Alaska Power Association: Accounting & Finance Conference
U S econom ic update
In te rest ra te update / ou tlook
O il m arke ts – supp ly / dem and
Transm iss ion d iscuss ion
In fras truc ture as a v ita l part o f the ru ra l econom y
Overview
C onfidentia l and P roprie ta ry 2
C onfidentia l and P roprie ta ry 3
C onfidentia l and P roprie ta ry 4
M odera te g row th (3 .9 percen t in 2Q 15)
Im prov ing jobs m arke t (5 .1 percen t unem ploym ent as o f S ep t 2015)
In fla tion under con tro l (.20% th rough A ugust TTM )
C ontinued apprec ia tion o f hom e va lues in m ost m arke ts
C orpora te p ro fits ho ld ing s teady
U.S. Economy – Key Indicators
C onfidentia l and P roprie ta ry 5
Historical Ten Year Treasury Yields
0.00%
2.00%
4.00%
6.00%
8.00%
10 .00%
12 .00%
14 .00%
16 .00%
18 .00%
S ep-05 S ep-15 S ep-25 S ep-35 S ep-45 S ep-55 S ep-65 S ep-75 S ep-85 S ep-95 S ep-05 S ep-15
10Y T reasu ryS ource : Federa l R eserve
C on fidentia l and P roprie ta ry 6
0.0
2.0
4 .0
6 .0
8 .0
10 .0
12 .0
A ug-75 A ug-80 A ug-85 A ug-90 A ug-95 A ug-00 A ug-05 A ug-10 A ug-1
Perc
ent
Unemployment Rate
Fed’s Focus
0.001.002.003.004.005.006.007.008.009.00
10.0011.0012.00
Ju l-75 Ju l-80 Ju l-85 Ju l-90 Ju l-95 Ju l-00 Ju l-05 Ju l-10 Ju l-15
CORE PCE Deflator (YoY)
S ource : B ureau o f Labor S ta tis tics , B ureau o f E conom ic A na lys is C on fidentia l and P roprie ta ry 7
Fed Balance Sheet
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15
Fed Balance Sheet Bank ReservesS ource : Federa l R eserve
C on fidentia l and P roprie ta ry 8
Will the Fed Move?
S ource : B loom berg
C on fidentia l and P roprie ta ry 9
World Stock Markets
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
10,000
12,000
14,000
16,000
18,000
20,000
22,000
Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15
Shanghai and Euro Stoxx (D
ow Jo
nes &
Nik
kei)
Dow Jones Nikkei EURO STOXX 50 Shanghai Stock ExchangeS ource : B loom berg
C on fidentia l and P roprie ta ry 10
S upp ly D riven P rice U ncerta in ty
Crude Oil:
Main Themes Driving Uncertainty in the Market
1) G loba l S upp ly and D em and D ynam ics
2 ) S h ifting O P E C P o licy
3 ) D ecoup ling o f U .S R ig C ounts and E nergy P roduction
4 ) G eopo litics
C onfidentia l and P roprie ta ry 12
Supply Growth Among Top Global Producers 2010-2015
S ource : In te rna tiona l E nergy A gency (IE A )
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2010 Q 3 2011 Q 1 2011 Q 3 2012 Q 1 2012 Q 3 2013 Q 1 2013 Q 3 2014 Q 1 2014 Q 3 2015 Q 1 2015 Q 3
N orth A m erica O P EC Form er S ovie rt U n ion
P ercent G row th R e la tive to 2010
C on fidentia l and P roprie ta ry 13
Global Demand Growth 2005-2014
-20
-10
0
10
20
30
40
50
60
C h ina M idd le E ast A frica O ther A s ia LatinA m erica
FS U P acific E urope A m ericas E urope
P ercen t G row th 2005-2014
C on fidentia l and P roprie ta ry 14
Chinese Oil Consumption versus Industrial Output
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2010Q 4
2011Q 1
2011Q 2
2011Q 3
2011Q 4
2012Q 1
2012Q 2
2012Q 3
2012Q 4
2013Q 1
2013Q 2
2013Q 3
2013Q 4
2014Q 1
2014Q 2
2014Q 3
2014Q 4
2015Q 1
2015Q 2
2015Q 3
O il C onsum ption C h inese Industria l P roduction
Y ear-over-Y ear G row th
C on fidentia l and P roprie ta ry 15
Decoupling of Rig Counts and Energy Production
50
100
150
200
250
300
350
400
450
600
800
1000
1200
1400
1600
1800
2000
2200
R ig C ount (Le ft A xis) R ig P roductiv ity (R igh t A x is)
N um ber o f U .S . R igs B arre ls per R ig per D ay
C on fidentia l and P roprie ta ry 16
• C ontinued production grow th am ong U .S . sha le producers
• U .S . re finery m ain tenance th rough the fa ll cou ld reduce dem and by 1 .3 m illion barre ls per day
