Financing and Structuring Power

Projects In Nigeria
Key financial and commercial factors in developing bankable power projects

Patrick Mgbenwelu,
Director & Head, Project & Structured Finance
FBN Capital Limited

25th April 2013

1
Outline

1. Challenges & Financing Issues 3

2. Due Diligence Issues 10

3. Key Documents & Agreements 26

4 St t i Issues
Structuring I 32

5. The Power Project Financial Model (snapshot only) 38

6. Closing Remarks 51

8. Q&A 52

9. Appendices 54

2 2
Challenges
g & Financing
g Issues

3
Financing Issues – Key Features of Power Financing

COMMENTS

 Debt term varies from project to project and also on the plant type and
location:
Long
g Tenor – Power: 8 - 30 year debt term
 Bridge funding available where required – but avoid if possible unless
take-out is 100% certain

 Amount of leverage is determined by what the project’s cashflows can

High Leverage support
 Debt tends to be c. 60 to 90% of total project cost

 Local and international banks

Multi-source  Export
p Credit Agencies
g
 Bilateral and multi-lateral DFIs

 Naira / USD mix recommended

Multi-currency
 Foreign exchange risks must be addressed

 Credit supports include guarantees, warranties and other covenants from

the sponsor, its affiliates and other third parties, completion guarantees
Security
 Stregnth of guarantee ensures transaction achieves optimal debt pricing
and tenor and demonstrates commitment from the Sponsor

4
Financing Issues – Funding Sources

Local Banks
International Banks
Regional Banks and DFI’s
DEBT ECAs
Capital Markets
Islamic Finance
P
Pension
i funds
f d

Up to 90% can be achieved for strong power plant economics …..

Government
Foreign and Local Partners
Local Private Sector
EQUITY Local Stock Market
Pension funds
Recent entries since 2001 = Infrastructure Funds, Sovereign Wealth Funds,
Private Equity…

5
Financing Issues – Potential Sources of Term Debt Finance

IPP

DFI’s MLA’s World Bank Group Commercial Sources DCM and Others

 FMO  EIB  IFC • Funds

 DEG  AfDB  IBRD

 PROPARCO  OTHERS
 DBSA
Commercial
Commercial Sovereign
 IDC Lending with Export Credit
E C di
Lending
PRI (e.g. WB Policy Lending Agencies
 SIDA without PRI
PRG)
 OTHERS
 NIGERIAN  INTERNATIONAL  CDB  COFACE
BANKS BANKS  HERMES
 CHINA EXIM
 JBIC  JBIC
 KEXIM  KEXIM
 SINOSURE
 U.S. EXIM

6
Credit Enhancement - World Bank “Partial Risk Guarantee”

 The PRG is a tool used by the World Bank to catalyse private debt finance in support of
host governments' developmental objectives

 The PRG has been used successfully in a number of developing markets such as:
– Phili i
Philippines (L t )
(Leyte)
– Pakistan (Uch Power / Hub Power)
– Morocco (Jorf Lasfar)
– Nigeria – (Power Holding Company of Nigeria)
– Bangladesh (Haripur Power Project)
– Vietnam (Phy My 2 Phase 2 Power Project)
– Uganda (Bujagali Hydro Power Project)
– Kenya (Kenya Power and Lighting Company Ltd., and Nairobi Toll Road (under negotiation))
– Mozambique – Sasol Natural Gas Pipeline project

 The PRG has rarely if ever been called on. This can be attributed to:
– The World Bank’s influence and intervention, prior to an actual default and potential claim
under the PRG, to help resolve the issues that have arisen
– The importance of the PRG to the governments of developing countries:

7
Credit Enhancement – PRG in the Context of the Power Sector

 Typically, the IDA will provide coverage to commercial lenders for loan default by the borrower
(often an SPV) resulting from a government’s failure to meet its payment obligations under:
– Concessions or Investment Agreements
– Power Purchase Agreements
– Gas Sales Agreements
– Water Supply Agreements, etc.

 Obligations covered include both periodic payments and termination amounts. Allows for the
extension of debt maturities, reduction in spreads, and increased debt capacity;

 Commercial risks such as completion and operational risks and natural force majeure risks are
typically not covered by the PRG. These should be mitigated through the normal contractual
arrangements

 Guarantee support is documented in a Guarantee Agreement, which outlines the scope of risk
coverage and defines the trigger mechanisms of the Guarantee;

 Charges fees of approximately 75 bps per annum on outstanding principal amounts of the
guaranteed loan (comprised of Guarantee Fees,
Fees Stand
Stand-by
by fees,
fees Initiation Fees and Processing
Fees);

 In parallel, WB has an Indemnity Agreement with the host government, under which the
government has counter-guaranteed WB for any payments made under the Guarantee
Agreement;

8
Power Financing Typical Challenges

 Higher raw material prices

 Constrained contracting capacity
Capital costs
 Constrained sub-contractor and vendor capacity
 Higher
Hi h profit
fit margins
i ffor contractors
t t and
d suppliers
li

