Symposium on District Cooling Asset Valuation. International District Cooling Conference October 12-13, 2009 Dubai, United Arab Emirates

Transcription

1 Symposium on District Cooling Asset Valuation International District Cooling Conference October 12-13, 2009 Dubai, United Arab Emirates

2 Symposium Agenda Context Asset valuation in the Brave New World Preparing for due diligence review Cash flow analysis

3 Relevance Situation Massive recent investment in district cooling, often rushed In some cases, overinvestment based on overoptimistic assumptions re underlying real estate development Credit meltdown has resulted in major constraints on access to capital for completion of current projects and for new projects De-levering of finance deals has exacerbated cash crunch

4 Relevance Results Banks are conducting far more extensive due diligence review Asset sales may be considered to raise cash, and equity investors are looking hard at risks Current turmoil requires a return to valuation as a framework for decision-making Should affect decisions of all players in design, finance, marketing, operations, suppliers

5 Purpose of due diligence Requires sound and integrated technical, contractual and organizational elements In sale of asset or equity stake, the ultimate question is: can the assets generate the predicted cash flow? In debt financing, the question is: will the cash flow cover the debt service? The same issues are highly relevant in asset restructuring!

6 Asset Valuation in the Brave New World International District Cooling Conference October 12-13, 2009 Dubai, United Arab Emirates Utpal Guha

7 Agenda Given the current financial environment What are the keys to success in obtaining debt financing? What are the critical financial considerations in obtaining maximum value in sale of assets or equity stakes? Overview of transaction process

8 Key characteristics of district cooling assets Long asset life Essential utility service Monopoly characteristics Significant upfront investment Capital costs (depreciation & interest) form large part of cost structure Infrastructure asset class

9 Financing district cooling projects Infrastructure assets: Efficient funding structure translates into low WACC, and resultant benefit to end users through economic tariffs: Optimum leveraging Long tenor debt Low cost of debt and equity Robust risk allocation is a key requirement for efficient non-recourse financing

10 Robust contractual structure is a fundamental value driver Infrastructure assets are most economically financed under an efficient risk allocation framework, underpinned by a strong contractual structure The more efficient the risk allocation, greater the predictability of the cash flow line, and hence lower the discount rate District cooling assets are no different

11 Structuring to deal with key risks Key risks and mitigation strategies: Construction risk EPC Technology risk contract Offtake/ demand risk, ramp-up risk concession agreement end user agreements Operations risk O&M contract Financing risks Regulatory risks

12 Project structure Creditworthy entity Concession Grantor EPC Contractor EPC services Payment guarantee Concession agreement Interface agreement DBO Contractor DBO contract SPV Cooling services agreement Customers O&M Contractor O&M services Financing documentation Equity subscription Lenders Investors

13 Some major issues facing district cooling projects Quality of Offtake No government backing/guarantee unlike power and water projects that have seen financial close Real Estate exposure Most greenfield projects heavily exposed to demand and occupancy risk Reliant on offtakes from real estate developers, most of whose credit scores have declined In current climate, this is not just a cost of capital issue; it affects the availability of finance Guarantees For DC projects serving new developments, end user offtakes not sufficient Payment guarantees from creditworthy entity required through construction period and until billing and collection milestones are achieved Master developer guarantees generally not available; however, in current climate provide little comfort to capital providers

14 Project structures Back to basics Some key risks to focus on: Payment availability rather than throughput Termination payments must be equitable Refinance risks Default risk on short term debt linked to concession termination Share the pricing risk on upside and downside Limited or no exposure to market risk Force majeure risks Increased emphasis on counterparty risk

15 Valuation drivers as asset matures Key determinants of valuation: Progressive de-risking as the project moves along the project life-cycle curve: construction completion load ramp-up and capacity uptake billing and collection track record O&M track record more certainty behind projected cash flows, lower discount rate But a major value driver is the ability to refinance/ regear the asset, which is largely a function of the original contractual structure

16 Overview of sell-side process Selecting the process: Negotiated sale Limited auction Wide auction Investor contact and screening Committing management time and resources Investing time and resources in preparation and due diligence

17 Overview of sell-side process (cont..) Arranging management presentations Preparing Information Memorandum Building a financial model Project documentation Furnishing data-room Preparing buyers due diligence pack: Technical Insurance Accounting Arranging site-tours

