Financing Future Power Supply October 4, 2004 Peter Kind

Transcription

1 CPUC Installed Capacity Conference Financing Future Power Supply October 4, 2004 Peter Kind

2 Key Questions What are we doing to address fuel diversity/energy independence? Do Least Cost Plans result in least cost? Is capital available to fund future new generation? Who will own/construct new generation utilities, IPP s or both? Availability of capital to fund Brownfield environmental upgrades? 1

3 Power Generation Dynamics Recovery disallowances impact utilities view on future building PURPA crowds out utility capacity build Industry restructuring crowds out utilities Uncertainty prevails; utilities consider future construction Nuclear/Coal Construction Phase Concludes PURPA Phase Merchant Phase Market Over Supply 2

4 Power Supply Additions 70,000 Net Additions by Fuel Type, Gas vs. Coal Prices, 1994 present (MW) 60,000 50,000 40,000 30,000 31,690 43,035 57,958 56,835 ($ / MMBtu) Coal (2) Gas 10 yr Avg. $0.28 $ yr Avg yr Avg Price as of 8/31/04: $ ,000 10,000 7,850 10,317 9,737 8,195 5,318 2,792 11,938 2 Price as of 8/31/04: $ (1) 0 Aug-94 Aug-95 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Coal Oil Gas Nuclear Other (includes Geothermal, Solar, Water, Wind, and Other Renewable/Non-Renewable) Powder River Basin 8800 Btu Coal Spot Price Henry Hub Natural Gas Spot Price Capacity Mix 1993 Other 14% Capacity Mix 2003 (1) Other 12% Nuclear 10% Coal 33% Nuclear 13% Coal 42% (792,065 MW Total) (1,029,880 MW Total) Gas 23% Oil 8% Gas 39% Oil 6% 3 Sources: EIA, Bloomberg, Platts Notes: data is preliminary 2. Does not include transportation charges Coal Oil Gas Nuclear Other (includes Geothermal, Solar, Water, Wind, and Other Renewable/Non-Renewable)

5 New Baseload Generation Cost Capital Costs/KW (2004 $) Capacity Factor Costs Per KWH Capital (1) O&M Non-Fuel Costs Fuel (Coal = $12.13; Gas = $4.50/MMBtu) Total Cost Coal $1, % CCGT $ % Break-Even Gas Price/MMBtu $3.87 (1) Debt/Cap = 50%; ROE = 12%; Depreciable lives: Coal = 35 years; CCGT = 25 years 4

6 Financing New Power Generation < NON UTILITY OWNED Revenue Source L/T Contracted * Merchant Contracted * Project Debt % 70 80% 50 60% Function of: Contract Term ~ Debt Avg. Life Offtaker credit UTILITY OWNED Revenue Source Ratebased Ratebased or Affiliated Contract Ratebase with Centainty as to Recovery Debt % Investment Grade Investment Grade Investment Grade * Investment grade counterparty assurances 5

7 Investor Issues Utility Owner Regulatory Recovery Certainty Fuel Cost Recovery Construction Term & Cost Project Need Project Economics (Need and Competitive Position) IPP Owner Funding Certainty Offtake Agreement Locational Issues (i.e. NYC) $ Environmental Issues & Compliance Credit to Support Fuel Procurement Credit Quality of Counterparty Fuel Supply & Availability Transmission Issues 6

8 WEC Power The Future POWER THE FUTURE GENERATION PROJECTS Natural Gas-Fired Facilities Replace coal-fired plant at Port Washington site Two units, each 500 MW plus 45 MW peaking capacity Each unit includes 2 combustion turbines and 2 heat recovery steam generators Received PSCW approval on 12/10/02; Dane county judge rejects PSCW approval on 1/30/04 Unit 1 in service 2005; Unit 2 in service 2008 Coal-Fired Facilities Expansion of existing Oak Creek facility Two 615 MW supercritical pulverized coal units One 600 MW coal gasification unit The two 615 MW plants were approved by the PSCW on 11/10/03 Coal gasification unit denied approval Unit 1 in service 2009; Unit 2 in service in 2010 Wisconsin Electric ( WEPCO ) (Operates Plants) Gas-fired: 25 year lease Coal-fired: 30 year lease (Constructs / Owns Plants) WE Power LLC constructs PTF generation facilities with a lease back to WEPCO Plan will create contracted generation to be sold to utility by non-regulated affiliate (approx. 1,800 MW) Shields utility from immediate financing costs related to construction Generation units would not go into rate base Lower net cost of capital results from the predictable risks surrounding long-term lease and PPA agreements Financial Terms Estimated Construction Costs: Allowed Capital Structure: Allowed Return on Equity Portion of Lease: Natural Gas-Fired Facilities 1,090 MW at $545/ kw 53% Equity / 47% Debt 12.7% Coal-Fired Facilities 1,230 MW at $1,460 / kw 55% Equity / 45% Debt 12.7% Allowed Cost of Debt: Allowed Cost of Debt after In-Service Date: All-in interest rate paid to finance construction costs Based on lowest rate senior unsecured long-term debt of WEC selected from index defined as Moody s Daily long-term Corporate Bond Yield Average 7

9 Summary Q: What are we doing to address fuel diversity/energy independence? A: (??) Q: Do Least Cost Plans result in least cost? A: Apparently not. New gas fired capacity raises significant price volatility. Q: Is capital available to fund future new generation? A: Merchant plants currently not financeable. Investors are seeking certainty! Q: Who will own/construct new generation utilities, IPP s or both? A: (?) Answer dependent upon future industry structure and capital availability. Q: Availability of capital to fund Brownfield environmental upgrades? A: Investors seeking certainty of recovery and/or competitive economics. 8

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