 Governments keen to extract value from natural resources

 Higher input costs impact cash flows
Constrained economies
 Higher capital costs mean that cash flows
f are more thinly stretched
 Combined with limited debt capacity….ability to leverage has fallen

 Larger investments mean all funding sources now more important

 Local commercial banks’ liquidity insufficient for many projects
Financing costs and
capacity  ECA and Regional Development Institutions critical – pace of due
diligence sometimes not aligned with sponsors timetable
 Increasing reliance on international debt capital

 Maturities getting longer

Others  Demand for US$ borrowings
 Eroding
E di G Governmentt supportt over time
ti

9
Due Diligence
g Issues

10
Due Diligence Issues

 Grand total costs might be understated – though not deliberately but due to
absence of independent verification;
 Costs might escalate – not as a result of any external inflationary pressure, but
CONSTRUCTION COSTS due to in-experienced
in experienced construction managers and poor project execution;
 Variations and change orders;
 Poor planning construction activities against other critical path items / key
dependencies;

 EPC contractor might not have the requisite skills for project of such type and or
EPC CONTRACTOR magnitude which could lead to construction delay;
 EPC contractor might not have the financial muscle to adhere to its terms of the
contract;

 O&M contractor might not have extensive power plant experience which could
lead to escalating O&M costs over and above those budgeted in the financial
model;
O & M CONTRACTOR
 O&M contractor might not have the financial muscle to adhere to its terms of the
O&M contract – i.e. compensating the borrower for any shortfalls in agreed
POWER PLANT performance;

11
Due Diligence Issues

 Interest rates may increase substantially over and above what was assumed in the
financial model – this will jeopardize the borrower’s ability to meet its debt service
INTEREST RATES and other obligations;
 Therefore need to stress tests “pinch points” and how these can be covered via
some hedging arrangement or sponsor support / top-up;

 This is a major risk factor for power plants projects that have costs and revenues
that are not matched in the same currency - exchange rates may increase
substantially over and above what was assumed in the financial model – this will
jeopardize the borrower’s ability to meet its debt service and other obligations;
EXCHANGE RATES
 Structuring phase must include an exchange rate stress test to assess the
impact of a deteriorating exchange rate and structure protections into the
overall financing plan to protect the power plant and also debt service;

 The risk that the Right of Way (“RoW”) may not be available in its entirerity,
leading to completion delay;
 P
Promoters
t mustt ensure the
th RoW
R W has
h been
b f ll obtained
fully bt i d and
d secured
d and
d that
th t this
thi
RIGHT OF WAY is documented;
Power plants not always ring  In certain projects, although a “sign-off” meeting may be held with the State and or
fenced… local government(s), it is now generally very common to also have “sign-off”
meetings with the various stakeholders chiefs through who’s land the RoW runs;
 The cost impact of this risk can be quite sizeable, bringing projects to a complete
halt and furthermore if not suitably managed can remain unresolved for months;

12
Due Diligence Issues

 No amount of financial structuring can mitigate such risks;

 The approach to be taken is as follows:
 Ensure project company takes out the requisite insurances – but note that certain policies
are prohibitively expensive and not even available;
 Involve a collection of local,
local international and regional lenders,
lenders all of which can put pressure
on the host Government / Sponsor to seek a lasting solution;
 Project Company (from the outset) must be seen to be sensitive to the needs of the local
TERRORISM
community. In a number of cases, key members of the local community are placed on the
project company’s payroll – this way they have a vested interest to protect the project
assets;
 The project however should not be embarked upon where there is a general view by the
experts that the project will (i) attract sabotage and terrorism and (ii) be exposed to substantial
loss given the nature of the project assets – i.e. exposed oil / gas pipelines traversing terrain
which are susceptible to sabotage and or terrorism;

 Risk that either (i) power demand projections are below base case due to optimistic assumptions
or (iii) assumptions are correct but competition reduces expected demand;
 Because independent assessments are never 100% correct (but necessary) the base case must
include substantial allowance for reduced power demand risk to ensure debt service is
OFFTAKER / protected;
DEMAND RISK  In certain power projects, the host government / sponsor will provide demand guarantees so as
to ensure the project remains attractive to debt and or equity providers;
 Independent demand and or market consultants are generally retained to provide advice in
these matters;
 Less of a risk where PPA is based on a minimum demand threshold and “take or pay”

13
Due Diligence Issues

 Payment record of Offtaker will need to be acceptable;

OFFTAKER CREDIT  Oftaker may need to provide a guarantee in certain cases in the event it is not able
STREGNTH to meet its periodic paymennts;

 It is common practice to engage an Insurance Consultant to advise the sponsors on

the pre
pre-completion
completion as well as post
post-completion
completion aspects of insurance
 In addition, lenders will need to retain their own Insurance Consultant to provide a
BUSINESS INTERRUPTION review of the adequacy of the insurance arrangements proposed by the sponsors
RISK  The Insurance Consultant will comment on the market standards for similar projects
and the current state of the insurance market for the cover sought by the sponsors;
 Nature of likely interruption events will need to be opined on by the consultant and
also whether such policies will cover such events;

