GPUG Flashcards

Terms Definitions
What are the six main goals of deregulation in the power & utilities space?
(1) lower costs, (2) spur competition, (3) customer service, (4) customer choice, (5) economic efficiency, (6) innovation
In a regulated structure, customer rates are set to allow utilities to ______, ___, and ___.
each cost of service, pay capital charges, earn an ROE
What are the four major components in the power supply chain?
generation, transmission, distribution, retail
What two components of the power supply chain are natural monopolies? How has deregulation affected them?
transmission and distribution; remain largely regulated even in deregulated markets
Do many utilities companies operate in more than one segment of the supply chain?
Yes; many utilties own all four segments of the supply chaina s seprate business entitites within a holding company structure
In a deregulated market, the source of income for a generator is…
margins; the difference between fuel costs and power prices (similar to refiners)
In a deregulated market, the source of income for T&D businesses is…
regulated cost recovery + regulated return (they stay regulated)
In a deregulated market, the source of income for retail operations is…
competitive with retail margins similar to gas stations
In a regulated market, what is the primary asset of generators?
power plants
In a regulated market, what percentage of total utilities assets do generator assets comprise?
In a regulated market, what is the source of income for generators?
regulated cost recovery + regulated return
In a regulated market, What is the key cost(s) for generators?
In a regulated market, what is the regulatory outlook for generators?
Some states are deregulated, otehrs are not
In a regulated market, what is a current issue with generators?
generation supply tightening
In a regulated market, what is the primary asset of transmission operators?
high-voltage lines
In a regulated market, what percentage of total utilities assets do generator assets comprise?
In a regulated market, what is the source of income for transmission operators?
regulated cost recovery + regulated return
In a regulated market, What is the key cost(s) for transmission operators?
labor, maintenance expense
In a regulated market, what is the regulatory outlook for transmission operators?
will stay regulated indefinitely in all states
In a regulated market, what is a current issue with transmission operators?
underinvested infrastructure in many areas
In a regulated market, what is the primary asset of distribution operators?
last mile (of wires) to customer
In a regulated market, what percentage of total utilities assets do generator assets comprise?
In a regulated market, what is the source of income for distribution operators?
regulated cost recovery + regulated return
In a regulated market, What is the key cost(s) for distribution operators?
labor, maintenance expense
In a regulated market, what is the regulatory outlook for distribution operators?
will stay regulated indefinitely in all states
In a regulated market, what is a current issue with distribution operators?
largest source of power outages
In a regulated market, what is the primary asset of retail operators?
customer transactions
In a regulated market, what percentage of total utilities assets do generator assets comprise?
In a regulated market, what is the source of income for retail operators?
cost recovery and return; linked to distribution segment
In a regulated market, What is the key cost(s) for retail operators?
labor, bad debt
In a regulated market, what is the regulatory outlook for retail operators?
some states deregulated, others not
In a regulated market, what is a current issue with retail operators?
customer service, management of bad debt expense
What are the three major long-term value drivers in a regulated market?
reliability, incentive sharing rate plans (better performance, better ROE), relationship with regulator
What are the three major short-term value drivers in a regulated market?
weather, fuel costs (eventually recovered), unexpected outages
Why is the regulatory environment important to utilities companies?
determine's a utility's ability to make new investments and earn a fair return
What is the definition of rate base?
amount invested by the utility in the electric system (includes storm recovery costs)
What is the formula for rate base?
~PPE - depreciation +/- deferred taxes
Rate base is growing when…
capex > depreciation
Rate base is declining when…
capex < depreciation
What is a common model used by regulators to determine the allowed return on equity?
In a regulated market, net income =
rate base * allowed equity ratio (i.e. debt to cap) * allowed return on equity
In a regulated market, revenue =
cost + profit
In a regulated market, earnings are a function of ___ and ___.
assets, allowed returns
What are three positive factors affecting projected rate base growth?
(1) T&D upgrades needed to improve system reliability and move renewable energy to loads, (2) new generation needed to meet growing loads, (3) environmental retrofits needed to meeting tightening standards
What is one negative factor affecting rate cases?
Regulators penalizing T&D businesses for competitive generation successes
What are two negative factors affecting M&A in regulated utilities?
Regulators want a significant portion of merger synergies to give to ratepayers to offset fuel costs
Who are the five players in a rate case?
