Issues in Financing Hydro PlantsIssues in Financing Hydro Plants

FIELDSTONE

Presented By

Clive Ferreira

5 March 2008

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Table of ContentsTable of Contents

� Fieldstone Overview

� Case Studies

� Generic Project Structure

� Issue in financing Hydro Power plants

� Conclusion

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Fieldstone OverviewFieldstone Overview

� Fieldstone is an independent investment banking boutique and was founded in 1990.

� The firm is 100% employee-owned, and has more than 40 professionals with principal offices in New York, London, Berlin, Hyderabad and Johannesburg.

� The firm is focused on the Energy & Infrastructure sectors.

� Fieldstone is able to execute complex domestic, international and cross-border transactions based on its broad market knowledge, structuring expertise and demonstrated access to international capital markets.

� Completed approximately US$ 40 billion transactions globally.

� Additional information on the company is available on the company website www.fpcg.com.

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Fieldstone ActivitiesFieldstone Activities

Egypt • Al-Ahram Beverages

• Sidi Krir

Congo • Inga – Kinshasa Transmission Line

South Africa • Metro Gas

• Kelvin Power Station IPP

• Pretoria West Power Station IPP

• Mondi Merebank Cogeneration Project IPP

• Cape Power Project

• Safika/MTN;

• NSB;

• CEIN

• Athlone Power Station

• Alstom BEE Participation

• EDI

• Exxaro

• National Energy Regulator

• GrownEnergy

• Eskom

• Sasol

• Promethium

Tanzania • Dar es Salaam/Mwanza Pipeline

• Central Corridor Road project

• Tanesco

• Kiwira

Zimbabwe • Zimbabwe Electric Supply Authority - Hwange

Mozambique • Cahora Bassa: Phases I & II

• Beira-Mutare Pipeline

• SADCBA PPP Capacity Building Programme

• Tete - Nacala Corridor

Ghana • Ansaldo/Mitsui Power Barge

• GECAD

Nigeria • NGC

• NPDC

• Edo State Power

• River State Power Project

• IPC

Zambia • ZTK Interconnector

• OPPPI

• ZESCO Namibia

• Nampower

• KUDU

Uganda • UEB Generation &

• UEB Distribution

Swaziland • Gas Power Projects

• Bagasse Power Project

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2007 2007

Development of regulatory

guidelines and qualifying

principles for the National

Electricity Regulator of South

Africa (Nersa)

2007

Development of initial Power

Purchase Agreement,

Expressions of Interest and

Request for Tenders for Pilot

National Cogeneration Project

2007

US$500m restructuring

of the 2075MW Hydro

Power Cahora Bassa

Dam

2006

Refinancing of non-recourse

project financing facility of

Sidi Krir Generating

Company, Egypt

Sidi Krir Power Facility A

682.5MW gas and oil-fired

steam cycle power plant

2005

Acquisition of a 20 year

concession from Government

of Uganda to operate the

electricity distribution system

Uganda Electricity

Distribution Company Ltd

2005

Purchase of a 100% interest in

InterGen Egypt Holdings Ltd

owner of a 61% interest in

Sidi Krir Power Facility A

682.5MW gas and oil-fired

steam cycle power plant

2002

20 year concession to operate

the 380MW Nalubaale and

Kiira hydroelectric facilities

Uganda Electricity Generation

Company

SELECTED EXPERIENCE: FIELDSTONE AFRICA

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Case StudiesCase Studies

� Uganda

Fieldstone advised the Government of

Uganda on the corporatisation and

privatisation of 380 MW Uganda’s

electricity generation. Eskom Enterprise

was selected as the preferred bidder after

an international bidding process. The

project reached financial closure in

November 2002.

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Case StudiesCase Studies

�MozambiqueFieldstone acted as an exclusive Financial advisor to the Government of Mozambique on the restructuring of the 2075MW hydro power Cahora Bassa dam.

-10 year advisory assignment

-Restructuring of $3bn historical debt;

-Renegotiating PPA with Eskom;

-Acquisition of majority shares from Portugal;

-Advised on refinancing of the Dam.

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Case StudiesCase Studies

�Zambia – Kafue Gorge Lower

A Consortium led by Fieldstone advised on the project preparation of the 750MW power plant located in the Kafue Gorge, about 65 km upstream of the confluence of the Kafue River and the Zambezi River.

-IFC are advising Government of Zambia on transaction.

-Bidding expected in 2009/10.

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Case StudiesCase Studies

� Zambia – Itezhi Tezhi

Fieldstone together with StanChart advising the ZESCO and TATA on the development of a 120MW power station and 330km transmission line; development of the project structure and resource mobilisation for Itezhi-Tezhi. Challenges include:

-Development of an integrated transmission and generation facility;

-National utility is the off-taker;

-Alligning interest of private sector with governments: low tariffs vs acceptable returns;

-Accelerating project to meet growing power shortages.