14
Due Diligence Issues

 Feedstock source;
 Dual or single fired;
FEEDSTOCK SUPPLY
 Feedstock availability,
y, p
price,, escalation;;
 Who carries risk for non-supply and compensation regime;

 Tariff will be set out in the PPA – this must be captured in the financial model;
 Question is what risks are there for possible changes (i.e. reductions) in tariffs;
TARIFF / PRICES  A historical view of tariffs will need to be “married” against the plant’s future tariff
regime to determine its likely acceptability once the plant is up and running – of
course this will not hold if an agreed PPA is already in place;

 Power plants require uninterrupted utility supply so due diligence will need to
ensure robust contracts are in place for the supply of utilities which will be critical
UTILITY SUPPLY f its
for i operations
i
 Certain projects enter into various individual utility supply agreements;

15
Due Diligence Issues

CONSENTS, PERMITS &

 Are these one-off or based on a renewals regime;
g ;
APPROVALS

GRID ACCESS &  Is this already in place;

DISCHARGE  Does total project costs include grid connect (infrastructure) costs

 Technology MUST be proven;

 Power plant projects must not be used as a “test
test bed
bed”;;
TECHNOLOGY  Ensure comfort is obtained from other similar plants in operations across the globe
and what their average operating rates are;

16
Due Diligence Issues

 Plant needs to comply with stringent requirements regarding noise and other
hazardous emissions;
ENVIRONMENTAL  Construction and ongoing operations of the plant must ensure it does not cause
environmental
i t l damage;
d

 Basis of bid award;

 Post handover management plan;
 Evaluate the entire value chain;
 Government credit support;
 Composition and capacity of consortium members;
OTHERS
 Contractor support – performance bond, warranties, etc
 PMC – Lenders LTA would generally double up as the PMC;
 Nature of commissioning, testing and handover – lenders reliability test regime;

17
Due Diligence Issues – Coal to Power

Project development should be coordinated and seamless….

Coal Mine Processing Plant Power Plant MW Evacuated

1. Coal mined and 3. Separated and washed 5. MW supplied to the

extracted coal transported via grid – terms stipulated
overland conveyors to within the PPA
2. Coal transported via Power Plant
overland
l d conveyors tto
processing plant for 4. Coal milled pulverized
separation and and fed to the boiler to
washing, i.e. plant generate steam
must be located near
to mine

18
Due Diligence Issues – Gas to Power

Production
Supply Pipeline Power Plant MW Evacuated
Well

1. Gas extracted with 3. Gas transported via 5. 750MW supplied to

other hydrocarbons, pipeline
p p to Power the g
grid – terms
and processed to Plant stipulated within the
remove impurities PPA….
4. Plant does not have
2. Issues include: to be located near
Adequacy of supply; gas source. Choice
security of supply; i whether
is h th to t
priority of resources; transport gas or
pricing policy and power
transportation
logistics

19
Due Diligence & Financiers’ View – Fuel Supply Risk

 Available Fuels

The key determining factor. Influences plant technology, output, efficiency, capital and operating costs, water / sorbent
consumption, by-product disposal, asset life, emissions among others. Essentially, the generation investment hinges on
the types
yp of fuel that are available at the p
potential g
generation location

 Location and Proximity

Typically, substantially cheaper to transport power than fuel. Conventional wisdom for coal is to build plant adjacent
to fuel source, given complexities/costs of long distance road / rail transport (e.g. cost, social impact, servitude risks).
Th
There i more flexibility
is fl ibilit for
f gas transportation
t t ti (
(especially)
i ll ) and
d oilil / diesel-fired
di l fi d generation
ti given
i l
lower t
transportation
t ti
costs.

 Quality and Emissions

I
I. Coal will lead to higher SO2 and CO2 emissions than comparators.
comparators (e.g.
(e g natural gas)

II. Coal uses significant volumes of water (even if plant is air-cooled)

III. Equator Principles imposes a high financing hurdle and entails the need for a robust ESIA process

IV. Certain fuels (e.g. coal) produce huge by-products (ash) which may impact on ground water quality

20
Due Diligence & Financiers’ View – Fuel Supply Risk

 Contractual Structure

I. Is the fuel supplier just a supplier or are they tied into the deal/ company? Co-shareholder?

II
II. Long-term contracting usually better than short-term but not without risks (e.g.
(e g cost indexation due to inputs
outside of utility’s control)

III. Where does the risk allocation lie? Held with the Generator or by the Fuel Supplier?

 Price

I. Benchmarked to an international index? Implications for transparency

II. Are base and variable fuel prices passed through to tariffs and a cost recovery enabled?

III. What is the mode of contracting (e.g. fixed price, cost-plus or otherwise)?

21
Due Diligence & Financiers’ View – Water Supply Risk

 Underlying Hydrology

I. The key determining factor. The projected water balance influences the underlying risk profile, the selected
plant technology, concerns as to consumption, impacts on flora, fauna and nature (e.g. wetlands). Can the
water be extracted and
and, if so
so, at what cost (economic and environmental)?