Administrative law judge, PUC / PSC staff, company, intervener, PUC commission
What are the three main roles of an administrative law judge in a rate case?
evaluates testiomny, sets hearings / timetables, runs procedural issues
What are the two main roles of the PUC staff in a rate case?
evaluates company and intervener testimony, makes recommendations
What is the role of the company in a rate case?
seeks fair rate of return on rate base
What is the role of an intervener in a rate case?
provides comments either in support of or against company filings
What is the role of the PUC / PSC in a rate case?
elected or appointed officials who set policy and make final decisions on cases
What are the 10 events in a typical rate case timeline?
(1) compay files request with supporting testimony, (2) interveners file testimony either agreeing or disagreeing with company filings and make recommendations, (3) PUC staff comments on company testimony, (4) company files rebuttal testimony, (5) interveners and staff file rebuttal testimony, (6) hearings are held, (7) staff / ALJ post hearing briefs, (8) ALJ decision / recommendation rendered, (9) PUC commissioners vote in open hearings, (10) new rates implemented
How is the revenue requirement calculated in a rate case?
Net Income + fuel (if utility has a fuel clause) + depreciation + O&M (operating & maintenance) + capital cost (interest expense) + taxes (property & franchise) + federal income taxes - third-party revenues (e.g., off-system sales)
When calculating required revenue for a rate case, you typically start by designating a ____.
test year
In merchant generation, capacity = , which represents ___.
capacity * price; ability to deliver energy
The 5 key drivers (5 "Cs") of merchant generation
Capacity prices, commodity, carbon, capital optimization, and capex
In merchant generation, capacity prices are a function of ____.
reserve margins
What two factors increase the value of existing generation?
(1) tightening reserve margins, rising construction costs
In merchant generation, commodity prices determine _____.
generation margins
In merchant generation, the implementation of carbon markets benefits ___ and hurts ____.
Nuclear, coal generators
How do merchant generators optimize capital?
FCF positive companies have been leveraging to buy back shares
In merchant generation, two ways capex are employed are ___ and __.
(1) new investments that facilitate future earnings growth and (2) environmental retrofit obligations that consume cash without enhancing returns
In merchant markets, ____ labor and mateirals expense plaing ____ pressure on O&M
higher, upward
Efficiency =
power out / fuel in
Heat rate =
fuel in (MMBtu/hr) / power out (MW)
A low heat rate implies
high efficiency
A high heat rate implies
low efficiency
traditional unit of energy equal to about 1,055 joules. It is the amount of energy needed to cool or heat one pound of water by one degree Fahrenheit
A combustion turbine (CT) uses ___ and is essentially a ____.
gas or oil, jet engine
A combined cycle gas turbine (CCGT) is _____.
2 combustion turbines with heat recovered from the CTs for use in a steam turbine
Typical heat rate of combined cycle gas turbine (CCGT)
Typical heat rate of a steam turbine (ST)
Typical heat rate of a combustion turbine (CT)
Typical heat rate of internal combustion engines
market heat rate definition
theoretical heat rate of the marginal plant; indicator of supply demand balance
market heat rate formula
power price / gas price
In merchant generation, gross margin =
electricity sales revenue - fuel cost (i.e. coal nuke, gas)
In merchant generation, electricity sales revenue is related to …
gas price
Coal and nuclear plant outlook is _____ correlated to gas price outlook
As gas prices rise, profits in coal, nuclear, and gas-fired plants ___.
Gas plant is ___ sensitive to gas prices but are dependent on changes in dispatch
In gas generation economics, spark spread =
power price - fuel cost
If gas is on the margin, spark spread =
gas price *(market heat rate - plant heat rate)
Plant efficiency advantage =
market heat rate - plant heat rate
In merchant generation, gas plant margins are highly ____.
In merchant generation, plant profitability is tied to ___ and ____.
gas prices, the plant efficiency advantage
In merchan generation, the plant efficiency advantage is dependent upon ____, ____, and ____.
reserve margins, weather, economic conditions
The 3 major advantages of a combustion turbine are…
fairly reliable, quick start, flexible
The 2 major advantages of a combustion turbine are…
low efficiency, higher fuel costs
The 3 major advantages of a combined cycle are….
some quick start capability, more efficient, provide load following
The 2 major disadvantages of a combined cycle are…
higher fuel costs, unproven cycling capability
The 2 major advantages of a steam turbine are…
burn low-cost fuels, provide load following
The 2 major disadvantages of a steam turbine are…
lack quick start ability, need to keep running at night to provide service during the day
The 11 major gas markets in the US are….
