Issues in Financing Hydro PlantsIssues in Financing Hydro Plants
FIELDSTONE
Presented By
Clive Ferreira
5 March 2008
2
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
55
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.