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Case StudiesCase Studies

� Zambia – Kariba North Bank

Extension

Fieldstone currently advising ZESCO on the development of 360MW extension to the existing Kariba North Bank.

Challenges include:

-Single sourcing contractors vsInternational Competition Board;

-Use of ECA facilities;

-China Eximbank insisting on corporate finance;

-Breaking new ground in peaking power;

-Regional transmission to be reinforced;

-Development of carbon credits for cross border deal.

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Case StudiesCase Studies

� Zambia – Kalungwishi

Fieldstone is mandated by OPPPI to act as advisor to the government during the construction of a 300 MW hydro power station on the Kalungwishi River. The developer has been selected and negotiations are currently underway to complete signing of the Implementation Agreement. The total project cost is estimated at US$ 700 million, with funds to be raised through traditional project financing methods.

12FIELDSTONE 12

Typical Hydro IPP Structure

Operator

Off-Taker (s)

Concession

Genco:

Independent

Power

Producer

Operation and Maintenance

Water rights

Power Purchase

Agreem

ent

DebtEquity:

Although a typical IPP structure as set out looks simple at first glance, understanding the finer nuances of risk and reward is critical to successful project execution.

NB: Creditworthiness of Off-taker and Proven technology is critical for financing of the new IPP.

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Typical Hydro IPP StructureTypical Hydro IPP Structure

FIELDSTONE 1

IPP Structure Outlining Some ComplexitiesIPP Structure Outlining Some ComplexitiesIPP Structure Outlining Some ComplexitiesIPP Structure Outlining Some Complexities

GENCOGenerationCompany

PROJECT DEVELOPERSAND SPONSORS

PROJECT LENDERS

OFF-TAKER

•Eskom•SAPP•Other?

OPERATORO&M Services

EPC CONSORTIUMEPC Services

Dividends

Equity Investment

Payments for Electricity

Electricity

Debt Service

FUEL SUPPLY

•Exxaro

Payment for Fuel

Long Term Loans

Fieldstone to advise and assist in managing all complexities in the IPP structure

Shareholders Agreements Inter-Creditor Agreements

Insurance Cover:Operations

Equipment Supply Contracts;Shipment Issues

Environmental Permit

Licensing

Insurance Cover:Construction

Risk Analysis & Mitigation

Grid ConnectionCredibility

Bonuses & Penalties

Hydrology

Off-

takerGovernment

Concession

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Typical Funding of Typical Funding of IPPIPP’’ss

� Equity (20-30%)

• Developer/Owner/Operat

or

• Infrastructure funds

• Utilities

• Contractor and equipment

suppliers

� Projects evaluated on

Internal Rate of Return

(“IRR”) and Net Present

Value (“NPV”)

• Debt (70-80%)

• Export Credit Agencies

(ECA’s)

• Multi-lateral and bilateral

banks

• Commercial Banks

• Bond Markets

� Projects evaluated on credit quality of the operator and the off-taker

� Debt service coverage ratios

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Some Issues in Financing Hydro Some Issues in Financing Hydro PlantsPlants

� Investment Climate;

� Regulatory environment;

� Quality of Potential Off-taker;

� Applicable Electricity Tariffs;

� Hydrological Risk;

� Transmission for cross border deals;

� Mitigating political risks by creating off shore structures;

� Carbon Credits.

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Some specific issuesSome specific issues

� Water Rights;� Hydrological Risk;

� What level of firm power � Who takes risk

� EPC Risk issues� Geophysical� Size of Project� Aggregate

� Environmental Considerations� Grave yards� Rare species� Abutments� Siltation� Fish

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Project Risks & MitigationProject Risks & Mitigation

� Geophysical

� Reduced output

� Late completion

� Inefficient

� Environmental compliance

Risk Mitigation

� Risk can be shared

� Turnkey, lump sum, date certain

contract

� Liquidated damages for

performance failure

Water supply

Construction

Operational

� Low availability

� High operating cost

� Fixed fee contract with

performance bonuses

� Operational guidelines and

penalties/termination for

performance failure

� Reliable water rights

� Firm hydrology

� Concession royalties

� Agree level with investors and lenders

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Project Risks & Mitigation (Cont.)Project Risks & Mitigation (Cont.)

� Creditworthiness of Power Purchaser

� Utility

� Industrial User

� Municipality

� Demand for electricity

Risk Mitigation

� Long term power purchase agreements (fixed)

� Escrow accounts

� Government Gurantees

Revenue

� Force Majeure for unforeseen circumstances

� Usually insurable

� Strikes and labour disputes usually contentious issue

� Parties to receive payments from power purchaser under Force Majeure

Force Majeure

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ConclusionConclusion

� Hydros can be a wonderful clean source of energy

� Run of river is better than large reservoir lakes

� Other environmental problems can however cancel out benefits

� Geophysical risk can be very significant

� Resolution of Hydrological risk is key

� Project size has become a major issue

� Carbon credits development has potential to enhance

projects

� Transmission infrastructure for cross border deals.