Sumas (WA state), PG&E Citygate (NoCal), SoCal Border, San Juan Basin (NM), Houston Ship Channel, Henry Hub (LA), Chicago Citygate, TCO Pool (KY), Dominion South (WV), TETCO M3 (PA), TranscoZ6-NY (CT)
The 4 major coal markets in the US are….
PRB (WY), IL Basin, CAPP (VA), NAPP (PA)
In a typical northeastern load curve, base load producers are ____.
baseload gas, coal plants, nuclear plans, wind, etc.
In a typical northeastern load curve, intermediate load producers are ___.
intermediate gas, intermediate oil, cycling oil
In a typical northeastern load curve, peak load producers are ___.
gas peakers and oil peakers
What are three plant types are examples of low variable operating margin plants?
nuclear, wind, hydro
The x-axis on an a power demand (economic dispatch) curve is ____ and the y-axis is ____.
hourly demand and cumulative supply [MW], variable operating cash costs [$/MWhr]
A deregulated market is still coordinated because margins are determined by the ___.
spread between the marginal producer (usually a gas burner) and what you make
In a deregulated market, as gas prices go down the marginal producer's price goes ____ and the spread ___.
down, compresses
In merchant genration, the generating margin is the spread between ___ and ___.
clearing price and the plant's variable price
In merchant generation, the reserve margin =
capacity / peak load
In PJM, capacity prices for stand-by generators are determined by ___ and set where ___.
an annual auction, spply intersects the demand curve
Two distinct power market structures in the US are ____ and ____.
Contract path, pool
Two examples of contract path power market structures are ___ and ___.
Entergy, Southern
In the contract path market structure, transmission price is ___, service availability is ___.
known, unknown
An IOU is an ____.
investor-owned utility
An IPP is an ____.
independent power producer or non-utility generator (NUG)
An example of an IPP is ____ which are capable of ___.
rural solar or wind energy producer, feeding excess energy into the system
The two types of service in a contract path market structure are ___ and ___.
Network (used by IOUs to serve load), point to point (used by IPPs)
In the contract path market structure, ____ service always has priority.
In the contract path market structure, transmission customer pays ____.
posted tariff rates
In the contract path market structure, bilateral markets are dominated by ___.
In the contract path market structure, congenstion is managed through ___, which forces ___.
transaction curtailment, generation redispatch
The contract path market structure, favors ______ ability to ____.
IOUs ability to serve their own load
Three examples of pool power market structures are ___, ___, and ___.
In the pool power market structure, transmission structure is ___, but price is ___.
always available, unknown
In the pool market structure, there always is ___ service unless ____.
network sercice, exporting outside the pool
In the pool market structure, entities pay ____ based on ___ for access
annual fixed demand charges, size
In the pool market structure, the auction market is administered by ____, where generators bid prices a ____ ahead and in ___.
independent operator, da ahead, real time
In the pool market structure, congestion is managed through ____, which send ____ to generators to ____ to relieve congestion.
bid-based locational marginal prices, pricing signals, encourage redispatch
In the pool market structure, _____ are available to hedge congestion risk
Financial Transmission Rights
The pool market structure favors market dispatch of generation and load service by _____.
non-generation owning entities
Load shaping and resource management are simpler in the ____ power market structure.
5 opportunities for retail electricity provider (REPs) to upsell are___.
(1) custom billing for large customers, (2) energy delivery solutions that accommodate client fuel swings, (3) pricing alternatives (i.e. fixed vs. collared price), (4) purchasing energy from "green" generators for environmentally conscious customers, (5) energy management services down the road
Retail is exposed to the volatile spread between ____ and ___.
revenue received from customers, cost of fuel-purchased power
3 potential differentiable skill sets that will drive growth in retail are….
(1) being able to design custom energy products, (2) create margin that goes beyond commodity curve-based margins, (3) incorporte energy management services with commodity delivery
Retail price =
base load - wholesale market on peak - wholesale market shaping risk - option premium volumetric risk - option premium ancilliary services - option premiuty capacity - wholesale market
Transmission controls the high-voltage wires that run from the power plant to the ____.
last transformer before the customer's connection
Transmission wires are typically ___ kV.
> 69
In Federal Energy Regulatory Commission (FERC)-regulated zones, energy corridors ___.
facilitate siting of new lines in needed areas
In Federal Energy Regulatory Commission (FERC)-regulated zones, incentive ROEs promote ___ and ___.
