Cost estimate analysis for the Corporation’s scenario Enemalta Corporation 14 January 2013
Important information relating to this presentation This presentation is addressed to Enemalta Corporation (the Corporation) and has been prepared in accordance with our terms of engagement dated 14 January 2013. Our duties in relation to this presentation are owed solely to the Corporation and accordingly we do not accept any responsibility for loss occasioned to any third party acting or refraining from action as a result of this presentation. We understand that this document may be provided to third parties including the general public as part of a public consultation process. We have given our consent for this document to be copied or disclosed to such third parties on the basis that we do not owe such third parties any duty of care as a result of giving such consent. In providing our services we may refer to and quote from laws, regulations, directives or rules issued by regulatory bodies. We may also comment on their general or specific applicability to the subject of our engagement. We will do so in the context of providing you with business advice and/or assistance and should not be construed in any way as the provision of legal services. We have indicated in this presentation the sources of information presented. We have not sought to establish the reliability of those sources. The scope of our work was different from that for an audit and, consequently, we do not issue any opinion or any other certificate or confirmation relating to the financial statements, tax position or the internal control systems of Enemalta Corporation. Our report makes reference to “KPMG analysis”; this indicates only that we have (where specified) undertaken certain analytical activities on the underlying data to arrive at the information presented; we do not accept responsibility for the underlying data. In carrying out our work, we have relied on information obtained from parties not employed by us and this information has been assumed to be true and correct. We have for the most part based our work on information, including audited and unaudited financial information, relating to the Corporation. We do not accept responsibility for such information which remains the responsibility of the Corporation. We have not sought to establish the reliability of this information by reference to sources independent of the Corporation. Our reliance on and the use of this unaudited information should not be construed as an expression of our opinion on it. We do not accept any responsibility or liability for the impact on our analysis and conclusions of any inaccuracies in such information. This presentation, including the underlying models, include certain statements and estimates with respect to the Corporation’s business. Such statements and estimates reflect various assumptions made by the Corporation which assumptions may or may not prove to be correct. No representation is made as to the accuracy of such statements and estimates. In compiling this presentation, we have relied on the financial cost estimates for 2013 which were based on the Corporation’s assumptions related to the nature and size of the intended level of operations. There will usually be variances between projected and actual results, because events and circumstances frequently do not occur as expected and these variances may be material. We must emphasise that the scope of the work required in this engagement is different from that required for an audit carried out in accordance with International Standards on Auditing and cannot therefore be relied upon to provide the same level of assurance as an audit of financial statements prepared in accordance with those standards. There exists a significant degree of judgement involved in selecting methods and basis for arriving at our opinions and recommendations, and a significant number of items may be subjectively considered when arriving at such opinion. It follows therefore that, whilst our opinion will be one which we consider to be both reasonable and defensible, others may arrive at a different conclusion. The analysis set out in this deliverable takes into account all the information known and made available to us up to the time of its preparation and is therefore current as at the document date, or such other date that may be specified.
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
2
Terms of reference Terms of reference We structured this engagement in a way that we would be in a position to give a ‘highlevel overview’ within a short time-frame, allowing the Corporation to narrow the scope of options under consideration. More specifically, the tasks which you required us to undertake in this assignment are set out as follows:■ to hold meetings with senior key officials from the Corporation and to gain a good understanding of the potential scenario envisaged by the Corporation, and the underlying parameters and assumptions taken up by the Corporation’s management ■ to collate supply and cost data and underlying assumptions for each of the parameters of the Corporation’s scenario, including collating information from the Corporation’s Estimates for 2013 ■ to compute an estimated average unit cost of generation based on the Corporation’s scenario and its underlying assumptions ■ to draw up a high-level report outlining our findings and conclusions. © 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
3
Sources of information The assumptions underlying this analysis have been adopted by Enemalta Corporation on the basis of the principles approved by the Malta Resources Authority. This presentation is based on: ■ current management information ■ the Corporation’s Cost Estimates for 2013 ■ the Corporation’s 3-year financial forecast 2013-2015 ■ the Corporation’s forecast Balance Sheet for year end 2012 ■ the Corporation’s 2013 estimate for MW generated ■ meetings and discussions with senior management and senior executives of the Corporation’s Finance Function and Technical Division ■ pricing information for LNG sourced from the Corporation’s technical external sources.