II. Can the asset produce for the designated asset life? Is there the water balance to ensure this (with a suitable
reserve margin)?

 Underlying Technology

I. Wet cooling requires constant supplies of water, for coal-fired and solar technologies. Dry cooling (currently
required in South Africa for new build coal-fired plants), requires less water (albeit significant compared to
many other water uses), although increases generation costs and commonly reduce efficiency.

II. Relatively low concerns regarding hydrological impact of oil or gas-fired technology

22
Due Diligence & Financiers’ View – Water Supply Risk

 Responsibilities for Performance

I. Does the utility (or a third party) have to build new water transmission infrastructure (e.g. dams, pipelines) to
supply the plant? and / or pay for it? How is this assessed within the initial investment decision?

II. Who takes the risk of non-supply of water during the plant life? Utility or Consumers?

III. Who takes the responsibility for securing of permits (e.g. water usage risks) and servitudes?

IV. Financiers will extend the Equator

q Principles
p to the associated water delivery
y mechanisms

 Contractual Structure

I. Is the water supplier just a supplier or are they tied into the deal/ company?

II. Water suppliers are typically a State owned entity so often a greater alignment with the incumbent utility than
regarding fuel suppliers

III. Long-term contracting almost certainly the only method on offer

IV. Are private parties asked to take construction risks on State owned water suppliers? This is unlikely to be a
bankable risk

23
Due Diligence Issues – Environmental Implications

Potential negative impact on the surrounding environment will require an Environmental & Social Impact Assessment Plan which
is in compliance with the World Bank’s Equator Principles (which all major financiers are signatories of).

Kyoto Protocol
Future Carbon
Taxes?
Compliance with
Compliance with World Bank
World Bank Equator
q Equator
Principles CO2 / SO2 Principles
Emissions

Water
Consumption
Resettlement
of population

Coal mine concession & licenses /

gas transportation pipeline / new
power transmission lines

Thorough due
diligence in selection
and
d application
li ti Coall fi
C fired
d plants
l t generate
t hi
higher
h CO2
CO2, SO2 and
d
process use more water than gas-fired plants.

24
Due Diligence Issues – Gas or Coal Fired Plants

 The critical first choice is to determine the Project Site and Fuel / Technology. All project issues flow from this
choice.

 Therefore, the main issues pertaining to the development of power plants are as follows:

 Determine Site, Fuel / Technology

 Frame Capacity (MW) by reference to what is ultimately financeable as a single transaction within the target
timeframe

 Develop the Project commercial concept based on the above parameters, and including issues such as
interconnections, associated infrastructure and transmission

 Develop Project Agreements, focusing upon (1) PPA and (2) Fuel Supply Agreements as the key priority

 Identify critical financiers in parallel with the Project concept determination

 Identify equipment suppliers and contractors, partly based upon their ability to fund the project. A project is
not a project unless it can secure funding

25
Key
y Documents / Agreements
g

26
Key Document – The Power Purchase Agreement (PPA)

The PPA grants the concession and sets the tariff. It is the primary document all should focus on. To some extent
all the others are secondary.

 Grants the concession

 Sale and purchase of capacity (on an Availability basis) and energy
 Indexation (of FX / Inflation / Energy price movements)

Performance criteria
 Pl t specifications
Plant ifi ti and
d performance
f standards
t d d
 Revenue write down provisions for Plant under / non-performance
 Delays LDs for late commissioning

Thi d party
Third t responsibilities
ibiliti
 Fuel, Water and power transmission interconnections
 Supply of gas / coal / fuel
 Permits and Licences

Force majeure
 Natural / Political Force Majeure (e.g. Change in Law)
 Implications for mitigation of risks

27
Key Document – The Power Purchase Agreement (PPA)

Termination

 Default and Termination provisions

 Credit quality of Offtaker / credit support for PPA payment obligations (Invoice and / or Termination payments?)

Key Decisions:

 Whether fuel supply obligations (for gas-fired plant) should be contained in a Separate Fuel Supply Agreement or
also included in the PPA

 If the former, need to identify the counterparty and structure the FSA so it is aligned with the PPA. This may be
difficult if a private company is the fuel supplier (e.g. an IOC)

 If the latter, or if the fuel supplier is State owned, potential for the IPP to be “Tolled”, which is a globally proven IPP
risk structure. This may assist bankability, especially if the Ministry of Finance guarantees PPA payments

 This
Thi iissue will
ill nott arise
i ffor coal-fired
l fi d plants
l t ((given
i th
they will
ill be
b mine
i mouth)
th)

28
Other Key Project Agreements

Excluding the Fuel Supply Agreement, the other documents would largely be the responsibility of the power
plant developers to draft and execute.