RTO membership, technological upgrades
2 key drivers in transmission are ___ and ___.
need to move renewable energy to load centers, need to relieve transmission congestion, which cuases grid inefficiencies
Distribution is the portion of transmission that runs between ____ and ____.
the utility's power pole and transformer, and a customer's final point of connection (i.e. house, business, etc.)
Distribution wires are typically ___ kV.
<= 69
Transmission is state regulated in ___.
Distribution is regulated by ___.
2 key drivers in distribution are ___ and ___.
new development, replacement of old equipment
A Regional Transmission Organization (RTO) is ___.
an independent entity tasked with operating the transmision system on bhelf of transmission owners and ensures fair access to the grid (e.g. SPP)
An Independent System Operator (ISO) is __.
an independent entity tasked with operating the transmission system; ensures fair access to the grid and administers a power market (e.g. PJM, NY-SIO, ISO-NE, ERCOT, Cal-ISO)
What are production tax credits (PTC)?
they are wind tax credits that help enhance the rate of return on a project
For wind facilities brought into operation by December 2009, the credit is ____/kWh or approximately ____/MWh on a gross revenue basis.
$0.02, $30
The PTC is escalated annually by the ___ factor and is applicable for __ years from the start of plant operations.
consumer price index (CPI), 10
Wind projects receive ___ tax depreciation benefits (over __ years) to facilitate a quick return of cash
accelerated; 6
Est. cost of debt for a wind power plant
Est. cost of equity for a wind power plant
A typical IRR for a wind power plant can be ___.
2 ways to currently alleviate emissions from coal-fired plants are…
switching to low-sulfur coals, installing pollution control equipment
Emissions cost for generator =
emission rate (lb / MMBTU) * emission cost ($/lb) * plant heat rate (MMBTU/Mwh)
Market price of emissions =
emission rate of marginal plant (lb/MMBTU) * emission cost ($/lb) * heat rate of marginal plant (MMBTU / Mwh)
Gross margin impact on generator =
[Market impact ($/Mwh) - Cost ($/Mwh)]*volume
What are the 4 valuation methods used for regulated utilities?
(1) PE , (2) EBITDA, (3) dividend discount model, (4) divident yield spread
When valuing a regulated utility, the most commonly used method is __.
When valuing a regulated utility, EBITDA is ___.
often distored due to transition charges
When valuing a regulated utility, the dividend discount model is ___.
appropriate for companies with steady growth
When valuing a regulated utility, the dividend yield spread is ___.
proven most effective for price target for high-yielding companies
What are the 3 valuation methods used for diversified utilities?
(1) PE, (2) EV/EBITDA, (3) DCF
When valuing a diversified utility, the most commonly used method is __.
When valuing a diversified utility, EV/EBITDA is the ____ most common method and the ___ common for individual assets
second, most
When valuing a diversified utility or merchant generator, DCF is best method for ___, ___, and ___.
identifying value, accounting for hedging, and capex obligations
What are the 3 valuation methods most used for merchant generators?
(1) EV / EBITDA, (2) DCF, (3) replacement cost
When valuing a merchant generator, EV/EBITDA is the ___.
exclusive method used by buy-siders
When valuing a merchant generator, replace cost is ____, but ___.
increasingly popular as the market tightens; may not reflection the value
Are return measures like ROIC typically used in the utilities sector?
How can transmission be unregulated?
Like forcing to rent out broadband lines in South Korea
Most M&A transactions are __- and ___-based.
generation, transmission
The investor in a regulated market relies upon a _____ calculated as a ___.
cash flow stream from a predetermined 20 year period, spread
A merchant power plant is ___ to finance due to ___.
more difficulty, steep penalties for financing the cash flows by rating agencies because of raw material costs
Describe Nextera
diversified generator that owns regulated Florida Power (mostly nuclear and gas) and merchant generation
Florida is ____ by ___.
completely regulated, a PSC / PUC
Nextera is currently ___.
building a natural gas pipeline from the gulf coast to Florida
When commodity prices were boming in 2007, Nextera ___.
bought a lot of merchants, but now they are moving away from merchants to either regulated or contracted generation
In ____, you don't usually get paid for idle capacity, unlike ___ or ___.
The debt of regulated generators is _____ because the are _____.
investment grade, guaranteed ROE
Since utilities went private in 1983, ___ have defaulted.
