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J A N U A R Y 1 9 , 2 0 0 7. U R G E N T I S S U E S I N E N E R G Y F I N A N C I N G S. Presented by Paul Neuhedel. S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L. English_General.

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Presented by Paul Neuhedel


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This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party.This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan.Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan.

The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change.JPMorgan’s opinions and estimates constitute JPMorgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only.In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us.In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity.JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction.Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.

Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by JPMorgan.

JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation.JPMorgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.

IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P.Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A.JPMorgan deal team members may be employees of any of the foregoing entities.

This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.


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JPMorgan is the market leader in public power

  • Ranked #1 in Public Power

Tax-Exempt Public Power Underwriting 2002 to 2006 ($ billion)

  • JPMorgan led the largest public power transactions in:

    • 2002: JPMorgan led the largest public power financing ever – $11.3 billion for the State of California DWR

    • 2003: $1.4 billion transaction for Memphis Light, Gas and Water

    • 2005: $2.5 billion California Department of Water Resources and $1 billion Puerto Rico Electric Power Authority

  • JPMorgan is the #1 senior manager of public power financings since 2002 with over 25% of the public power market share

JPMorgan is a leading public power underwriter


Source: Securities Data Corporation as of January 7, 2007


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Issues in Energy Financing



Financing Products





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Environmental legislation has costly implications for utilities

  • The U.S. is taking a hard look at global warming legislation

  • Utilities are likely targets when the newly-elected Congress takes on energy issues

    • Congress plans to establish a fund to finance alternative energy sources – using money from oil companies

    • The new Speaker of the House has demonstrated global warming concerns – sponsor of the Safe Climate Act of 2006

    • Over 20 states have renewable energy mandates and almost 30 states have climate action plans to limit greenhouse gas emissions

  • A 20% reduction in CO2 emissions for a single 460 MW PC plant could cost $32 million per year



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Credit perspectives

  • Industry Outlook

  • Moody’s

    • Moody’s 2006-2007 Public Power Outlook projects “continued credit stability” through 2007

    • Median public rating for public power issuers is an A2

  • S&P

    • S&P’s Public Power Report Card similarly cites the overall credit stability of the industry

    • Only one non-investment grade rated utility, with 84% of all credits rated at least ‘A-’

  • Fitch

    • Fitch’s “U.S. Power and Gas 2007” claims public power continues to be a “solid and predictable sector”

    • Ratings of ‘A’ for wholesale power system and ‘A+’ for retail systems remain the norm

  • Credit considerations


  • Ability and willingness to pass on costs – automatic pass through

  • Contracts with members – length and step-up provisions

  • Offsets to construction risks

  • Maintenance of competitive position

  • Liquidity levels during construction

  • Use of proven technology

  • Potential environmental issues

  • Recovery of capital costs

  • Address transmission issues


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Natural gas and petroleum prices have risen dramatically in recent years

Average costs of fossil fuels ($)1


1 Costs measured in 106 Btu

Source: Electric Power Monthly. November 2006. Available


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Energy consumption and demand are on the rise

Energy consumption by fuel, 1980-2030 (quadrillion Btu)

  • History

  • Projections


Source: Annual Energy Outlook 2007 (Early Release)


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What is the current environment for financing power projects?



  • Investors are requiring a premium for non-recourse energy projects

  • Rating agencies are applying greater levels of scrutiny, particularly to

    • Liquidity levels

    • Fuel sources

    • Competitive position

    • Rate setting mechanisms (ability and willingness)

    • Counterparty risk

    • Ability of customer base to absorb higher prices without material increase in delinquency rates

  • Concerns over potential changes in transmission protocol and grid operations by FERC

  • Investors are beginning to focus on financial risks associated with environmental issues

  • Demand for high quality paper remains strong although credit spreads have narrowed as investors seek yield

  • Issuers implementing “full disclosure” are rewarded by investors

  • Historically low interest rate environment and current yield curve make both short and long-term debt financing attractive

  • Relative to IOUs and independent producers, public power utilities and cooperatives are viewed more favorably and are able to attract capital at a lower cost

  • Given the recent volatility in oil and gas, investors are more receptive to coal-fired projects

  • Investors like proven technologies



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Next wave of generation projects

  • Coal-fired baseload plants

    • Oklahoma Municipal Power Authority: 950 MW Red Rock Generation Facility

    • Wisconsin Public Power Inc.: 300 MW baseload plant in Escanaba

    • Illinois Municipal Power Agency/Indiana Municipal Power Agency: partners in Trimble County Unit No. 2, a 732 MW facility