Shareholder  Equity Financing Commitments  Share Transfer Restrictions

A
Agreementt
 Formation and Control of IPP Project Company  Deadlock and dispute resolution

EPC Contract  Engineering,

Engineering Procurement,
Procurement and Construction  Right of rejection
 Liquidated damages - delays and performance  Testing regime
 Must be bankable - good credit risk or credit  Lump sum turnkey
 worthy guarantor

Operation and  Allocates plant operational risks

Maintenance
 Balance between incentives and penalties
Agreement
 Fixed price v cost plus
 Operator must be bankable - experienced, creditworthy

Finance  Loan Agreements, Common Terms Agreements, Inter Creditors

ocu e ts
Documents
 Security documents - mortgages,
mortgages charges
charges, assignments
 Direct Agreements with Lenders

29
Other Key Project Agreements (Nigeria)

The following have emerged as some of the key documents which will need to be in place for power sector
financings in Nigeria.

 Ancillary Services Agreement;

 Bulk Trader Credit Support;

 Deed of Assignment of Pre-Completion Receivables;

 Gas Sale and Aggregation Agreement;

 Gas Transportation Agreement;

 Grid Connection Agreement;

 O&M Agreement;

 Power Purchase Agreement; and

 Pre-Completion
p Liabilities Transfer Agreement.
g

30
Non-documentation Commercial Issues

Other risks
Fuel  Adequacy and Security of Fuel Supply
 Volatility of Price Fuel Supply
 Technical Specification Risk Agreement

 Efficiency of Fuel Utilisation

Environmental  Environmental & Social Impact Assessment

 Environmental Management Plan
 Equator Principles
 Permitting
 Flue Gas Desulphurisation (coal-fired)
 Compliance costs
Localisation  Disincentives to international bidders if overly onerous obligations
 Compliance
 Change in law provisions re future legislative changes

Project-on-Project  Interdependence on other projects - Fatal Flaws FSA / PPA

Risk
 Potentially an issue for gas-fired plants

Macroeconomic  Interest Rate risks

Risks
 Foreign
F i Exchange
E h risk
i k PPA
 Inflation risk

31
Structuring
g Issues &
Considerations

32
Structuring Issues & Considerations

 Project funding….who carried initial risk;

 Structure your funding accordingly….Prorata, Front Loaded or Back Ended…

70.00

60.00

50.00

40.00

30.00

20 00
20.00

10.00

0.00
1 2 3 4 5 6 7 8 9 10
Equity Debt

33
Structuring Issues & Considerations

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
1 2 3 4 5 6 7 8 9 10
Equity Debt

34
Structuring Issues & Considerations

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00
1 2 3 4 5 6 7 8 9 10
Equity Debt

35
Structuring Issues & Considerations

Financing structure should mitigate (i) exposure to each cash flow line item and (ii) pass other contractual risks as
distant as possible from the lenders.

 DSRA – quantum and timing;

 MMRA – quantum , timing and input of LTA;

 Liquidated Damages;

 Gearing;

 Debt Sculpting – no balloons please;

 Debt sizing – are all costs captured – LTA input critical;

 Equity injection – quantum and timing;

 Cash Waterfall;

 Dividend lock-up restrictions;

36
Structuring Issues & Considerations

 Early generation revenues – are these 100% certain and caught in the debt sizing computations?

INFLOWS FROM TARGET / OP CO

ICA 1 ICA 2

Debt Service Reserve Account

(6 months debt service)

Dividend Reserve Account

Debt Service Account

Major Maintenance Reserve

Account
SPV (i.e. BORROWER) OPERATING ACCOUNT

Debt Repayments
PAYMENTS IN THE FOLLOWING ORDER OF PRIORITY
1) Operating Costs
2) Debt Service Reserve Account top up, if required
3) Dividend Reserve Account top ups, if required
4) Major Maintenance Reserve Account top up, if required
5) Any other costs

6) Partial debt pre payment equal to Dividend (if required)

7) Shareholder distributions subject the Facility Agreement

LENDING BANKS
Constant minimum cash balance of US$10 million

DISTRIBUTIONS ACCOUNT Red boxes represent lenders secured accounts….

37
The Power Project
j Financial Model
(snapshot only)

38
Financial Modeling – Key Issues for Power Financing

Power project financial models must be as comprehensive as possible to capture all the revenue and cost items, ideally on
a line-line or input-by-input basis;

Sufficient time must be spent developing the model so as to adequately assess the project’s debt capacity and sensitivity
to a range of events;

 The starting point is essentially gathering data from the feasibility study (i.e. if one
has already been prepared);
 In a number of cases,
cases the project sponsors may already have an in-house in house model
DATA GATHERING
developed which will be made available to their lead arranger or financial adviser;
 Other key sources of data will include the results / outputs from the various
independent consultant reports;

 Review overall outputs to identify “pinch points” and areas that will require detailed
financial structuring;
 Are ratios above acceptable levels;
 Is desired initial equity sufficient;
STRUCTURING 1a
 Is debt tenor likely to be acceptable to potential lenders;
 Feed in escalation of inflation rates;
 Undertake initial stress test to determine sensitivity of model to a range of likely
scenarios;

