Cap Ex Op Ex Feasibility

8/3/2019 Cap Ex Op Ex Feasibility

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CapEx, OpEx, FeasibilityHouston Workshop

Nov. 29, 2007

Uwe Roeper, President, ORTECH


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ORTECH Power

Wind Consulting: Technical & Financial Advisors

Affiliated with DEWI

German Wind Energy Institute

Wind Resource Assessment

Development Plans

Operations Support Feasibility & Sector Analysis

Due Diligence / Independent Engineers.


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Outline

Estimating CapEx Turbines

Construction

Other

Estimating OpEx O&M Fixed & Variable Parts

Analyzing Feasibility Revenue / Costs IRR

Cost of Funds


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CapEx(Example 100 MW, $200 million)

Development Costs Land, Wind, Grid, Permits

Financing Costs

Cost of Funds, Construction Interest

Construction Costs

Turbines, Commissioning, BOP


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Development Costs(Illustration)

Land $100k Wind $200k

Grid $100k

Permits $200k

Sub-total $600k (0.3% of Capital)

Pre-Constr. $1,400k (0.7% of Capital)

Total $2,000k (1.0% of Capital)


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Financing Costs(Illustration)

Due Diligence $500k Equity Fee $2,500k

Debt Fee $2,000k

Constr. Int. $12,000k

Total $16,500k (8.3% of Capital)


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Construction Costs(Illustration)

Turbines $150mill. BOP $40mill.

Financing $17mill.

Development $2mill.

Developer Fee $5mill.

Total (2010) $214mill.

($2.1mill./MW)


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CapEx Summary

CapEx (100MW, $214mill.)

Turbines70%

Dev.Fee

2%

BOP

19%

Financing

8%

Dev.Cost1%

Turbines majority cost, rapid increases BOP site dependent, modest increases

Financing going up due to project timing.


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Balance of Plant Portion

BOP Cost Make-up

Ship

Crane

Found.

Trnsf

Substation

CollectorRoads

GridInstall

Foundations are the often the largest BOP cost. BOPcosts can very widely depending on connection costsand the site location.


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Turbine Costs

Very large increase 2004 to 2007 Latest figure for 2009 delivery, could be special circumstance

Several factors, currency, input costs, global market.

Turbine Price Increase

$1.0

$1.5

$2.0

$2.5

0% 3% 7% 17% 31% 52%

Sample Quotations 2004 to 2007 (1.5MW Units)

$Mill.


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Changes in Euro exchange

US$ - Euro Exchange

1.00

1.10

1.20

1.30

1.40

1.50

FX Jan 04 to Nov 07

US$

Euro exchange is significant because many turbinecomponents come from Europe. Recent weakening ofthe US $ could put addition pressure on turbinepricing. However, not main recent for price incrs.


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US Steel Price Index

Steel prices and other commodities have increased substantially.This contributes to the price pressure, but does not account for allthe increases. Bulk is due to supply demand of turbines on theglobal market.

US Steel Price Index

100

120

140

160

180

200

Jan 04 - Oct 07


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Historical & Projected Wind Energy Costs

0

5

10

15

20

25

30

1980 1985 1990 1995 2000 2005 2010

Year

ce

ntsUS/kWh

Not attainable

Adapted from: CanWEA 2004

Price Reduction

Due to

Technology Innovation

Recent

Trend


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Key Issue

What impact will the significant increases inturbine prices have on prices of wind power,

and how could this affect the continued

expansion of the wind industry in the US in thecoming years?


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OpEx

Turbine design life 20 years, op. experience


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Cost of Warranty, ServiceMaintenance Contracts

Example of price variability in WMS contracts.

Hi quotes related to remote sites.

Large WTGs typically have slightly higher $/WTG-yr. We will use $39,000/WTG-yr as typical for 1.5 MW turbine

(limited ext. wty. + srvc.)

$/WTG - O&M + Warranty (Yr. 3-5)

$20

$40

$60

$80

1 2 3 4 5 6 7 8 9

Thousands

Selected Price Quotations by OEMs


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Wty. portion of WMSO&M Contract, $39,000/WTG-yr

Service, $26,000

Warranty, $13,000

Warranty cost seldom broken out.

Contractual exclusion vary. 1/3 Assumed as wty. portion of contracts.


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WMS as part of total O&M

WMS typically amounts to approx. 60% Largely market based, not indicative of actual.

Avail. only for early years (few repairs).

Warranty O&M - $(000)/WTG-yr

O&M, $26

Warranty, $13Reserve, $0

Ins, $7

Land, $5

M-Tax, $9

BOP, $5

Adm, $5


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Post wty. Costs

Post O&M - $(000)/WTG-yr

Service, $25

Maintenance, $4

Repair Reserve, $16

Ins, $7

Land, $5

M-Tax, $9BOP, $5

Adm, $5


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Wty. Vs. Post Comparison

Warranty vs Post O&M

$0

$10

$20

$30

C$(000)/WTG-yr

Warranty $26 $13 $0 $7 $24

Post $25 $4 $16 $7 $24

Service Wty/Mtc Reserve Ins. other

Repair

Maintenance is the expensed portion (recurringannully), Reserve is the capital portion.

Mtc. + Reserve = $20,000/WTG-yr.


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Service

Routine day to day operation 24/7 Remote monitoring

Scheduled maintenance

On-site services


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Unscheduled Maintenance

Unscheduled minor maintenance highlyvariable by site / model.

