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Merchant Plant Funding Assistance Product Potential Roles for Bank Participation February 2000
©1999 BR 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
©1999 BR Confidential Enrons Perspective Unlike 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
©1999 BR Confidential 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 Enrons ultimate hammer over equity is the mortgage In essence, Enron has sold equity the right to put the project to Enron
©1999 BR Confidential Contract Features The 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
©1999 BR Confidential Basic Price Risk Management Contracts EPMI Financial - Buy Contract EPMI Financial - Sell Contract Project $ Fixed $ 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
©1999 BR Confidential O & M Equity EPMI Fin - Sell EPMI Fin - 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 Confidential 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 ENRON Baa2/BBB+ EPMI Fin. Buy guarantee $ Fixed Reimbursement Agreement e- $ Fixed e- $ Proceeds Bondholders $ Proceeds $ D/S
©1999 BR Confidential Expanded Deal Structure with Enron 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 doesnt evergreen LLC/ Trustee EPMI Enron SPV Insurance Co. Capital/Bank Markets 5-year wrap $ Funding Loan 20-year $ Proj.-Loan 20-year Ins. Co. ratingBBB+/Baa2 $ D/S $ Fixed e- Fin Sell e- Fin Buy
©1999 BR Confidential 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 Enrons risk basis Mortgage style amortization schedule $500/kw equals equity risk basis
©1999 BR Confidential Predicting the psychology of equity Highly unlikely that equity will exercise put early in its life…equity has too much invested. At very least, equity will refinance when residual value is in excess of par amount of bonds outstanding Enron has sold equity a put on the underlying project putting Enron into essentially a creditor position Enrons 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
©1999 BR Confidential Potential Bank Roles 1Basic 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 2Expanded deal structure: extend funding loan to the Enron SPV that incorporates springing interest rate and credit features
©1999 BR Confidential Basic Deal Structure Event map leading to put of bonds to bank LLCTrustee EPMI Fin Sell ENRON Baa2/BBB+ EPMI Fin. Buy guarantee $ Fixed Reimbursement Agreement e- $ Fixed e- Senior Bondholders $ Proceeds Bank $ Proceeds $ D/S EPMI buys bonds EPMI puts bonds 1. LLC defaults under EPMI Financial-sell 2. EPMI terminates Financial-sell Causes MTM to be owed to EPMI Creates 2nd secured obligation under reimbursement agreement 3. Project LLC goes into bankruptcy 4. EPMI buys Sr. bonds to control process 5. EPMI takes control of asset through bankruptcy 6. EPMI puts bonds to bank Restructuring opportunity Reactivates mortgage to bank
©1999 BR Confidential Expanded Deal Structure Credit and interest rate springs to Enron levels if insurance securing debt doesnt 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 years Insurance supported credit spread % Credit Spread ENE 15-year ENE 10-year ENE 5-year Initial Insurance Period Evergreen Insurance Period Evergreen Insurance Period Evergreen Insurance Period
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