IPP & Power Project Finance Fundamentals

By attending this highly interactive and practical three day training school you will: Gain a better understanding of best practice lending techniques for independent power project finance in Nigeria, as well as globally Gain a better understanding of the current trends in project finance in Nigeria, as well as globally Review the technical evaluations of a power station Understand how the technical issues of IPP projects are translated into financial and credit risks Understand the finer aspects of financial modelling by identifying and quantifying the major risks that impact a project’s cash flow generation capabilities Gain a better understanding of credit structuring techniques, so as to effectively mitigate the credit risks of an IPP project Review the finer aspects of legal documentation, with legal documentation techniques and tips to help you properly reflect a credit structure in the legal contract Who should attend? Energy Investment Bankers Corporate Planners and Strategists Equity Analysts Investors Credit Analysts Lawyers specialising in power sector and project finance Course overview The credit crisis and economic down turn have made it more difficult for Independent Power Projects to secure credit. However, credit is still available for good projects and good borrowers. This practical course on IPP project finance best practise is a useful tool for lenders and borrowers alike. The course director will walk candidates through the best practices of IPP project finance and by conclusion of the course candidates will be better prepared to successfully navigate through the current credit climate. Course objectives The course will enable participants with skills to identify and analyse prospective borrowers, structure credit facilities, and prepare credit applications for formal presentation and approval by bank credit committees. These skills can be used by the origination teams and credit teams of lenders and to support organisations which run or sponsor projects. Course methodology Each section will be covered briefly as a module in a traditional class style, and the real learning experience will be found in the exercises within each module. Suggested solutions to each exercise will be provided and discussed. Supporting materials will be available for further in-depth learning.
Day 1 Introduction to project finance Brief history of project finance Rising energy costs, the evolution of the independent power stations (IPP) and modern project finance Current trends and issues in project finance The project development process Criteria for a successful project financing Case study: Participants will work in teams to establish a checklist for criteria necessary to achieve a successful project financing. Overview of the Nigeria power sector: Challenges and successes Overview of Nigeria’s power generation capacity PHCN privatisation: Lessons learned and future outlook Challenges and successes in Nigeria’s power generation sector Nigeria’s available power capacity vs. installed capacity: Filling the funding The objectives of the parties involved in a power project The parties involved and their roles/potential conflicts of interest Sponsor's rationale Lender's criteria Constructor's objectives Government's role(s) The role of financial institutions/investors Case study: Participants will identify the parties involved in an independent power project (IPP) finance transaction and the potential conflicts of interest arising from their involvement. Stages in project finance lending Time, team, costs Information memorandum/project proposal Credit/investment Committee considerations Due diligence and documentation The role of advisors – who to involve and when? How to make effective use of advisors and control costs Risk analysis – identification Risk categories Commercial Technical Financial Political Risk identification – what are the key risks of concern? Construction period Operational period Financial Exercise: Participants will work in teams to identify the key risks in the project financing of an independent power project. Risk mitigation strategies in project finance Risk allocation techniques - the project finance contractual framework Risk mitigation techniques: Sponsor support & guarantees Financial analysis and structuring The use of insurance Due diligence Project Finance risk analysis – the approach of Rating Agencies and Basel II Case study: Participants will review the information memorandum for the Barka II Al Rusail IWPP Project and prepare a risk analysis. Day 2 Risk analysis templates for independent power projects Case study: Participants will, in teams, prepare and make a brief risk analysis presentation for an independent power project case study using a typical risk analysis template. Financial modelling The role of financial models in project finance Key elements in the structure of Project Finance spreadsheets Key ExCel functions Financial model assumptions - sources Lessons from the past – what can be learned from past transactions about the value of forecasts and feasibility studies Case study: Reviewing the underlying assumptions – participants review information memorandum for the Umm Al Nar Power and Water Desalination Project case study to assess the source of the underlying assumptions for the financial model. Key financial ratios - the project financier’s measures Debt service covers: Before/after tax, target cover ratio and minimum cover ratio Loan life cover ratio: Target cover ratio and minimum cover ratio Using financial models for financial analysis and evaluation of risks Determining debt capacity Impact of leverage Calculating liquidated damages/overrun/retention requirements Breakeven analysis How to choose sensitivities Key ratio targets Contrast to sponsor’s IRR, NPV, valuation analyses Case study: Reviewing the project sensitivity – participants will review a project finance model for an independent power project to assess the sensitivity of the cover ratios to identified key risks. The equity investor’s perspective Understanding the equity investor’s approach to achieving returns from the project company, including operating relationships with the project company, and cash extraction through re – financing The growth and future development of private equity funds as investors in infrastructure projects Differing approaches to projects by type of investor Developers Contractors Operators Investment funds Case study: Working in teams, participants will develop a financial model to determine the debt capacity for the acquisition financing of the Intergen Power Station Portfolio from Shell and Bechtel; taking into account the risk and return criteria and anticipated debt structure. Day 3 Project finance legal documentation Term sheet development Role/purpose Layout/length Content The 'covenant package' – lenders’ controls and protections The loan agreement Security documentation Inter-creditor issues and agreements Relationship of the lenders with key project participants – the role of 'direct' or 'tripartite agreements' Exercise: Participants will, in teams representing the lender and the borrower, develop the 'covenant package' for an IPP project financing and then seek to negotiate a mutually acceptable package between the lender and the borrower. Impact of the credit crisis on project finance Tenor Pricing Syndication Debt capacity Why independent power projects (IPP) face difficulty – Tips for handling problem projects Typical reasons for failure Lessons which can be learnt from past project difficulties Potential options for dealing with problem projects Case study: Participants review a problem project to establish the reasons for the problems and to assess whether the problems should have been anticipated and how they could have been addressed through further risk allocation/mitigation structures. Financing the power project’s fuel supply (the gas fields) The bank lending markets Common types of lending: reserve based lending, mezzanine debt, bonds Credit risk vs. equity risk Recent developments in oil and gas lending Reviewing the reserve report Assessing the development plan Case study: Each team will review an upstream oil and gas company, identify its financing needs and propose an appropriate financing solution. Course summary and close