A major PE group in the utilities space is ___.
LS Power
One ___ is typically needed to run everything in your house.
kilowatt (KW)
A typical value method for a utility is ___, which is a measure of ____.
$ / Mwh, capacity * time
A big gas plant typically generates betwee ___ and ___.
500 MW, 1 GW
A wind turbine typically generates ___ to ___.
1, 5
A nuclear plant typically generates between __ and __.
2 GW, 3 GW
A sold photovoltaic plant typically generates ___.
700 MW
Nuclear plants always have ___ capacity than they actually ____, unlike __.
more, generate, oil
A typical nuclear power plant has a lifespan of ___.
40 years
A typical wind power plant has a lifespan of ___.
25 years
Unlike nuclear plants, wind turbines are ___.
much easier to decommission and replace with new ones
According to the Energy Information Administration (EIA), by 2016, solar will have a cost of electricity of ___, nuclear will have a cost of ___, and wind will have a cost of ___.
21 cents / KWh, 11.39 cents / KWh, 9.7 cents / KWh
Dispatchable generation refers to sources of electricity that can be
dispatched (adjusted or turned on or off) at the request of power grid operators
Is nuclear power dispatchable?
No, it has limited capability to adjust its output, so it's good for base load
Are wind or photovoltaic power dispatchable?
No, their output cannot be controled by operators
Capacity factor is the ratio of ____.
actual output over a period of time, to its potential output (max capacity)
Capacity factor for nuclear is ___.
Capacity factor for wind is ___.
Capital Power deal (seller background)
Edmonton, AB, CA-based, independent power producer with diversified assets (i.e. natural gas, coal, wind, solar, landfill gas); still have 6 merchant facilities in AB (~1GW); 6 contracted facilities in AB, B, ON, and NC (~GW); 4 facilities in construction, 2 gas, 2 wind in AB and ON (1.5GW in generation capacity); 1 power purchase agreement in AB in AB (coal); natural gas and electricity trading
Capital Power deal (seller financials)
employees = 939, PE = 15.1x, EBITDA $434m, revenue $1.3bn, market cap, $1.4bn, TEV= $3.7bn, total assets= $5.1bn, ROE= 5.5%, ROA= 2.8%, UFCF=($349.2m), Q2'2013 Alberta power prices up to $123/MWh when compared to $40/MWh a year ago
Capital Power deal (date announced, TEV, assets sold)
8/28/2013, $541m, 3 merchant combined cycle gas turbines [520 MW plant in Bridgeport, CT (v. 1999); 265 MW plant in Tiverton, RI (v. 2000), and 265 MW plant in Rumford, ME (v. 2000)] --> all ISO-NE total of 1.05 GW; all new assets, power is sold to NEPOOL on an hourly basis ($515/KW)
Capital Power deal (buyer background)
Halifax, NS, CA-based, generates, transmits, and distributres electricity, gas transmission, utilities services, provides energy marketing and trading; assets in NS, Maine, NB, NF, Carribbean; gas, hydro, ~497k custyomers in NC, 156k in ME, 124k on Barbados
Capital Power deal (buyer financials)
employees = 2.960, revenue=$2bn, market cap=$3.7bn, EBITDA = $672bn, NI=$257, TEV/EBITDA=11.3x, PE=15.1x, Total Debt to EBITDA = 5.2x, Assets = $7.5bn, debt = $3.5bn, ROE = 12.0%, ROA = 3.2%, UFCF = $82.9m
Capital Power deal (buyer rationale)
Emera has operated in the regulated markets in the Northeastern US for over 10 years, has wind and hydro in the Northeast and now gas, buying at a cyclically low period for gas (must go up with gas exports)
Capital Power deal (buyer financing)
Cash and short-term credit sources on closing, utliamting finance with a c ombinataiton of debt and equity
Capital Power deal (seller rationale)
Reduce reduce merchant risk profile and provide more predictable earnings and cash flow; focus on merchant business in AB, continue to pursue contracted power across NAMA; wind down commoditya nd energy trading business outside AB before 2014 and close Toronto and Chicago offices
Capital Power deal (underlying trends)
Several power companies have recently begun to sell or spin off merchant units to focus on rate-based regulated operations as power prices hover near decade lows (i.e. in March, Ameren sold merchant generation business to Dynegy, Dominion Resource's sold three merchant plants around then too), shale fields have pushed natural gas prices to decade lows, hurting power prices, gas produced 30% of electricity in 2012 up from 25% in 2011
Capital Power deal (prior transactions involving assets)
In February 2011, Capital Power acquired Tiverton, RI [265 MW] and Rumford, ME [265MW] for $315m ($594/KW) from Brick Power Holdings, in March 2011, acquired Bridgeport, CT [520 MW] from LS Power for $355m ($683/KW), total 2011 investment of $670m ($638/KW), financed using debt and equity
Capital Power deal: Question 1: In 2011, if Rumford / Tiverton have a combined capacity of ___ MW, then Capital Power paid ___ per KW. If Bridgeport had a capacity of ____ MW, then Capital Power paid ___ per KW. On a combined basis, Capital Power paid ___ for ___GW or ___ per KW. In 2013, it sold those assets for ___ KW. Was that a fair price given changing merchant market in New England? Did the buyer suspect that Capital Power didn't sufficient capital without issueing equity to help its current projects like the 800-MW Shepard natural gas–fired power plant in Alberta, a 50 percent joint venture with Enmax
530, $594, 520, $683, $670m, 1.05, $638, $515
Capital Power Deal question 2
What's the appetite for merchant assets in New England
Capital Power Deal question 3
Were these all high-dispatch merchant assets?
