Public Power - September/October 2007 - (Page 31)

Bank Pre-Paid PPA Bond Debt Financing Ownership of Interest by One Public Power Entity; with Power Purchase Agreements with Partners Pre-fund PPA Receive Power PPA Partner Take and Pay PPA PFC Pre-Paid PPA Bond Debt Financing Highly Rated PPA Partner Take or Pay PPA Public LLC 100% Undivided Interest PPA Partner FINANCING “Take and Pay PPA PFC Pre-fund PPA Receive Power BENEFITS • • • • Risks taken off balance sheet for downstream participants PPA costs recovered through fuel adjustment Pre-paid PPA cost of capital rates reflected in PPA rate Operational risk and upside assumed by single public power partner • “Public LLC” issues no debt • Public entities issue tax-exempt debt to pre-fund PPA obligations • Must have PFC pre-pay obligations OWNERSHIP • Only LLC holds asset share, rights, interest that assumes risks of construction and operation • Ownership, construction and operating risk tied back to single partner RISKS • PPA under take-or-pay to get debt financed at highest rated entity’s rates • Oversight delegated to one entity ther less than the cost of generation or substantially below the market), you risk having to meet your generation needs by buying electricity in the spot market because the merchant generator will not deliver. Structuring your project this way also means the cost of project development capital will be at the PPA seller’s cost of capital, which is likely higher than the cost of municipal tax-exempt debt. Third, if the PPA seller has project development and operating risks, the seller will want a PPA price premium on top of the project costs for assuming those risks. Finally, if you pre-pay the cost of a PPA and your developer disappears, not only will you have to pay for power from your market, but also write off the bad debt. This arrangement may make sense when the project developer is proposing to deploy new technology for which it could receive tax incentives. If your counterparty is an investor-owned utility, in addition to taking advantage of any production tax credits, it also can take a deduction for plant depreciation. If properly structured, your utility is not assuming project risk, but it is providing the PPA that will allow the developer to www.APPAnet.org get financing. The PPA price could be lowered to share in the project’s tax incentives. Pre-paid PPAs may be a win-win for seller and buyer, by allowing a project to be developed at a low cost of capital, if you have a strong PPA counterparty that will be willing and obligated to perform even if the project fails. Special-purpose entity—Another alternative is to participate in development of the project through a special-purpose entity. In Texas this special purpose entity is a creature of state, rather than federal, statute. Under either Chapter 303 of the Texas Local Government Code or Chapter 431 of the Texas Transportation Code, a municipal utility or its sponsor municipality may form either a public facility corporation (PFC) or a local government corporation (LGC). With the special purpose entity as the project participant, it may raise capital for the project by issuing debt, and it may use a PPA with your utility to secure that debt. If the PPA is through a take-and-pay contract, the project development risk is isolated to the special purpose entity. If lenders view the technology as new or not fully demonstrated, at a minimum, the cost of capital will be higher or, in the worst case, the special-purpose entity may have difficulty financing the project. On the other hand, if you are proposing to build proven technology using experienced constructors and engineers, you may be able to obtain a credit rating for the project debt approaching or at the same rating as that for debt your utility issues directly. Why go to the trouble? First, if you are going to partner in a project, this makes your risk profile while developing the project comparable to a private limited liability company. If you partner with a limited liability company, why should you take on more project risk than your partner? Second, this arrangement also would allow you to enter into an agreement between your special-purpose entity and your utility to buy the power through a PPA. The special-purpose entity could issue debt and the interest could be carried until the project is in service. (While there are other ways to accomplish carrying the interest during construction until the project is generating electricity, one means to do this is for the special-purpose entity to issue capital appreciation bonds.) Customers then pay the capital and operating SEPTEMBER-OCTOBER 2007 31 http://www.APPAnet.org

Table of Contents Feed for the Digital Edition of Public Power - September/October 2007

Contents Washington Focus 10 Questions Public Power (Every) Week Training Tomorrow’s Work Force What’s in Your Wallet? U.S. Lags in Broadband Deployment Now What? For Engineers Safety Community Broadband For Governing Boards Human Resources Hometown Connections Customer Service DEED Index to Advertisers Advertisers by Category Parting Shot

Public Power - September/October 2007

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