39
Financial Modeling – Key Issues for Power Financing

 Validate / update all information in the financial model with final outputs from the following:
 EPC contract;
 Lenders Independent Technical consultant’s report;
 Lenders Independent Market consultant’s report;
DATA VALIDATION
 Lenders Independent Insurance consultant’s report;
 O&M contract;
 Updated rates for LIBOR / NIBOR as appropriate;
 Assess impact of all the above on overall project economics;

 Undertake stress tests on the model to determine the following:

 Is equity injection sufficient;
 Can the project accommodate existing repayment profile and maturity;
STRESS TESTS /  How much delay can project withstand;
SENSITIVITIES  How sensitive are the ratios to given changes in key variables (i.e. interest rates,
exchange rates, changes in capital costs, construction costs, etc);
 Derive “bankers expected case” which will accommodate all the above perceived risks – you
will have two scenarios built into this “bankers expected case” (i) showing the pinch points
and (ii) showing what changes need to be made to the overall financing structure to enable
you move from a “bankers expected case” to a “banking base case”

40
Financial Modeling – Key Issues for Power Financing

 Engage with client / sponsors to achieve the following changes:

 Injection of additional equity;
 Agreement to inject standby equity to accommodate likely completion delay;
 To obtain additional liquidated damages from the EPC contractor to accommodate
STRUCTURING 1b likely construction cost increase;
 To obtain additional liquidated damages from the O&M contractor to accommodate
likely reductions in plant performance;
 Building an interest rate and or exchange rate hedge into the financing plan;
 Ensure client is “hand held” / directed in the right direction;

41
Financial Modelling - key issues for power financing

 Engage jointly with client / sponsors and lenders to achieve the following changes:
 Increase in debt tenor;
 Ideal repayment profiles which the project can accommodate;
 Agreement to inject standby debt to accommodate likely completion delay;
 Finalize any impact of debt pricing and fees;
 Timing for funding of reserve accounts and quantum they will be satisfied with – the
STRUCTURING 2
LTA will also be involved in agreeing
g gqquantum for the maintenance accounts;;
 Ensure the financial model is constantly being updated and re-run to ensure the desired
ratios are being achieved / moving towards what will be accepted as all the above changes
and negotiations are taking place;
 It is your responsibility as the financial modeler to raise any alarms / red flags if
it is clear that the direction of negotiations / changes will not achieve the desired
resultl / ratios
i / financing
fi i structure;

42
Financial Modeling – Key Issues for Power Financing

 You only have a Base Case once all the issues discussed on the preceding pages have been
THE BASE CASE
made and your ratios are at or above the minimum thresholds;

 Documentation is important and therefore the changes made over time should be logged in
the audit trail worksheet;
 The actual key assumptions and use of the model should be set out in a “User Manual / Data
MODEL DOCUMENTATION Book of Assumptions
Assumptions”;;
 Both of the above will be a useful reference for all parties – potential lenders, the client, the
lenders independent consultants who will be expected to provide sign-off of their individual
sections of the model and also the model audit consultant;

 The model audit is undertaken to provide all parties (particularly the lending banks) with the
assurance that:
 All algorithms used in the model are correct;
 The tax and accounting assumptions are correct and have been computed correctly;
MODEL AUDIT  Th model
The d l produces
d the
h desired
d i d results
l after
f allll the
h various
i sensitivity
i i i changes
h h
have
been undertaken;
 The model auditor will be expected to give a 1 / 2 page report on the model;
 Finally, the audited Base Case should be saved as the VERY FINAL version which will be the
reference version for any changes to be made post financial close;

43
Financial Modelling - key issues for power financing

ASSESSING THE CASHFLOWS:

 Capital / Construction costs;
 Revenue line item 1:
 Normal contract hours;
 Turbine availability factor;
 Power plant hours of operation;
 Revenue line item 2:
 Nominal Power Capacity (MW);
 Energy Declared Available;
 Revenue line item 3:
 Feedgas Energy;
 Daily Gas Throughput;
 Operating
p g Costs;;
 Debt Service;
 Reserves;
 Working Capital
 Tax;

44
Financial Modeling – Key Issues for Power Financing

REVENUE LINE ITEM UNIT TRACK RESULT FORMULA

Generating Plants Operating Hours

hours A Days in period x number of hours
- Normal
o a CoContract
t act Hours
ou s - Power
o e Plant
a t 2,160
, 60 hrs
s
B Input Data
- Turbine Availability Factor 80.0%
Hours C A x B
- Hours of operation - Power Plant 1,728 hrs

Key Inputs for Power Generation

MW D Input Data
- Nominal Power Capacity 120.0 MW
GWh E C x D / 1,000
- Energy Declared Available 207 GW hrs
GWh F E x Dispatch Rate of 95%
- Actual Energy Dispatched 197 GW hrs

Power Plant Feedgas

Tbtu ((Heat Con Rate x C x D) x
)
G (1+Degradation)
- Feedgas energy from GSU 1.86 T btu
MMScfd H 20.3
- Daily Gas Throughput MMscfd
(G / Feedgas Energy Content)
- Feedgas Charge based on GMP including MMBTU I 289.9
gas transmission
t i i costt MMBt
MMBtu
Gas Cost
Gas Cost
KW hour J (I x Plant Heat Con Rate)
- Feedgas Tariff based on GMP 3.5 KW hr
45
Financial Modelling - key issues for power financing

Capacity charge  Capacity charge x number of days x MW x MYTO;

Fixed O&M charge  Fixed O&M charge x number of days x MW x MYTO;

Variable Payment  Variable Payment x number of days x MW x MYTO;

E
Energy P
Paymentt  Energy Dispatched x Feedgas

46
Financial Modeling – Key Issues for Power Financing

So what have you modelled?