Dynegy (background on the company's operations)
Holding company that engages primarily in power generation in the Midwest, Northeast and Southwest, all of which are coal-fired (4 in IL) and natural gas-fired (8 in Southwest, IL, and NE). The company operated primarily by producing wholesale energy then packaging and selling it to retail utility companies. With approximately 12,300 Megawatts (MW) of energy capacity and operations in six states, Dynegy is a serious industry player
Dynegy (early 2000s)
Originally known as Natural Gas Clearinghouse, the company took a turn for the worse when it rebranded itself Dynegy in 1998. As part of this shift, Dynegy began to rapidly expanding to areas like energy trading and broadband internet, adopting the strategies of its larger rival Enron. Dynegy would almost follow Enron into bankruptcy after an investigation revealed fraudulent accounting practices in 2001.
Dynegy (2012 bankruptcy)
Dynegy had structured itself so that Dynegy Inc. (the holding company) had little debt. Nearly all the debt was held by its subsidiary, Dynegy Holdings, which also guaranteed debt for the operating divisions. Dynegy Inc. created three operating divisions: the natural gas group (GasCo), the coal group (CoalCo), and a group for all other businesses (known as "the stub group"). GasCo and CoalCo were structured so that they would be little affected by any bankruptcy filing by either Dynegy Inc. or Dynegy Holdings. Few of the natural GasCo's and CoalCo's dividends were given to Dynegy Holdings. GasCo and CoalCo sold themselves to Dynegy Inc., which left Dynegy Holdings holding US$1.25 billion in debt but without the ability to seize the assets of GasCo and CoalCo in the event of a default. Under the structure adopted by Dynegy Inc., the company could meet its debt obligations to Dynegy Holdings by paying cash or by forgiving debt. This provided an incentive for Dynegy Inc. to withhold payment and force Dynegy Holdings to declare bankruptcy (thereby reducing the value of the debt and making it easier to pay off).
There were legal challenges to this structure that eventually bankrupted Dynegy Holdings but did not, however, affect GasCo, CoalCo, or the "stub group", and allowed the Dynegy Holdings bankruptcy to proceed. Sold some assets.
Dynegy emerged from bankruptcy on October 2, 2012, and its shares began trading on October 3 under the "DYN" symbol.[109]
Dynegy (March 2013 acquisition of assets from Ameren)
purchased The company will gain five coal-fired power plants of Ameren. Dynegy's Illinois Power Holdings (IPH) subsidiary will acquire AER adding 4,119 megawatts (MW) of generation to Dynegy's IL operations. The purchase involves no cash or stock issuance. Dynegy will take on $825m of debt with its acquisition of AER subsidiary Ameren Energy Generating Company (Genco), according to Dynegy's press release.