• U .S . o il inventories rem ain w ay above average
• O P E C and R ussian production continues to rise
• Iran cou ld supp ly 1 m illion barre ls per day w ith in 5 m onths o f sanctions be ing lifted
• G loba l dem and, particu la rly in C h ina is like ly to rem ain s lugg ish
Overall Bearish Signs for Crude Prices
C onfidentia l and P roprie ta ry 17
Transmission Financing Update:
S trong repaym ent sources R egu la ted , p red ic tab le cash flow s A ccep tab le regu la ted deb t s truc tu re ; ho ldco deb t m ay be added S trong co lla te ra l va lue due to h igh m arke t va lua tion m u ltip les Low construction com p le tion risk
R egu la ted cap ita l s tructu re ensures opco w ill no t over-leverage
M in im a l, bu t recoverab le , on-go ing m a in tenance expenses
S upportive regu la to ry env ironm ent during and post construction . FE R C perm its : Forw ard tes t year Theore tica l cap ita l s truc tu re du ring construc tion C W IP revenues – deb t se rv ice supportab le du ring construc tion R O E ca lcu la ted on asse t base , no t vo lum e – revenue / ea rn ings ce rta in ty (Theore tica l) recovery on abandonm ent (bu t no da ta due to p ro jec t com p le tion )
N ew entran ts
S trong sponsors V arious assurances o f com m itted equ ity cap ita l E xperienced in investing , deve lop ing , execu ting , and opera ting transm iss ion
Transmission Investment – Fundamentals
C onfidentia l and P roprie ta ry 19
The chart be low is focused on P ro ject and C orpora te financings. G row ing s tructu res inc lude R E ITs and Y ie ld C os
C hart exc ludes qua lifica tion crite ria to b id on p ro jects
Transmission Investment – Types and Stage
B ank financing ava ilab le a t each s tage and pro ject type; debt cap ita l m arkets access becom es easier as cred it p ro file
im proves
LEAST RISK
Construction Strage Completion StageProject Financing Type Ex: Construction of a single line - wholly owned or JV Ex: Single line in service - wholly owned or JV(Opco only) Financing - Bank Construction Revolver - Bank Working Capital Revolver (smaller size)
- Debt Capital Markets (once in service)Terms - Parent / equity support during construction - Lighter covenants, particularly under Indenture
- Fairly robust covenants including Leverage ratio
Corporate Finance (Opco or Holdco) Type
Ex. Construction of multiple projects in early stages of overall completion
Ex. At or near completion of a project portfolio with the majority of projects reach completion
Financing - Bank Construction Revolver - Bank Revolver- Some Debt Capital Markets once sales generated - Debt Capital Markets (once majority in service)
Terms - Parent / equity support during construction - Parent / equity support depends on capital sources- Robust covenants, but less than single project - Covenants mirror corporate debt transactions
- Can add leverage at Holdco entity
MOST RISK
C onfidentia l and P roprie ta ry 20
M igra ting dem ograph ics
M obile genera tion R etiring coa l p lan ts ; new gas &
renew ab les
G rid com plex ity d riven by D G
G rid re liab ility
C yber security
E xis ting sys tem : T rack record , consum er con fidence / benefits , pub lic po licy
P artnersh ips
D isrup tive Techno logy C entra liza tion to decentra liza tion due to
renew ab les, s to rage, and D G
G rid com plex ity due to D G
S ubstitu tes : e lec trons vs . B TU s (gas p ipe line g row th vs . e lec tric transm iss ion g row th)
H igher financ ing cost - financ ia l regu la tion
In te rveners im pact on R O E s / C ap S truc tu re
Future of Transmission Financing
Opportunities – More Investment Due to? Threats
C onfidentia l and P roprie ta ry 21
CoBank Presentation: Alaska Accounting & Finance Conference
B rock Tay lo r C oB ank