Project Finance: Practical Case Studies

(Frankie) #1

Power marketing plan


To maximise the profit potential of the projects within certain risk tolerances, the Partnership
planned to use a portfolio sales approach, negotiating contracts with a variety of terms and
pricing structures. Over the long run it expected to implement a mixture of short-term, medi-
um-term and long-term sales agreements, with a mixture of fuel-indexed and fixed energy
pricing and tolling arrangements. Any of those arrangements could be structured as firm or
non-firm sales of capacity.
Approximately 50 per cent of each project’s capacity was expected to be used in long-
term sales agreements (longer than one year) to provide for consistent revenues, and pay a
large part of the projects’ fixed expenses and debt-service obligations. Pricing would be on
either a fuel-indexed basis or a fixed-energy basis with fixed monthly capacity payments, or
it would be determined as part of tolling arrangements, in which a third party would assume
both fuel price and electricity price risk.
Up to 25 per cent of capacity would be used in intermediate-term sales agreements
(90–365 days), which would incorporate seasonal sales and purchases, and take advantage of
regional situations such as generation capacity limitations. The remaining portion of the
power portfolio, and any excess power released from the long-term and medium-term
arrangements, were to be offered for sale to Aquila, the designated power manager for short-
term transactions at the time of the project financing. (Aquila’s exit from the energy trading
business and TECO’s intention to secure a new power manager are discussed below in the
section ‘Subsequent developments’.)


Fuel management


The fuel supply strategy works in conjunction with the power marketing strategy. Firm trans-
port arrangements are maintained with supply basins for approximately 50 per cent of each
project’s full load requirements. The remainder of each project’s transport needs is contract-
ed on terms consistent with current power sales agreements and market opportunities. Noble,
an experienced fuel manager, provides fuel management services to the project. Noble coor-
dinates with the Energy Coordinator to take advantage of opportunities to improve cash flow
through gas/power arbitrage or increased generation.


Credit and risk management


TPS has primary responsibility for risk management. The Risk Control Manager heads the risk
management and reporting functions, working closely with the Credit Manager, the Fuel and
Power Managers, and a position control function to ensure the effective ongoing identification,
evaluation and reporting of risk. The main responsibilities of the Risk Control Manager include:



  • reviewing project-specific hedging strategies in the context of the marketing and trading
    of power;

  • assessing fuel arbitrage opportunities;

  • performing risk analysis on existing and proposed transactions;

  • providing daily risk reports; and

  • enhancing ongoing risk mitigation and portfolio optimisation efforts through consistent
    stress testing, scenario analysis and simulation techniques.


POWER PLANT

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