Typical power plant cashflows…………………

cashflows

1,000.0

800.0

600.0

400.0

200 0
200.0

0.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

(200.0)

(400.0)

(600.0)

Negative Cash Revenues All Bank Debt Drawn Project Loan Drawn Equity subscribed

Senior Debt Service Zakat Opex Capex Dividends

47
Financial Modelling - key issues for power financing

So what have you modelled?

Typical power oil & gas cashflows…………………

cashflows

2,500.0

2,000.0

1,500.0

1,000.0

500 0
500.0

0.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

(500.0)

(1,000.0)

Negative Cash Revenues All Bank Debt Drawn Project Loan Drawn Equity subscribed

Senior Debt Service Zakat Opex Capex Dividends

48
Modelling – monthly / quarterly build up

Advantages:
 Captures timing differences in cash flows (overdraft / working capital requirement?);

 Enables quarterly repayment profile if required – to match cash flows;

 Tracks seasonality where revenues in model are driven by cyclical demand / volume;

 C t
Captures tturbine
bi / plant
l td downtime
ti

 Timing of capital expenditure and funding requirement; Monthly or Quarterly key inputs
/ assumptions are best…...

 More flexible and easier to sensitize.

Drawbacks:
 Spreadsheet end up larger in size;

 Much more time consuming to build;

 Appears unusually complex but not necessarily the case

case.

49
Modelling – key banking ratios

1 - DSCR Cash flow available for debt service in period

Principal and interest installments for the period

2 - ICR Cash flow available for debt service in period

Interest payment due for the period

3 - LLCR NPV of future cash flow to service debt over loan life
Principal and interest outstanding for the period

3 - PLCR NPV of future cash flow to service debt over project life
Principal and interest outstanding for the period

Above represent only a select few ratios looked at for assessing project economics but financing term sheet will include others such as balance sheet
ratios…..

50
SUMMARY & CLOSING REMARKS

51
Summary and Closing Remarks

 Evaluate the entire value chain;

 Value chain must be contractually linked – obligations must be replicated in the model, project
agreements and financing documents;

 Track record is critical;;

 Build-in cushions across the entire value chain;

 Seek independent expert opinion;

 The financial model is fundamental, start early – do not rely on the sponsors projections;

 Sensitize each cash flow line;

 Documentation

52
Q&A

53
Appendices

54
About The Presenter

55
About the presenter

Patrick joined FBN Capital in December 2011 having spent 3 years heading the project financing department at Stanbic IBTC
Bank. He joins FBN Capital with over 20 years banking experience of which 17 years has been dedicated primarily towards
financial advisory, structuring, debt arranging / lending and closing of big‐ticket project finance transactions in the UK,
Portugal, Saudi Arabia, Qatar, Oman, U.A.E. and other GCC countries. He has worked on project financings in excess of US$67
billion since 1996. As head of FBN Capital’s project and structured finance division, he is responsible for leading the deal team
involved in originating,
originating structuring,
structuring executing and closing of all the firm
firm’ss project and structured finance business.
business

Patrick’s project financing career commenced as a financial modeller at London Underground Limited’s (“LUL”) project finance
advisory group as an executive member of the deal‐team developing complex financial models, business cases, payment
mechanisms and financing options where he advised and negotiated on various projects being implemented by London
Transport utilizing the UK Government’s Private Finance Initiative (“PFI”) at that time. His career further developed at the
London branch of Bayerische Landesbank
Landesbank’ss ((“BLB”)
BLB ) structured finance group where he undertook various project finance (PFI
/ BOT / PPP) duties, and subsequently as Assistant Manager, Project & Trade Finance Department, GCC Group, at Arab
Petroleum Investments Corporation (“APICORP”) Saudi Arabia where he was actively involved in a varied number of power,
petrochemical, oil & gas and shipping transactions both in the execution, advisory, lending and syndication of facilities. He
was subsequently appointed Senior Corporate Banker and acting Head of project finance at The National Commercial Bank
(“NCB”), Saudi Arabia with prime responsibility for managing the banks project finance lending and advisory activities. At NCB
Patrick led the deal team advising the Kingdom of Saudi Arabia on the US$11 billion plus Saudi Railway expansion Projects.
Projects

Patrick has been involved in structuring and closing power project financing transactions in the UK and the Middle
East since 1996. He has worked on power transactions in excess of US$$3.8 billion (UK and Middle East
combined) and was involved in financing the first wave of independent power projects (“IPP”) launched in the
Middle East from 2001 through to 2006. Prior to returning to Nigeria in 2008 he was Managing Director and Head of
Project and Corporate Finance at Bahrain based Gulf One Investment Bank, Bank Bahrain.
Bahrain His notable achievement at
Gulf One was setting up the bank’s project and corporate finance division and leading the deal team responsible for
funding the King Abdulaziz International Airport (Hajj Terminal) – the first ever project financing for an airport in the
GCC on a 100% Islamic finance basis.

