations at each stage. Equity Agreement Finance Agreements Equity investors Project Company Lenders Connection Power Purchase Engineer, Operation & Agreement Agreement ("PPA")/ Procure & Maintenance Offtake Agreement Construct ("O&M") EPC Contractor O&M Contractor Network Offtaker Distributor Tripartite Agreements Source: Construction, operation, regulatory and bankability issues for utility scale renewable energy projects, PwC, Feb 2016

Draft for discussion purposes only Greenfields/Development stage The greenfields/development stage involves feasibility studies, design, environmental impact assessment, agreements and applications, wind studies, establishment of procurement and contracts, a business case, and culminates in a final investment decision. Valuation approaches include discounted cash flows and multiples-based approaches. • For discounted cash flows we look at different scenarios for pricing, demand or capacity factor, regulation/politics or some other variable, and see what the effect on value is, because there is so much uncertainty at this stage. • For multiples-based approaches we typically consider the enterprise value per megawatt (i.e. debt plus equity per megawatt), although EBITDA multiples are also sometimes used. In general, we prefer to use the discounted cash flow approach as the primary valuation approach, with the multiples approach as a cross check. This is because each wind farm transaction is highly idiosyncratic: some may have full PPAs; some may be entirely merchant; PPAs vary in length and have different prices; there are different technologies used in construction, etc. This makes it very difficult to compare like for like when using multiples. In addition, there is often limited publicly available data on transactions (the primary source of determining multiples), which makes the comparison more difficult. 6

Draft for discussion purposes only Greenfields/Development stage The graph below provides an overview of risk, return and uncertainty at different stages. The graph is simplistic because at each stage there are wide variations in risk, return and uncertainty for different assets. However, in general the logic of this graph holds for a single wind farm across its life. At the greenfields/development stage risks are high and returns outcomes are variable. Returns can be high if construction is efficient, the right pricing is obtained and a high capacity factor is achieved. One of the key characteristics of this stage is a high level of uncertainty. For example there may be uncertainty related to capacity factor, technology (depending on what is being installed), wind history, regulation, off-take agreements and pricing, amongst other things. The cost of equity is therefore typically higher at this stage than in later stages. Deloitte published research on global wind farm transaction multiples in April 2016 across the different stages. They reported in Euros, which I have converted to Australian dollars at the April 2016 exchange rate (1.4887). According to the Deloitte report, late greenfields development stage multiples for onshore wind farms are typically $0.3m/MW to $0.4m/MW globally. One of the reasons multiples are low at this stage is that the price paid is only the initial outlay. 1 2 3 High Low Uncertainty Risks Returns 9%-14% Cost Equity 0.3-0.4 Global Multiples (m/MW) Source of Global Multiples: Deloitte “A Market Approach for Valuing Wind Farm Assets, April 2016 for Global Multiples in Euro millions, converted to AUD millions at April 2016 exchange rates. 7

Draft for discussion purposes only Greenfields/Development stage Key valuation considerations at this stage include (but are not limited to): • grid access, • site location and access, • approvals, • technology, • construction schedule, • EPC experience, • PPAs (if any), • pricing forecasts, • generation forecasts, • Regulation/politics. 8