Wind Farm Project Finance

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1 Wind Farm Project Finance Financing and Technical Requirements Gabriele Ferrante PPP Task Force, Presidency of the Council of Ministers, Italy Models and Strategies for Public-Private Private Partnerships (PPP): experiences from Italy and Bulgaria Bourgas, 18 th July 2007

Ministers, Italy Models and Strategies for Public-Private Private

2 AGENDA Project Finance: definitions and main characteristics Due Diligence and Risk Analysis in a Wind Farm Project Financial instruments for evaluation of a Wind Farm Project 2

3 Project Finance: Definitions and Main Characteristics Project Finance is a multi-discipline approach to the funding of specific investments characterised by wide levels of structural complexity as well as the possibility to resort to large financing from the banking sector. The main guarantee of debt payment are Project cash flows required to prove certain and effective management of the initiative-related risks which allows limiting the possibility of failure of envisaged cash flows. The evaluation of economic/financial sustainability of single initiatives is exclusively based on the quality (to be intended as the capacity to generate cash flows versus a given risk level) of single projects, rather than on the credit merit of single shareholders. 3

The main guarantee of debt payment are Project cash flows required to prove certain and effective management of the initiative-related risks which allows limiting the possibility of failure

4 Project Finance: Definitions and Main Characteristics The operational phase (likewise construction) is of primary importance, as only effective and high-quality management allows generating the necessary cash flows to satisfy banks and shareholders. The editing of the operation is characterised by an important process of negotiations amongst the various subjects involved (i.e. shareholders, banks, commercial counterparts), with variable duration and aiming to distribute initiativerelated risks amongst the various actors involved. 4

The editing of the operation is characterised by an important process of negotiations amongst the various subjects involved (i.e.

5 Project Finance: Definitions and Main Characteristics Project Finance Step-by by-step Business Idea Description Agreements and Negotiations Monitoring Debt Service period EVENTS Proposal Studies and Analyses Funding Debt Settlement PHASES ORIGINATION CONSTRUCTION OPERATION A B C Data Collection and Analysis Execution Management DOCUMENTS Financial Model Feasibility Study Term Sheet SPV Deed of Partnership and Statute Commercial and Funding Contracts Monitoring Report 5

Settlement PHASES ORIGINATION CONSTRUCTION OPERATION A B C Data Collection and Analysis Execution Management DOCUMENTS

6 Project Finance: Definitions and Main Characteristics DESIGN BUILD FINANCE OPERATE 6

7 Due Diligence and Risk Analysis Loan Banks, supported by external consultants professional, independent, and wellreputed on the financial market resort to Due Diligence for: Correct assessment of risks linked to the Project s nature and structure so as to identify the possibility to mitigate such risks Establish funding terms and conditions Create a robust Project structure also via a financial model capable of supporting sensitivity analysis Evaluate Project actual financiability 7

structure so as to identify the possibility to mitigate such risks Establish funding terms and conditions Create a robust

8 Due Diligence and Risk Analysis Risk Trend ORIGINATION PHASE CONSTRUCTION PHASE OPERATION PHASE PRODUCTIVE RISKS CONSTRUCTION RISK MARKET RISKS RISK FOR DEVELOPERS START-UP (Debt Service starts) REGULATORY RISKS RISK TREND 8

RISKS CONSTRUCTION RISK MARKET RISKS RISK FOR

9 Due Diligence and Risk Analysis Risk Analysis and Risk Allocation of a Wind Farm Project Price Risks/Market Risks Identification Energy price trend Mitigation Long-term projection of energy prices through adequate market surveys carried out by independent external consultants Annual revision mechanisms for prices envisaged in the funding contract Mechanisms of anticipated debt payment in the hypothesis of cash sweep Power Purchase Agreement : fixed-term and fixed-price energy sale contracts 9

out by independent external consultants Annual revision mechanisms for prices envisaged in the funding contract Mechanisms

10 Due Diligence and Risk Analysis Risk Analysis and Risk Allocation of a Wind Farm Project Productive Risks Identification Analysis of site windiness Turbine and system availabity factor Turbine technology Mitigation Evaluation of wind energy production Guarantee mechanisms of turbine supplier and manager through appropriate EPC and O&M contracts Turbine selection 10

factor Turbine technology Mitigation Evaluation of wind energy production Guarantee

11 Risk Analysis and Risk Allocation of a Wind Farm Project Construction Risks/Completion Risks Due Diligence and Risk Analysis Identification Construction price variations Construction delays Turbine performance risk Mitigation Multi-site construction programme Constructor evaluation Turn Key construction contract with guaranteed prices and deadlines Penalty mechanisms for constructor Reserve mechanisms for possible increase in Project costs (guarantee both on availability and productive capacity) 11

programme Constructor evaluation Turn Key construction contract with guaranteed prices and deadlines Penalty mechanisms for

12 Due Diligence and Risk Analysis Risk Analysis and Risk Allocation of a Wind Farm Project Regulatory Risks Identification Obtain necessary authorisations and permits Environmental Impact Assessment (E.I.A.) Mitigation Revision of Project authorisations and permits Analysis of land contracts 12

authorisations and permits Environmental Impact As

13 Financial Instruments Financial Strategy and Economic and Financial balance Investments Operational Costs Other Costs Revenue Profitability Indices Contractual Structure Risk Analysis Risk Allocation and Quantification Financial Structure Operational Cash Flows Debt service requirements Debt Service Capacity Bankability Indices Capacity Requirements? 13

Analysis Risk Allocation and Quantification Financial Structure Operational Cash Flows

14 Financial Instruments Economic and Financial Balance Economic and Financial Balance PROFITABILITY BANKABILITY IRR NPV DSCR LLCR 14

15 Financial Instruments Profitability PROFITABILITY Project capacity of: (a) creating value; ; (b) generating adequate level of profitability of the invested capital versus private investor s expectations,, and possibility to activate project financing. IRR NPV 15

of profitability of the invested capital versus private investor

16 Financial Instruments Bankability BANKABILITY Project capacity to generate sufficient cash flows to guarantee debt payment, compatibly with adequate return for private investors involved in the realisation and management of the initiative. DSCR LLCR 16

compatibly with adequate return for private investors involved

17 Financial Instruments Financial Structure DEBT Subordinated Debt EQUITY 17

18 Financial Instruments Creating a Wind Farm: Percentage Cost ELECTRIC WORKS 15% PUBLIC WORKS 10% VARIOUS 5% TURBINES 70% 18

19 CONTACTS UNITA tecnica FINANZA di PROGETTO Head Office - Via Boncompagni,, Rome, Italy Tel , Fax Gabriele FERRANTE Financial Advisor Tel : g.ferrante@governo.it 19

+39 06 4761 1850 1846, Fax. +39 06 4761 1857 www.utfp.

Financing PPPs: Project Finance June 2006

Financing PPPs: Project Finance June 2006 Index Section I. Section II. Section III. Project Finance Spanish Market Advantages Risk Matrix P. 2 Section I Project Finance Project Finance Definition Definition: