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Texas Clean Energy Project


Financing
Eric (Ric) Redman, President, Summit Power Group Gasica'on Technologies Council Workshop, April 7, 2011 Michael Moore, Execu<ve Director, NACCSA Supplemental Presenta'on for RECS 2011, June 6, 2011 S U M M I T P O W E R

Summary & Overview

TCEP: a 400 MW gross IGCC plant w/ 90% CO2 capture Designed from outset to be project nanced This provides useful discipline (even with DOE funding!) Financing: $1.4B debt (bank debt & project bonds); DOE award $450MM; remainder = equity investment Total costs to be known aZer FEED study (mid-summer) Royal Bank of Scotland (RBS): lead lender, debt arranger Equity syndicate: 4-6 major equity investors expected Keys now: (1) EPC, O&M details & costs; (2) tax issue

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ont plan projects environmentalists will oppose Summit maxim: D

Background: Incep`on

In 2002, we asked Clean Air Task Force Whats an OK coal plant? Mathema`cally, U.S. and world could not do without coal CATF recommended IGCC & CCS and later, Sustec technology Goal: To help change our industry by using coal cleanly & acceptably Summit began working with Siemens, Linde & Fluor on IGCC Tried many technologies, congura`ons, by-products, & sites Came to Texas at invita`on of Environmental Defense Fund (EDF) Learned Texas provides best current sites for CCS because of EOR Picked Penwell site when FutureGen Alliance chose Illinois Environmental support consistent, outspoken & gra`fying

Commercial concept

TCEP to be project nanced in private capital markets Congured and designed for best availability Availability maiers more than thermal eciency Plant contains no unproven, non-warranted technology Integra`on risk is enough risk for Wall Street Technological heart: Siemens gasiers + high-H2 turbine Financing heart: long-term availability & performance 90% carbon capture emerged from pre-FEED work Co-produc`on of urea = happy accident of sizing mismatch + market analysis by RW Beck

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Project nancing

Project revenues = sole source of $$$ for lenders & project owners Revenues must be enough to service debt + yield airac`ve ROE Key constraint: debt service coverage ra`o (DSCR)
First layer of protec`on for project lenders (revenues exceed project costs) DSCR level + assured revenues determine the maximum amount of debt Maximum amount of debt determines amount of equity required

TCEP nancial model uses market-required DSCR Revenues from power, urea, and CO2/EOR sales 95% of total Dura`on & quality of contracts aect ra`ng & lenders evalua`on Signicance of CCPI-3 award in this context: reduces product sales revenue required to meet DSCR & provide aDrac<ve ROEs, allowing output to be sold at market prices rather than produc<on cost

Project nancing risks

Key concepts: (1) lenders dont take ANY risks; (2) all risks must be taken by others; and (3) the others must have deep enough pockets Comple`on costs & mechanical: use EPC contracts, warran`es, must x & liquidated damages (LDs), reserves for con`ngencies Opera`ons & maintenance: need long-term warran`es, LDs, some signicant por`on of costs xed, some must x provisions Project revenues vs. costs: Need bankable o-take contracts & secure supply contracts; ideally these should track each other; dura`on of contracts maiers a lot (long term is beier than short) Financial capital cost risks: things turn sour quickly if costs exceed revenues for long; not like running a company quarter-to-quarter; trap door opens under projects if DSC requirements not met

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Tax & CCPI-3 benets

TCEP enjoys a CCPI-3 award ($450M), a Sec. 48A ITC ($313M), accelerated deprecia`on & Sec. 45Q sequestra`on credits

Combina`on is apparently unique & requires op`miza`on


Addi`onal nancing help DOE has provided:


80/20 reimbursement rate for $211M of DOE funds Willing to let loan proceeds & DOE funds be used rst in each phase

Incompletely op`mized TCEP nancial model shows adequate DSCRs + ROEs at es`mated project costs and revenues

But: (1) Project costs are not nal, and (2) taxability of CCPI award would cost TCEP $157 MM up front.

Cost ques`ons - 1

Old IGCC fear: no warranted availability. TCEP tries to x that. New IGCC fear: risk of huge capital costs increases & overruns Supposed lesson of Edwardsport, Taylorville, Eastman, etc. Our need to dis`nguish TCEP is constant The out of control cost fear can become self-fullling DOE will have limited ability to provide addi`onal funding What we are doing about it:
Have tried to learn from other projects Cost reduc`on team (CRT) eort with FEED contractors Contract & nancial arrangements with vendors Top engineers, consultants, and lawyers assis`ng the Summit team Working to op`mize nancing, innovate with o-take agreements

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Cost ques`ons - 2

What Summit, Siemens, Linde & Fluor have done to limit costs: 3+ years of pre-FEED work on design & congura`on Project components are proven/warrantable ones Integra`on is not over-op`mized for eciency Project is op`mized for availability ( simplicity) Both RW Beck & CH2M/Hill helping Summit Latham & Watkins assis`ng with EPC Contracts EPC Contract structure will include rewards/penal`es Owners con`ngency (by other names) increased

Ownership & lenders - 1

Summit ini`ated TCEP itself, intending an eventual new owner Large company became prospec`ve owner in early 2008 but failed in late 2008; Summit had never transferred ownership Summit decided to de-risk project more before seeking new funding Jan-June 2009: Summit successfully sought Texas incen`ve legisla`on December 2009: DOE selected TCEP for $350M CCPI-3 award Summer 2010: To aid nancing, more engineering shiZed to Phase 1 from Phase 2; DOE boosts CCCPI-3 award to $450M Mid-2010: Summit retains Wellford Capital to commence serious nego`a`ons with poten`al new long-term equity owners Currently: RBS to lead 3-bank team; Capstar leads tax equity work
S U M M I T P O W E R

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Financing schedule

Permiwng scheduled to be complete by mid-2011 Air permit in hand; NEPA (EIS) ROD scheduled for mid-summer FEED Study scheduled to be complete by mid-2011 O-take agreements scheduled to be complete by mid-2011 Vendor contracts (water, coal, etc.) to be complete by mid-2011 EPC contract(s) to be ready for FEED Study results at same `me Signed EPC contract(s) should be nal step before closing Lenders to be lined up in advance; loan agreements prepared Members of equity syndicate to be chosen in advance Equity Contribu`on Agreement (ECA) prepared in advance Financial Closing to occur as soon as possible aZer EPC signing
S U M M I T P O W E R

Big Issues

Known big issues: Taxability of CCPI award when recipient is not a corpora`on Impact of elec`ng corporate tax treatment to avoid taxability Market percep`on of inevitability of project cost creep Poten`al big issues (possible but not expected to materialize): Actual project costs, if not kept in `ght control EPC contract structure, if not sa`sfactory to nanciers Long-term warran`es of availability & performance (diio) Inherent advantages: Permian Basin loca`on for CO2/EOR, Siemens gasiers & high-H2 combus`on turbine; revenue contribu`on of urea, DOE support, environmental support
S U M M I T P O W E R

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More informa`on

www.texascleanenergyproject.com = project website www.summitpower.com = Summit website Eric (Ric) Redman, eredman@summitpower.com
Thank you!

S U M M I T P O W E R