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
4
Assumed energy mix ■ The Corporation’s scenario is based upon a notional assumption that the proposed sources of generation and purchase of electricity and their supporting infrastructure, were available as at 1 January 2013. ■ Enemalta’s forecast generation for 2013 is 2,148,382 MWh which will be generated/sourced in accordance with the following mix: – Delimara extension
40%
859,000 MWh
– New Delimara plant
40%
859,000 MWh
– Interconnector
20%
429,676 MWh
■ The Corporation has forecast a generation and billed volume for 2013 of around 1,880,060 MWh, after allowing for technical & non-technical losses (assumed at approx. 11% of MWh generated) and Street lighting (approx. 32,000,000 units)
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
5
Assumed direct cost per MWh The Corporation has assumed the following parameters in its scenario: ■ Delimara extension converted to LNG – Average usage of 200.75 m3 of LNG per MWh ■ New Delimara generating plant working on LNG – Average usage of 172.50 m3 of LNG per MWh ■ Interconnector – Average price of €0.093 / MWh ■ Forecast long-term average LNG price of $ 11.21 /m3, reflecting the Corporation’s assumption computed as the average price of the Daily LNG South West Europe Spot DES between 15 and 22 October 2012, incremented by 15% ■ Forecast USD exchange rate – 1.284 ■ Forecast emissions costs - €8.36 million, equivalent to €3.89 / MWh generated ■ Forecast direct generation costs - € 67.08 million © 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
6
Costs of generation and purchase
Breakdown of average generation/sourcing cost per MWh Electricity supply mix %
Forecast Supply Average cost MWh €/kWh
Total generation/ sourcing cost € 000
Delimara extension (144MW) on LNG New Delimara plant
40.0% 40.0%
859,353 859,353
0.117 0.107
100,474 91,644
Local electricity generation Interconnector
80.0% 20.0%
1,718,706 429,676
0.112 0.093
192,118 39,960
Cost of generation and purchase Excise duty on electricity supply
100.0%
2,148,382
0.108
232,078 3,223
1,880,060
0.125
235,300
Variable cost of electricity supply net of T&D losses Source: Enemalta Corporation, KPMG Analysis
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
7
Assumed operating costs ■ Other operating costs €17.8 million ■ SPV rent €21.4 million for 2013 ■ Return on capital employed: – the Corporation has decided to again cap its ROCE at 8.40% in the light of the nature of the Corporation’s activities – The Corporation assumes that a private investor would expect a higher return, reflected in a WACC of around 10.92% ■ The underlying operational cost structure does not take into consideration the following: – LNG shipping costs – Higher insurance costs.
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
8
Breakdown of costs to be recovered through tariffs
Breakdown of average generation/sourcing cost per MWh Electricity supply mix %
Forecast Supply Average cost MWh €/kWh
Total generation/ sourcing cost € 000
Delimara extension (144MW) on LNG
40.0%
859,353
0.117
100,474
New Delimara plant
40.0%
859,353
0.107
91,644
Local electricity generation Interconnector
80.0% 20.0%
1,718,706 429,676
0.112 0.093
192,118 39,960
Cost of generation and purchase Excise duty on electricity supply
100.0%
2,148,382
0.108
232,078 3,223
1,880,060
0.125
235,300
Variable cost of electricity supply net of T&D losses Other operating costs SPV rent
17,777 21,413 -5,000 125,595
Compensation for street lighting Target return on capital employed Total target revenue to be recovered by the Corporation
395,085
Amount to be recovered through installation and fixed/service charges
34,910
Amount to be recovered through consumption tariff
1,880,060
0.192
360,174
Source: Enemalta Corporation, KPMG Analysis
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
9
Comparison of average tariff revenues ■ We set out below a comparison of the average tariff revenue per kWh arising from the Corporation’s Estimates 2013 and the parameters underlying the Corporation’s scenario analysed in this presentation Comparison of averarge revenue tariffs Enemalta Forecast Sales 2013 Estimates 2013 This Scenario Amount to be recovered through consumption tariff
Forecast MWh generated Forecast MWh generated and billed Average unit revenue tariff
344,342,080
360,174,306
2,148,382 1,880,060
2,148,382 1,880,060
0.1832
0.1916
Source: Enemalta Corporation, KPMG Analysis
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
10
© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).