Budget figure meant to refer to minorrecurring small part replacement.

Excludes major component repairs.


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Unscheduled Maintenance

Unscheduled extension of on-site service. Relies on parts inventory or readily available

parts that can be replaced by on-site service

team. Involves recurring outages of short duration

due to minor parts.

Is tracked as operating expense, not as capitalreplacement expense.


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FAILURE FREQUENCY & DOWNTIMECourtesy: B. Hahn, ISET: Wind Energy Report Germany 2006 (draft)

Drive Train

Structurals

Generator

Gearbox

Rotor Hub

Mech. Brakes

Rotor Blades

Yaw/Pitch Sys.

Hydraulics

Sensors

Electronics

Electrical

Down time per failure [days]Annual failure frequency [-]

1 0,75 0,5 0,25 0 2 4 6

Maintenance


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Repair Reserve

Planned or unplanned major repairs.

Highly variable by site / model / age. Best to track as Capital Account Repair Reserve.

Expected to occur only a few times during 20 year life.


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FAILURE FREQUENCY & DOWNTIMECourtesy: B. Hahn, ISET: Wind Energy Report Germany 2006 (draft)

Drive Train

Structurals

Generator

Gearbox

Rotor Hub

Mech. Brakes

Rotor Blades

Yaw/Pitch Sys.

Hydraulics

Sensors

Electronics

Electrical

Down time per failure [days]Annual failure frequency [-]

1 0,75 0,5 0,25 0 2 4 6

Major Repair


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Variable Annual Repair Costs

Annual Repair & Maintenance Expenditure (illustration)

$0

$10

$20

$30

$40

$50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Thousands

Operating Year

C$/WTG-yr

Major repair costs will vary from year to year, occur inintervals and increase in cost with age.

Wty.


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Total life cycle costCumulative Repair Expenditure (w/o CPI)

$0

$100

$200

$300

$400

$500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Thousands

Operating Year

C$/WTG-yr

The operating goal is minimize the cumulative total throughpreventative maintenance, early detection, reduction of outagetimes etc.

Small expenditure now may save big later.


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Capital Account

Purpose of the capital account is to ensure that the cost has been budgeted and thefunds are available, regardless of the year in which the repair occurs.

In early years, repairs are less than $16,000/WTG-yr, excess is saved. In later yearsthe reverse happens.

Capital Repair Reserve Account (w/o CPI)

$0

$20

$40

$60

$80

$100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Thousands

Operating Year

C$/WTG-yr


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Accounting for InflationImpact of 2.5% Annaul Inflation

$0

$50

$100

$150

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Thousands

Operating Year ($/WTG)

Service Repair Ins. other

Wty.

Budgets can be inflation project forward by assuming inflationrate.

Parts and labour costs may move differently than inflation.


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Key Issue

What is the financial risk related to theuncertainty of long term repair costs ofwind turbines?


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Feasibility

Typical project feasibility CapEx, OpEx, Revenue

Wind project feasibility

CapEx, OpEx, Revenue, Tax

Revenue market complex

Tax driven structure complex Revenue / tax structure unique to U.S.


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Composite Revenue(PPA, REC, Merchant, Hedges)

Composite Revenue Example

$0

$5

$10$15

$20

$25

$30

$35

$40

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Operating Year

millions/year

Merchant Revenue REC Revenue PPA Revenue

Part Year

PPA Ends

Various market structures by State / Region.

Revenue subject to complex policies / rules.


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Net Revenue (EBITDA)

Net Revenue / EBITDA

0

5

10

15

20

25

30

35

40

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Operating Year

Million/Year

Net Revenue Expenses

EBITDA = earnings before interest, tax, depreciation,

amortization (and before PTC) (but after OpEx)

Basis for cash flow feasibility (IRR = internal rate of return)


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Earnings Perspective

1525Adj. EBITDA

04Gross up

08PTC1513EBITDA

-10-7OpEx

2520Revenue

Yr 15Yr 2


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Adjusted EBITDA

PTC and PTC Gross-up create large earnings shift tofirst of project life.

$0

$5

$10

$15

$20

$25

$30

$35

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Operating Year

Million/Year

EBITDA PTC Gross up


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Tax Perspective

9-31Income a. tax

8PTC

-521Taxes14-59Taxable

-1-72Tax DA

1513EBITDA

Yr 15Yr 2


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After Tax (incl. PTC & tax benefit)

Wind projects generate large tax benefits in earlyyears. PTC add-back creates large after tax income inyear 7 to 11.

Income after Tax

-$40

-$30

-$20

-$10

$0

$10

$20

$30

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Operating Year

Million/Year


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Cash Flow Perspective

1042Cash F. a. tax

-521Taxes8PTC

(first yr. only)CapEx

1513EBITDA

Yr 15Yr 2


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Cash Flow after tax (unlevered)CFaftTax

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

$45.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Operating Year

Large after tax CF in early years reduces long termrisk.


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Additional Feasibility Drivers

Cost of debt / long term int. rates Cost of equity

Wind resource compared to competing

projects in the region

Access to grid connections


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Conclusions

CapEx Highly predictable On rise, concern to project economics

OpEx

Difficult to estimate long term costs Repair uncertainty managed by capital reserve

Feasibility Revenue and tax issues more complex than other

types of projects. In U.S. project feasibility is highly dependent on tax,

energy and environment policy.

Documents

Cap Ex Op Ex Feasibility