Finance Forum Keynote Session addresses financial issues for power projects

POWER-GEN International 2011 held its first Financial Forum Keynote Session Dec. 14 featuring Larry Kellerman, chief executive officer of Quantum Utility Generation.

Kellerman spoke about the issues that face power projects in terms of financing, including failed companies such as Solyndra.

“Lenders make mistakes,” Kellerman said.

Kellerman gives five options for having a successful financing package for projects:

  • Quality of engineering and systems design;
  • Quality of customers;
  • Knowing the costs that are incurred and the revenue that will be received;
  • Options are your friends; and
  • Quality of ownership and management.

For the first point, some projects are based on the lowest first cost and not the lowest maintenance and operating costs. As an example, he said a project company bought a boiler that was undersized for the project but it was chosen because it was less expensive up front.

“I told them it would have to be replaced before the design’s life span,” Kellerman said. “After that, the boiler experienced a lot of repairs and erosion and other problems.” Because of those additional expenses, the financing for that project is now in default, Kellerman said.

The quality of the customer is just as important because you want a partner that is trustworthy and dependable, Kellerman said.

“If they don’t send you financing on a regular basis, you are in a speculative business,” Kellerman said.

Kellerman also spoke on the risks of hedges, which is an investment position intended to offset potential losses that may be incurred by a companion investment.

“Hedges may be the smartest risk over other options, but you have to think about the unplanned and the unthinkable” such as companies going out of business or a plunging economy, Kellerman said.

He also said having control over the project financing is important.

“If you have more leverage than the project can support, you will lose control,” Kellerman said. “If you hit a default, the lender can take all of your equity.”

Kellerman said project developers and engineers must also make sound assumptions about revenues the project is expected to receive and the costs that can occur as the development begins operations.

“The road to bankruptcy is paved with bad assumptions,” Kellerman said.

Kellerman also said developers must embed as many options as possible for financing.

“Five years ago, it was inconceivable that gas would be at the prices that it is now,” Kellerman said. “You must identify structural options for your project to adapt.”

The last option is to have quality management and ownership over the project.

“Sometimes, bad things happen to good plants,” Kellerman said. “But will the owners be focused on getting the power plant to where it can be? Will they risk their reputation to make it successful?”

With government incentives for renewable energy projects set to expire in 2012, and possibly not be extended, Kellerman said projects should not completely rely on government financing, but also take advantage of it while they can.

“You must capture the window while they are still around,” Kellerman said. “But if you completely rely on incentives, you are in a very at-risk element.”