Patrick Mgbenwelu is a regular industry speaker and panelist and writes case studies / articles in various PPP / project finance
publications – i.e.
i e Infrastructure Journal,
Journal Project Finance Magazine and Project Finance International.
International He is an Associate of the
Chartered Institute of Bankers (“ACIB”) London, holds an M.Sc. Finance & Investment (London), and an MBA (London).

56
Case Study
y

57
Case Study 1: Shuaibah IWPP, Saudi Arabia

 The first IWPP (Independent Water & Power Project) development in Saudi Arabia, Project Summary
which laid out the framework for other IWPP transactions in the Kingdom of Saudi
Arabia Project:
P j t Shuaibah
Sh ib h IWPP
Sector: Power & Water
– framework mirrors that in UAE, Qatar and Oman
Total cost: US$2.45 billion
 PPP: Build, Own and Operate (“BOO”) Debt term: 20 years
 20 year Power & Water Purchase Agreement (“PWPA”)
( PWPA )
 36.5 months construction schedule
 Desalinated Water production (880k cm per day, using 12 units of Multi Stage Flash
technology)
 Power generation
P ti (900 MW 3 units,
it light
li ht crude
d oilil fi
fired
dbburners, b
back
k pressure
steam turbines)
 100% of water and power capacity and output sold to Government-owned entity for
20 years
 Main project parties are Saudi & Malaysian sponsors (60%) and Kingdom of Saudi
Arabia (40%)

Groundbreaking IWPP in Saudi Arabia laying down the framework for future IWPP projects in the country.

58
Case Study 1: Shuaibah IWPP, Saudi Arabia ― Finance Plan

H E R ME S 400

Is la m ic Tra n ch e 225

K E XIM 418

Bank D ebt 875

P re -co m p le tio n R e ve n u e s 233

E q u ity 496

0 100 200 300 400 500 600 700 800 900 1000
(U S $ m )

$500 
$450 
$400 
$
$350 
$300 
$250 
$200 
$150 
$100 
$50
$50 
$0 

Equity Bridge Loan Drawdwns
q y g Commercial Banks Drawdowns KEXIM Drawdowns Islamic Tranche Drawdowns HERMES Drawdowns

59
Case Study 1: Ownership Structure

PRIVATE SECTOR ENTITIES GOVERNMENT OWNED ENTITIES

Saudi Malaysia Public Investment Saudi Electricity

Sponsors Sponsors Fund Company

50%
32% 8%

Saudi Malaysia Water & Electricity Co Ltd

(Project developer / Bidder)
60%

SHUAIBAH Water & Electricityy Company

p y
(Project Company / Borrower)

6% PIF
8%
32% ACW A Power Projects
12%
Khazanah
Malakoff
12% SEC
30% Tenega Nasional Berhad

60
Case Study 1: Bankability Issues

 LSTK price and date certain EPC contract

Completion  Joint Venture between Doosan & Siemens (i.e. experienced EPC Contractors)
Risk  Significant LD’s for project delay
 Comprehensive construction period insurances plus extended Warranty period

 Black & Veatch as lenders Technical Adviser

 EPC contractor tests p
prior to handover
T h i l Risk
Technical Ri k
 PWPA sets minimum guaranteed capacities & performance levels
 Plant based on current but proven steam turbine technology

 Saudi Aramco (National Oil Company) is supplier of light crude (tolling structure)
Fuel Supply
 Plant site has reasonable fuel supply storage facilities
Risk
 Incremental cost for back-up fuel passed to Government

 Lenders Technical Consultant signs off on O&M arrangements

 Technical sponsor locked-in for 10 years post PCOD
Operating
p g Risk  Sponsor
p equity
q y backed by y LC from institution acceptable
p to the lenders
 Robust operating period insurances
 Tariff structure covers debt service, fixed O&M, back-up fuel and other variable O&M

 Tariff & Termination Payments guaranteed by MOF

Other Risks  100% construction period interest rate hedge and 75% 5-years
5 years pre maturity
 English law PWPA and Bahrain law for arbitration

61
Indicative Contractual Structure

Example Debt Funding: Equity Funding: World Bank / Africa

Development Bank
Private Sector MoF/ Fed. Govt. Facility
Sponsor SPV State Govt

Gas Supply / Fuel

Supply Agreement

IPP Company
C
 Power Purchase
Agreement

Contractors/ Service Providers:

Limited Recourse
Project Finance O&M Equipment
EPC Contractor
Contractor Provider

 Fixed Price Lump  Long-term  Long term

Sum Turnkey Contract Service
Contract  Aligned to PPA Agreement
 Performance obligations  Warranties
G
Guarantees
t

62