Power Project - Debt Financing. Bill Sutherland Senior Managing Director Project Finance April 9, 2014

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1 Power Project - Debt Financing Bill Sutherland Senior Managing Director Project Finance April 9, 2014

2 Project Finance Investment Manulife Project Finance Defined Principal Risks / Mitigates Challenges 2

3 Manulife Financial Project Finance Canadian based financial services group with 25,000 employees serving customers in 21 countries and territories worldwide. Operates under the Manulife brand in Canada and Asia, and primarily under the John Hancock brand in the United States. Both Manulife and John Hancock have been active investors in the power and renewable power industries with $14B and $2.8B currently invested. Canadian Project Finance team unique amongst NA life insurance companies in that we directly originate the majority of our investment opportunities. Canadian team has developed a strong franchise and reputation, particularly within the renewable power market (wind, hydro, solar): Highly regarded for our technical knowledge, structuring skills, ability to execute Ability to syndicate & close complex transactions on basis of agreed upon terms Typically hold 1 st $100MM and syndicate balance to other institutional investors 3

4 Transactional Summary Canadian Project Finance Team transactional summary: ($ in MM) Number Arranged / Held incl. Held & Total Arrange. Co-arranged Syndicated Participations Arranged Total PF Group Renewable Power - Wind $3,247 $1,524 $2,555 $4,079 - Hydro 9 8 1, ,238 - Solar Geothermal Landfill Gas Biomass Total Renewable $5,445 $2,127 $4,118 $6,245 Gas Fired ,013 Nuclear Coal Fired Total Power $6,449 $2,862 $4,640 $7,502 Non-Power Debt Total Debt $6,449 $2,862 $4,860 $7,722 Infrastructure Equity 7 0 $0 $0 $724 $724 4

5 Project Finance Defined 5 Secured debt financing provided for stand-alone projects (legally and economically) based on the reliability of future cash flows... which are dependent upon: Ability of Sponsors to construct Project on time and on budget Ability of Project to operate at output and efficiency as projected Strength and integrity of contracts and ability of counterparties to meet respective obligations under contracts Ability to withstand resource input, operating and economic risks Limited or non-recourse to Sponsors Lenders only recourse is to security taken (plant, equipment and contracts) Project assets typically have little value except as on-going business with contracts intact or with access to liquid alternative markets Quality of transaction (from a lender s perspective): Not a function of the credit quality of any one party but Function of risks involved degree to which risks are assumed by various counter-parties under contract creditworthiness of each counterparty, and nature of risks assumed by Lenders.

6 Project Finance Defined 6 Lenders focus on technical & contractual aspects of Project to determine and test reliability of future cash flows available to service Project Debt Certain risks mitigated by obligations of counter-parties under contracts Certain other risks born by Lenders and mitigated through statistical analysis, reference to expert opinion or through transactional structure Following must to be in place prior to Financial Close: Power sales agreement Interconnection and transmission contracts Site control (land leases and easements) Major equipment supply and balance of plant EPC contracts Operations and maintenance agreements Material permits 3 rd party resource assessments and engineering reviews Financial model reflecting input from consultants.

7 Principal Risks & Mitigates Sponsorship do sponsors have capability and capacity to execute? Reputation, track record, financial resources must be at risk Technology & Equipment Well proven with examples operating successfully elsewhere Suppliers to provide comprehensive performance warrantees Construction & Start-up Equipment supply & BOP on a fixed-price, turn-key, date certain basis Equipment supplier & BOP contractor to demonstrate necessary experience, track record and financial capacity to meet obligations Equipment supply and BOP contracts comprehensively drafted to apportion responsibility for engineering, procurement, construction and commissioning Liquidated damage provisions to compensate for costs of delay and deficiencies in performance (including servicing debt during delay) Independent engineer to review design, capital bugets, monitor construction and certify accomplishment of milestones 7

8 Principal Risks & Mitigates 8 Cost Overruns Capital budget fixed through contracts with contractors/suppliers Sufficient contingency reserves in capital budget or sponsors to demonstrate sufficient committed resources Overruns in excess of contingency funded by equity before further draws under debt facility or from construction escrow account Independent engineer certifies cost to complete as a CP to any draw Operations & Maintenance Reputable and experienced operators ideally under contract with remuneration tied to performance Operating & major maintenance reserves (depending on seasonality and fleet performance of equipment or strength of warrantees) Appropriate insurance coverage including business interruption Resource Assessment (if intermittent natural resource) Independent 3 rd party resource assessment Statistical and scenario analysis to quantify risk Risk mitigated through financing structure DSCR profile and debt service and operating reserves

9 Principal Risks & Mitigates Access to Markets Interconnection and transmission secured under long-term contracts with potential for curtailment understood and mitigated Independent engineer to confirm transmission capacity and reliability and Project conformity to grid code Market and Price for Outputs Secured under long-term contracts with high investment grade utility counterparties at predetermined prices Term of contract to be at least as long as term of financing Obligation to deliver should recognize intermittent nature, seasonality and yearly variability of natural resource inputs 9

10 Project Finance Defined: Schematic Investors Sponsors Lenders WTG Supplier Equity Equity Senior & Sub Debt Operator BOP Contractor Supply Agree. & Warrantees EPC Contract Project Company & Physical Assets O&M Contract Permits Government Transmission Provider Interconnection Agreement PPA or Merchant Customers Lease Agreements Land Owners Other potential counter-parties could include equipment and technology suppliers, guarantors, royalty holders, insurers, bonding, land owners and other classes of lenders. 10

11 Financing Challenges 11 Project size... small projects disadvantaged As much time/effort required to arrange a small financing as a large Lenders... minimum transaction size given pipeline and targets Difficult for smaller projects to attract interest of lenders Create critical mass... combine smaller projects into a portfolio Experience of sponsor/developer... Developers with limited experience... harder time attracting lenders Much more time/effort required to close with inexperienced developers Engage experience... partners, consultants, EPC contractor, contract O&M. Financial capacity of sponsor/developer... Financial capacity... lenders require sponsor skin in the game (equity) Vendors may offer to provide equity... not skin in the game FN equity provided by way of OFA guaranteed loans... OK if a passive investor with interest up to 50%... challenging if an active investor with interest >50%... not enough skin in the game Partner with experienced

12 Financing Challenges 12 Quality of resource assessment... Our experience... underperformance correlated to complexity of site Complex sites require more met towers & longer data sets Experienced lenders will require higher level of resource certainty BOP contract structure Developers acting as own general contractors with cost + contracts to save cost (to improve returns or make numbers work) Most developers lack necessary experience/capability to act as GC Often results in far too many contracts and weak interface between contracts... no single point responsibility... finger pointing... LDs?? Who responsible for geotech risk? delay? cost overruns? If financeable... will result in higher contingencies, increased equity requirement, reduction in debt amount, higher interest rates Quality and suitability of equipment to site... Reduce capex... propose equipment/suppliers without track record Boost revenues... propose overly large WTG rotor diameters for site conditions

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