The transaction creates synergies that Dynegy estimates will exceed $60m by 2015, and supports Dynegy's strategy to become a retail energy supplier for large commercial and industrial customers in Illinois.
deal allows Ameren to focus exclusively on its rate-regulated electric, natural gas, and transmission operations
Dynegy refinancing (date announced, general terms)
4/23/2013, $1.3bn in senior, secured term loan facilities, $475m corporate revolving credit facility,
Dynegy refinancing (2 uses)
(1) repay existing indebtedness at its Dynegy Power, LLC (GasCo) and Dynegy Midwest Generation, LLC (CoalCo) subsidiaries and (2) fund related transaction fees and expenses
Dynegy refinancing (term loan details)
$800m, $500m, maturing in 2020, priced at LIBOR + 300 bps with a LIBOR floor of 1%
Dynegy financing (term loans were offered to investors ___ at ___).
below par, 99.5
Dynegy refinancing (revolver details)
5-year, $475m revolving credit facility replaces an existing $150m GasCo revolving credit facility; interest rate = LIBOR + 275 bps with no LIBOR floor
Dynegy refinancing (9 lead arrangers, all of which participated on revolver)
MS (leading left), BAML, Credit Suisse, Goldman Sachs, Barclays, DB, JP Morgan, Royal Bank of Canada, UBS
Capital Power deal (subsequent transactions)
May 15, launched $500m senior notes 5.875% due in 2023 in a Rule 144A private placement to repay recently issued 7-year Term Loan B
earnings / enterprise value
People you've met at MS
Pragav Jain, Justin Craig (just started), Rohit Dube (Media & Comm), spoke with Sung Lee while I was in Shanghai
What would you do with $10m?
I have high upside in terms of future earnings and I’m young, so I would say that I have a higher risk profile than the average investor; I would still want to properly diversify my portfolio; Gaining investments (Government bonds, AAA corp bonds), Losing investments (Junk bonds, High-Yield Municipal Bond ETF, Tech stocks, Distressed real estate)
Accounting: Sale of fixed asset with book value of $100 for $50
IS: Loss on sale of equipment expense -$50, NI is -$50, SCF: SCF Ops -> NI -50, +50 loss on sale of equipment, Net change $0, SCF Investing -> +50 proceeds from sale of equipment, Ending cash $50, BS, Assets -> PPE -$100, Cash $50, Net change -$50, L + SE -> Retaining earnings -$50 (from NI)
PEG ratio
PE / annual EPS growth, Takes into account growth, Low PEG means the firm is undervalued
Current ratio
Current assets / current liabilities, < 1 can’t pay debts maybe, Just above 1 means efficient inventory management
Quick ratio
(current assets – inventories) / current liabilities, More conservative than current ratio because it assumes that a company cannot instantly liquidate its inventory to pay off debt coming due
Coverage ratio
EBITDA / interest expense
Long-term debt ratio
Total debt / EBITDA
6 Pro forma adjustments made in prep of an M&A
(1) See how much debt you're taking on (new debt level), (2) new shares issued if equity acquisition (accretion / dilution), (3) interest expenses, (4), synergies (e.g. Cost, revenue), (5) premium over book value is Goodwill, (6) inter-company transaction (e.g, upstream or downstream) effects revenues and COGS
Examples of normalizing earnings
adjust for non-recurring items (legal fees, restructuring, asset write-downs)
EV =
market value of equity (market cap) + Debt + Minority Interest + Preferred Stock - Cash
2 ways of calculating market cap
(1) NI * P/E ratio, (2) Shares outstanding * market value of share price
How do you calculate fully diluted shares in order to calculate fully diluted EPS?
Treasury stock method (a way to calculate fully diluted shares outstanding. Proceeds of the exercise price go to the company’s treasury, which will then be used to buyback the company’s shares sold to the outside market)
What is the equation for the treasury stock method?
Current shares outstanding + in the money options and warrants - # of shares that can be repurchased using the proceeds from exercising the options
If share price if $50, exercise price is $25, and company stockholders exercise 2 options, how many fully diluted shares outstanding will be added?
1 because company receives 2 x $25 = $50, which it will then use to buy back one share from the market
Most difficult part of new job
(1) ramping up on a new industry in September as things start to get busy; luckily I've already started that; (2) working in a larger group and new org. structure; always requires an effort to get to know everybody and establish a new good reputation in a group with XX bankers
10-year treasury note rate
Calculating Cash Flow from Operations
Net Income + D&A – Inc. to A/R – Inc. Inventory + Inc. AP
Beta unlevered =
Beta levered / [1 + (1-T)(D/E)]
Beta levered =
Beta unlevered*[1+((1-T)*(D/E))]
Calculating UFCF starting from NI
Net Income + Interest Expense*(1-Tc) + D&A – CapEx – NWC = FCF to firm – interest expense*(1-Tc) – principal repayments = FCF to equity holders
Calculating UFCF starting from EBIT
EBIT*(1-Tc) + D&A – CapEx – NWC = FCF to firm - Interest – principal repayments = FCF to equity holders
Example of financial covenants
The lender may want the company to stay below a certain ratio of debt to cash flow and to stay above a certain ratio of cash flow to interest. Breaking a covenant may put the company in default.
3 examples of financial covenants
(1) Senior debt ratio: Senior Debt / EBITDA, (2) Senior coverage ratio: EBITDA / Senior Interest, (3) Fixed charge coverage ratio: (EBITDA - CapEx - cash taxes) / (cash interest + debt amortization)
What is cash sweep?
an arrangement between a bank and a customer (usually a corporation) whereby all idle or excess funds in a deposit account are used to pay down short-term borrowing under a line of credit. The client usually sets a target balance which will determine how much of its funds will be used.
Is an increase in A/P always good?
5 steps to capitalize operating leases
(1) calculate PV of the operating lease payments at the current BS date, (2) + leasehold asset and obligation to BS, (3) - Rent Expense from IS, (4) + Amortization and Interest Expense to IS, (5) Adjust SCF by removing rent expense and adding interest and amortization
An increase in beta, ___ WACC
An increase in Rm only, ____ WACC
In a bond, principal = __ value
What is a zero coupon (accrual bond)?
A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value
Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price ___ than coupon bonds
Price of a zero-coupon bond moves in the ____ direction of interest rates
When interest rates fall, bond prices ___
What is a callable bond?
An issuer can call back a bond before maturity (paying a premium to do so)
What is a put bond?
Bond owner has the right to force the issuer to buy back the security (usually at face value) before maturity
What are 6 common sources in an LBO model?
(1) excess cash, (2) revolver, (3) non-controlling interest, (4) term loans, (5) debt (senior, mezzanine, subordinate), (6) management rollover
What are 6 common uses in an LBO model?
(1) Existing shareholders, (2) Fund cash balance, (3) Tender / call premium, (4) Expensed transaction costs, (5) Capitalized transaction costs, (6) Refinanced debt
What is the prime rate?
What is the federal funds rate?
What is current LIBOR (3, 6, and 12 month)?
0.26%, 0.39%, 0.67%
How are the three main financial statements connected?
There are many links between the three financial statements. Starting with the income statement, the last line item is net income. Net income is added to cash flow from operations on the cash flow statement. Beginning cash balance is cash from the balance sheet in the prior period. After making adjustments to Net Income for non-cash items, the cash flow from operations, investing and financing, the ending cash balance becomes the cash on the current period’s balance sheet under assets. Net income (minus any
dividends paid) flows from the income statement onto the retained earnings column (shareholder’s equity) of the balance sheet, causing the balance sheet to balance. Some other connections are as follows: Interest expense on the income statement is calculated from the long-term debt on the balance sheet. Depreciation on both the income statement and cash flow statement is calculated based on property, plant and equipment, from the balance sheet. Change in working capital on the cash flow statement is calculated from changes in current
assets and current liabilities on the balance sheet.
In CAPM, Re =
Rf + Beta*(Rm - Rf)
How would a $10 increase in depreciation expense affect the three financial statements?
IS: $10 increase in depreciation expense, $6 reduction in net income, SCF: NI down by $6, but depreciation expense of $10 is added back resulting in increase of CF from Ops of $4, BS: cash increases by $4, PP&E decreases by $10, and retained earnings decreases
by $6, causing everything to balance
In an all equity deal, if Company A wants to acquire Company B and Company A has NI of $100, share price of $25, and SO of 1,000 and Company B has NI of $200, share price of $50, and SO of 1,000, is the acquisition accretive or dilutive to EPS?
Company A: EPS = $0.10, P/E = 250, Company B: EPS = $0.20, P/E = 250, Pro Forma EPS = ($100 + $200) / (1,000 + 2,000) = 300 / 3,000 = $0.10, which is EPS neutral
4 components of coal plant generating costs
1) the type of coal burned 2) transportation costs from
the mine to the plant 3) the fuel efficiency of the unit and 4)
additional operating costs required to comply with environmental regulations
Renewable Portfolio Standards (RPS)
Utilities and other load serving entities (LSE’s) are required to
purchase renewable energy up to the percentage of load that
must meet the RPS; could be mitigated by RECS (renewable energy certificates)
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