1. Enbridge assigns this project a cost of equity of 8% and a cost of debt of 5.48%. Treasury determines the optimal capital structure for the project is 75% debt and 25% equity.  Using this information and the tax information provided in the CIM determine the appropriate WACC for this project, please show your calculations.
2. Build a financial model of the ORCA wind project. Be sure to show an XIRR for the overall project return and an XNPV for the overall project NPV. Assuming tax and book depreciation are equivalent what is the return and NPV for the Option 1 PPA case?  What is the return and NPV for the Option 2 PPA case? Which is the better investment and why? (All calculations done on an unlevered basis)  How do you interpret this return compared to the WACC?
3. What is the maximum purchase price that could be paid to achieve an overall return of 5.2%?
4. Assume Option 1 is your base case.  What happens to the project return and NPV if the project in-service is delayed by 10 months?
5. What is the return and NPV if the project NCF = the P75?  P99?
6. OPTIONAL - Build a financial model which incorporates the CCA rate for tax depreciation and an ARO.  Also include appropriate accounting for deferred taxes to ensure the balance sheet balances.
7. The business development team has decided to advance the Orca wind project for internal approvals based on a purchase price of $120MM.  They are looking for CDO permission to enter into full diligence.  Please help them complete their capital allocation committee deck to present to senior leadership.  Please populate the template provided using the information in the CIM and financial model you have constructed.  Feel free to pull supplemental pictures from the internet as required.

 

 

Summary- Orca Floating Offshore Wind Project

• Over the last 5 years Orca Holdings has been developing the Orca wind project. 
• The project contemplates 400MW of floating offshore wind capacity off the coast of British Columbia interconnected to the BC hydro power grid
• The project was recently awarded an offtake agreement from BC Hydro and has nearly secured all the necessary permits to enable construction
  • Outstanding permits include water lease (pending crown approval)
  • Construction permit (pending environmental submission and approval)
• With upcoming major capital commitments and a clear path to profitable construction Orca Holdings feels now is the ideal time to exit allowing a better funded late stage developer to complete the project
  • To date Orca has spent $100MM developing the project and does not have sufficient liquidity to continue with project development

Location	West coast of British Columbia.  200km NW of Port Hardy.
Capacity	400MW
Offtake	Power Purchase Agreement with BC Hydro
NTP/Target ISD	Aug 2023/January 2026
Net Capacity Factor ("NCF")	52%
Technology	8MW Siemens Turbines. Principal Power Floating Platforms
Land Control	25 year offshore lease, pending crown approval
Construction	Siemens
Permitting	Final construction permit pending environmental review

Sales Process

• Buyer enters into exclusivity agreement with Orca holdings "company" (credit rating CCC) to purchase the Orca project and provides indicative purchase price for project
• Upon execution buyer will post $50MM of cash collateral with BC Hydro.  This cash will be used by BC Hydro to conduct facility studies.  If the project is cancelled any time by developer any unused portion of funds will be refunded.
• Buyer will complete review and diligence and execute a purchase and sale agreement ("PSA") with the company by July 1, 2022.  Thereby transferring ownership of the project to Buyer.
• If parties cannot come to terms on a PSA, the company will be liable to the Buyer for the cash collateral
• The company is interested in counterparties with the ability to expeditiously close the contemplated transaction

Offtake Details

• Project has secured a 20 year offtake agreement with BC Hydro (credit rating AAA) for all the production from the facility 
• Offtake has two options (no escalation in price)
  • Option 1 - Fixed fee of $380/MWh
  • Option 2 - Upfront return of capital of $950 MM (reduces capex by this amount at FID). Fixed fee of $340/MWh for production.
  • Offtake contemplates project in service by January 2026.  If the in service date is delayed by more than 3 months the PPA price reduces by 1% per partial month to a max of 10 months.  After delays in in service date of 10 months BC Hydro has a right to terminate the agreement.
  • After 20 years the offtake agreement has a renewal option, at the projects election, and can continue to sell power for an additional 5 years at $285/MWh.
• Offtake has a target production amount of 1,752 GWh/year.  If production falls below 90% of this amount in any given year project pays liquidated damages to BC Hydro of $5 MM.    

Resource

• Resource has been assessed by DNV GL
  • DNV is a reputable company for providing this type of data
  • NCF assessed at 52% over the 25 year project life
• P75 - 48.4%
• P99 - 41.5%
• DNV report highlights this turbine and platform have never been used together in the field and has increased their uncertainty estimate to account for this fact.

Technology

• Turbine Provider: Siemens (Credit rating A)
• Siemens SG 8.0-167DD 8MW  Turbine
  • Expected to be market ready by 2024.  Currently retooling manufacturing facility.  Previous retooling took 18 months longer than planned.
• Purchase agreement with Siemens North America (credit rate BB)
• Platform Provider: Principle Power (Credit rating CCC)
• Principle has manufacturing facilities in Washington capable of delivering 40 platforms per year.  They require 1 years notice to deliver on an order.

Timeline

• May 2022 - Buyer enters exclusivity and posts $50 MM collateral
• July 2022 - Buyer acquires project - pays acquisition price + reimburses spent costs
• Aug 2023 - Buyer finalizes environmental review and submits to government for approval. 
  • Expected Crown approval of lease. 
  • Pay non-refundable deposit to Siemens and refundable deposit to Principal to secure delivery of equipment. 
• Sep 2023 - Notice to BC Hydro to commence interconnection construction.
• Jul 2024 - Environmental review approved.  Construction permit awarded. 
• Aug 2024 - Turbines and platforms begin arriving at site.
• Sept 2025 - Turbine installation complete.  Interconnection complete.  Commissioning begins
• Dec 2025 - Commissioning complete.  Project In service.

Capex

• Collateral of $50 MM paid at signing to BC Hydro
• Purchase Price + reimburse of incurred costs paid at closing
• Siemens Deposit - $100MM
• Principal Deposit - $100MM
• BC Hydro interconnection + studies costs $1,050 MM
  • Turbine repair and maintenance

Year	Refund costs	BC Hydro	Principal	Siemens	Other	Total
2022	100	50			50	200
2023		300	100	100	100	600
2024		300	250	250	200	1000
2025		400	250	300	250	1200
Total	100	1050	600	650	600	3000

Operating Costs (All numbers in 2022 $$)

Project operating costs fall into 4 categories:

• Balance of plant repair and maintenance
• Asset management
• Other

Turbine Repair and maintenance

• Turbine repair and maintenance covered by Siemens for $100 MM/year (5 years)
• Post contract assume cost of $150MMyear

Balance of plant repair and maintenance

• Estimated at $50 MM/year
• Every 5 years large maintenance will be required at a cost of $40 MM in addition to the base annual costs

Asset Management

• Contract with Siemens to cover all costs for $3 MM for life of project

Other 

• Insurance, property tax and misc. $ 80 MM

Retirement

• Required to remove turbines post operation cost $200MM in 2022 dollars

 

Tax

• Subject BC and Canada Corporate tax
• 25 year useful life
• All opex and accounting depreciation deductible for tax purposes

OPTIONAL

• CCA rate of 20% for 80% of capital
• CCA rate of 5% for 20% of capital
• ARO accretion rate 6%

 

Glossary of Terms

• This glossary is provided to help define terms that may be unfamiliar from the CIM and question set.
• MW - Megawatt a unit of Power equivalent to a million watts (Joules/second) commonly used in the power industry.
• MWh - Megawatt hour. A unit of energy equivalent to the energy produced by a 1MW power source for one hour. It is equivalent to 3.6 million Joules.
• Offtake - The agreement to purchase the product produced by a project. In this instance the project produces electricity and the offtaker pays to take the produced electricity.
• NTP - notice to proceed. The date a project gives notice to suppliers for delivery of materials.
• ISD - in-service date. The date the project is fully operational and begins generating revenue.
• NCF - Net capacity factor (determined as part of a resource assessment). This defines how much output the facility is expected to generate.  A 40% NCF means the project will produce on average 40% of its name plate capacity. Example: 100MW facility with an NCF of 40% is expected to produce 100MW x 24 hours/day x 365 days/year x 40% NCF = 350,400MWh of annual production.  Revenue = Capacity x NCF x Offtake price x hours/year
• P75 - NCF estimate at the 75^th percentile. Resources for renewable projects cannot be estimated with certainty. P75 represents a value for which the resource is 75% likely to exceed over the project life.
• P99 - NCF estimate at the 99^th percentile. Resources for renewable projects cannot be estimated with certainty. P99 represents a value for which the resource is 99% likely to exceed over the project life.
• Permits - Authorizations generally from government required to commence various project activities. Construction permits are required before construction activity can commence, operating permits are required to operate a facility.
• Credit rating - designation indicating the quality of a counterparty's ability to meet its obligations as they come due. The material provided is using the S&P scale.
• Liquidated damages - Cash penalties set to compensate party to an agreement for a breach of the agreement.
• Interconnection - Connection from a power generation facility to the power grid, necessary for power to flow to consumers.

 

Questions:

1. Enbridge assigns this project a cost of equity of 8% and a cost of debt of 5.48%. Treasury determines the optimal capital structure for the project is 75% debt and 25% equity.  Using this information and the tax information provided in the CIM determine the appropriate WACC for this project, please show your calculations.
2. Build a financial model of the ORCA wind project. Be sure to show an XIRR for the overall project return and an XNPV for the overall project NPV. Assuming tax and book depreciation are equivalent what is the return and NPV for the Option 1 PPA case?  What is the return and NPV for the Option 2 PPA case? Which is the better investment and why? (All calculations done on an unlevered basis)  How do you interpret this return compared to the WACC?
3. What is the maximum purchase price that could be paid to achieve an overall return of 5.2%?
4. Assume Option 1 is your base case.  What happens to the project return and NPV if the project in-service is delayed by 10 months?
5. What is the return and NPV if the project NCF = the P75?  P99?
6. OPTIONAL - Build a financial model which incorporates the CCA rate for tax depreciation and an ARO.  Also include appropriate accounting for deferred taxes to ensure the balance sheet balances.
7. The business development team has decided to advance the Orca wind project for internal approvals based on a purchase price of $120MM.  They are looking for CDO permission to enter into full diligence.  Please help them complete their capital allocation committee deck to present to senior leadership.  Please populate the template provided using the information in the CIM and financial model you have constructed.  Feel free to pull supplemental pictures from the internet as required. 

Answer rating: 100% (QA)

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