18 Overview of sell-side process (cont..) Allowing sufficient time for buyers DD Two-stage versus single-stage process Binding bids? Bid evaluation, selecting the preferred bidder, and closing the deal

19 Preparing for Due Diligence Review International District Cooling Conference October 12-13, 2009 Dubai, United Arab Emirates Robert Miller \

20 Solid preparation pays off Goal is maximum value for asset higher sale price lower financing cost fewer restrictions from lenders Facilitate goal by considering due diligence requirements during planning, construction and operation Better documentation = less uncertainty = fewer risk premiums

21 Roles of due diligence advisor Assess Fitness for Purpose Quantify actual or expected performance Evaluate O&M practices and procedures Review contracts Identify and quantify risks Describe risk mitigation strategies Review cash-flow model Recommend sensitivity analyses

22 Fitness for Purpose Cooling Plant Reticulation Control Panel Screenshots ETS Systems

23 Fitness for Purpose Will the assets perform according to design (new facilities)? Will the assets perform reliably to generate the expected revenue? Are the assets capable of serving the projected load (plant and hydraulic capacity)? Can the systems be operated and maintained within the projected O&M costs?

24 Plant data checklist Basis of design Specifications Drawings (as-built, IFC or latest issue) Architectural floor plans and elevations Mechanical PFD, P&ID and floor plans Electrical one line diagram, floor plans and cable routing

25 Plant data checklist (continued) Progress reports Equipment list, vendor, capacity Equipment technical data and performance Pump curves Geotechnical (soils) report Civil tests, compaction, concrete Acoustic reports Mechanical hydro-testing, weld inspection

26 Plant data checklist (continued) Electrical tests Controls hardware and software Pre-commissioning, startup, vendor sign-off Commissioning Trial operation Taking Over Certificate Punch list

27 Distribution data checklist Specifications and variances Drawings Progress reports Geotechnical (soils) reports Civil tests; compaction, concrete slump

28 Distribution data (continued) Mechanical hydro testing reports Field joint closure tests / inspections Cleaning, flushing, passivating Long term set up procedures Commissioning Taking Over Certificate Punch list

29 ETS data checklist Specifications and variances Drawings Mechanical hydro testing reports Equipment factor and/or field tests Controls hardware and software Commissioning Taking Over Certificates and punch lists

30 Plant performance Is the plant achieving the performance assumed in the cash flow model? Are the customers being properly served? Historical operating data, trend data Temperatures, pressures, flows Monthly data energy produced and sold (ton-hrs) electricity consumption and kw/ton water consumption and gals/ton-hr peak tons

31 Customer performance Are the customers providing the delta T required to achieve projected system performance? Historical operating data, trend data Flow and supply/return temperatures primary and customer side Supply pressure and delta P at customer Monthly performance; energy purchased and peak tons Performance levers in customer agreement

32 O&M data Have the systems been maintained such that high reliability can continue to be achieved at the costs assumed in the cash flow model? Maintenance records, repairs, vendor recommendations Outages, breakdowns Chiller and equipment run hours

33 O&M practices Is the operating organization ready to handle future growth? Operation and maintenance program Operators training program Mechanics training program

34 Assess stakeholder contracts Investors Lenders Suppliers Government District Cooling Utility Customers Operators Contractors

35 Customer service agreements Will the agreements generate sufficient, predictable revenue and provide incentives for optimization? Capacity and energy rates Cost pass-through Rate escalation Connection fees Penalties or incentives on delta T Term of agreement

36 Utility supply agreements What is the security of supply and price of power and water, and are back-up plans in place? Electricity Commitment from authority Rates Capital contribution Water Commitment from authority Water type and quality (potable or TSE) Backup Plan!

37 Construction agreements Are there completion risks resulting from delays in completion of any asset? increased costs reduced revenues Are there risks related to warranties and guarantees provided by construction agreements from assets already in operation or from assets that are planned or under construction?

38 Other agreements Insurance Land lease Permission to construct Building permit and wayleaves Permission to operate Environmental conditions Sewage discharge

39 Cash flow model Are assumptions reasonable, contracts signed, projects on schedule? Will the assets produce the projected cash flow? Growth projections Revenue generation CAPEX for growth Fixed costs Variable costs

40 Fundamental sensitivity analyses Electricity use and costs Water use and costs Growth scenarios Schedules

41 Upside potential (equity deals) Greater efficiency Reduced water use CAPEX reduction Increased customer revenue

42 Thanks for your attention! Questions?