    • Intermountain Power Agency: 2 unit, 1,650 MW Intermountain Power Project

    • Orlando Utilities Commission: 285 MW “clean” coal gasification plant at Stanton Energy Center

  • Gas-fired projects

    • Southern California Public Power Authority’s Magnolia project

    • Vernon’s Malburg Generating Station

  • Risks associated with building

    • Cost overruns

    • Schedule delays

    • New environmental regulations

    • Cost inflation

    • Use of unproven technologies



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Financing Products

Issues in Energy Financing







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Options for long-lead time financings

  • Long Term Debt

    • The cash market is an attractive option in the current low interest rate environment

  • Short Term Debt

    • Auction Rate Securities (ARS)

    • Variable Rate Demand Bonds (VRDBs)

  • Syndicated Loans

  • Index Bonds

    • CPI Bonds

    • % Libor Bonds

  • Hedging/Derivative products

    • Finance

    • Commodities

  • Energy Prepayments



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Syndicated loans can help meet utilities’ liquidity needs

  • Wide product spectrum in credit services

    • Letters of Credit

    • Liquidity Facilities

    • Loans

      • Term Loans

      • Revolving Lines of Credit

      • Bridge Financing

  • JPMorgan Chase Bank, N.A. can provide credit solutions

    • Strong ratings of Aa2/P-1 (stable), AA-/A-1+ (stable), and A+/F-1+ (positive) from Moody’s, S&P, and Fitch, respectively

    • Renown credit analysis and innovation

    • Innovative solutions for clients that blend derivatives and credit products

    • Strong record of agenting multi-bank deals fairly and smoothly

    • JPMorgan was ranked as the “Best Credit House” of 2006 by Credit Magazine



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What are CPI bonds?

  • CPI bonds overview

  • In the current market there is significant demand for Municipal CPI Bonds, especially from institutional investors looking for inflation hedging investments

  • Municipal CPI Bonds are floating rate bonds that pay a fixed spread over the trailing percentage change in the Consumer Price Index (CPI)

    • To date, issuers of Municipal CPI bonds have swapped them either to a fixed rate or BMA plus a fixed spread

  • In the current market, the Issuer can take advantage of this market opportunity and save 10 or more basis points relative to traditional fixed rate bonds in selected maturities

  • Discussions with investors, as well as recent CPI Bond issues, indicate demand for “AAA” insured CPI bonds in the 8 to 20 year maturity range


CPI + Spread

CPI Bonds

  • What drives investor demand for municipal CPI bonds?


  • The prospects for inflation have generated increased investor interest in inflation-linked products

  • Buyers of Municipal CPI bonds may be looking to express a view on inflation, fix a real rate of return and/or diversify their investment portfolio

  • Municipal CPI bonds offer a number of advantages relative to alternative investments

    • Commodities and stocks generally increase in value with rising inflation. However they do not provide direct or explicit inflation hedges, and are taxable

    • Tax-exempt money market funds are exempt but do not explicitly provide an inflation hedge

    • Treasury Inflation Protected Securities (TIPS) principal accretion structure generates “phantom” income and therefore have adverse tax implications


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What are % of LIBOR bonds?

Typical Bond Structure

  • Maturities range 10-30 years and can be bullets or amortizing structures

  • Interest based upon 67% of 3 month LIBOR plus a fixed spread

    • Could be structured using a different reference rate, such as 1 month LIBOR or a constant maturity swap rate (i.e., 5 or 10 year CMS rate)

  • Interest Paid Quarterly, with an Actual/Actual day count convention

    • Could be structured to pay with a different frequency or day count basis

  • May give Issuer a call option in 5 to 10 years

  • Investors do not have a put to the Issuer

  • Bonds are insured or highly rated (AA- or above)

  • Issuer sells bonds through a public offering to investors

    • Can be incorporated into multi-modal documents similar to VRDBs, if requested


% of LIBOR

+ Spread

% of LIBOR



Why are % of LIBOR bonds so desirable to investors?

  • Certain investors evaluate the % of LIBOR Bonds by comparing the % of LIBOR bonds swapped-to-fixed basis versus traditional fixed rate bonds

    • When compared to 20 year fixed rate bonds, the % of LIBOR bonds swapped-to-fixed would carry a lower all-in yield in the current market

    • Given the 5 year call on the bonds, a % of LIBOR bonds swapped-to-fixed would have a higher all-in yield in the current market

  • In addition, the current yield of the % of LIBOR bond is much higher than can be achieved in the current market on a long dated fixed rate bond due to the flatness of the yield curve

  • % of LIBOR bonds are a good diversification tool for this class of investor

    • If rates increase, fixed rate bonds will depreciate but the % of LIBOR bonds outperform, offering an attractive hedge


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Less liquidity /More expensive

Greater liquidity /Less expensive

Issuer trading

spread vs.

muni market

Muni bonds vs.


Muni bonds vs.


Tax reform


Tax reform


Tax reform




















Financial hedging products

Hedging products



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Energy risk management is a high priority

  • Utilities should work to institutionalize energy risk management as part of the utility’s overall risk management program

  • Natural gas and electricity risk can be bifurcated between physical and financial risks

    • Price and supply can be managed separately

    • Systematic price hedging can be advantageous

    • Structured transactions can offer significant value

  • Emissions markets continue to develop with much more active interest from Institutional Investors

    An energy hedging program can help reduce price volatility, decreasing exposure to prices through periods of extreme price increases and reducing impact on a utility’s budget



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Emissions markets

The market

  • US SO2 market is illiquid and challenged by highly inelastic supply/demand side

    • The nature of the market creates natural longs and shorts who are compelled to buy or sell with little sensitivity to price

  • The vast majority of S02 allowances trade through the OTC Broker Market. Other sources of liquidity include:

    • Direct bilateral deals

    • OTC via Intercontinental Exchange (ICE)

    • NYMEX Futures (Clearport only)

    • Chicago Climate Exchange Futures

  • Prices are highly volatile and depend heavily on current supply and demand

  • Natural Shorts:

    • Large coal intensive generators

  • Market makers, Suppliers:

    • Banks, Hedge Funds, Utilities, Municipalities



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Emissions markets hedging transactions

The market

  • Spot Market Purchases / Sales

    • Transactions are settled via electronic transfer between buyers/sellers EPA allowance accounts.

  • Physically Settled Options

    • Typically trade in larger volumes than the market for spot purchases/sales

  • Forward Market Purchases / Sales

    • Allows customers to lock in current allowances prices while delaying the settlement and associated cash flows until a future date

    • Customers generally execute these transactions only with highly rated counter parties.

  • Financially Settled Swaps & Options

    • Used when customer has exposure to price fluctuations in the emissions markets but does not have a need for the actual physical allowances.

  • Vintage Swaps

    • Allows naturals to manage their allowance position across the different vintage years

    • Historically done as a like-kind exchange. Recently the ability of these transactions to achieve this tax benefit has been disputed.

  • Emission Lending Arrangements

    • Natural longs can earn a small rate of interest on idle allowances in their EPA accounts or borrow allowances to meet compliance obligation.



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MGAG $68.1



Main St.


MGAM $72.9



Treasury Review

No transactions completed



















Tennergy $234.2



Renewed interest in energy prepayment projects

Selected tax-exempt commodity prepayment transactions ($ millions)

Prior to Treasury Review

Benefits of commodity prepayments

  • Prior to Treasury review, energy prepayment transactions were well received in the market

  • There were over 20 municipal transactions completed with a total par amount of over $2 billion

  • JPMorgan was involved in 9 gas prepayments prior to the Treasury review process

  • Since the new regulations, JPMorgan has led 5 energy prepayments totaling over $4.0 billion

  • There continues to be strong interest in prepayment transactions from municipal utilities

  • Long term, reliable gas supply

  • Discounted price to index

  • Take-and-pay gas contract

  • Standard NAESB based terms

  • Firm deliveries with attractive force majeure provisions

  • No bond or other financial obligations under non-recourse structures

  • Key drivers: interest rates, credit spreads, tenor, natural gas prices, prepayment volumes, contract terms



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How does the basic prepayment structure work?



Debt Service






Ventures Energy



Chase & Co.














Issuer issues tax-exempt debt secured by revenues from the project, which includes gas sales and swap receipts

Issuer and JPMVEC execute matched commodity swaps with AA/Aa category counterparty to convert pricing from fixed to a floating Index



JPMorgan Chase & Co. (Aa3/A+) guarantees JPMVEC delivery obligation to the Issuer

Issuer prepays JPMVEC for a 10/12/15/20 year supply of firm natural gas

Issuer delivers daily gas volumes to Participant(s) in exchange for a floating Index price less a discount


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