This document discusses why district cooling projects under a BOT/BOO structure may not be viable for private sector off-takers based on learnings from the Dhahran District Cooling Project. Key challenges for private developers include uncertain capacity planning and utilization, weak contractual frameworks, lack of utility guarantees, and high payment/credit risk from end users. These risks result in high costs of debt and equity that require very high tariffs to make projects financially viable. The Dhahran project succeeded due to support from the public sector off-taker which ensured long-term financing, adequate utility supply, a take-or-pay structure, and a strong contractual framework. The conclusion is that projects with private off-takers

1. Why District Cooling Under BOT/BOO Structure May Not Be For Private Sector Off-takers: Learnings from Dhahran District Cooling Project For Kuwait District Cooling Conference 26th January, 2011 Presented by Anand K Rohatgi anand.rohatgi@synergyconsultingifa.com

2. 2 Outline of the Presentation Philosophy of a District Cooling Plant Key Participants in District Cooling Project Key Revenue Sources – The Tariff Requirements for a Bankable Transaction Profiling of Private Developer / Offtaker vs. Public Offtaker Key Challenges for a Private Development Dhahran Area DCP – A Case Study Conclusion Solution for Making Such Transactions Viable

3. 3 Philosophy of District Cooling Motivational Factors Hygiene Factors Highly Profitable From National Economy Prospective Lower Initial And Recurrent Operating Costs For DCP Operator Smart Energy Technology And Economically Efficient Utility Service Reliability In Excess Of 99.7% Philosophy of District Cooling Improvement In Carbon Footprints For The Economy Smooth Load Distribution – Lower Cumulative Capacity Requirements Presents Attractive Value Propositions To Building Owners In Terms Of Space Lower Cooling Costs To End Users

4. 4 Key Participants in a District Cooling Project Shareholder 2 Shareholder 1 Shareholders Support/Agreement Lenders Utilities Financing Agreement Project Company Offtake Agreement Offtaker Utility Guarantees Concession Agreement Concessionaire EPC Contract O&M Contract EPC Contractor O&M Contractor

6. May include coverage for costs like:

7. Service Line Costs

8. Distribution System Extension Costs

9. Some Portion of Other Capex

10. One time Upfront fee payable on connection date

11. No Offtaker or End User = no Connection Charge

12. Payable by Offtaker to Project Company to compensate for Capital costs.

13. Is a function of Contracted Capacity

14. Includes coverage for:

15. Debt Service i.e. Interest + Principal

16. Equity returns for investors i.e. ROE

17. Paid From Date of Connection of Load

18. No End User / load = no Capacity Charge

19. Payable to compensate Project Company for Fixed O&M cost

20. Includes coverage for costs like:

21. Plant O& M

22. Overhaul & Replacement

23. Plant G&A

24. Other Fixed Expenses

25. Paid from Date of Connection of Load

26. No End User / load = no Fixed O&M Charge

27. Payable to compensate PC for Variable O&M cost

28. Is a function of Actual Cooling provided, EFLH

29. Includes coverage for costs like:

30. Water

31. Electricity

32. Sewage

33. Chemicals

34. Variable O&M

36. Ensures balanced recovery of all project costs

37. Ensures appropriate equity returns

39. Thus enables access to competitive, long term and high level debt funding

40. Capacity planning should be such that complete capacity is utilized at commissioning

41. In case of under-utilization, proper debt repayment should be ensured thru fixed revenues

42. Contractual framework should be such that proper risk allocation is made to the entity who is best positioned of handling the risk

43. Tariff structure should be designed so as to cover 100% of underlying costs (Fixed & Variable)

45. Ensures rationale equity return requirements

46. Financial viability over the concession term

47. Successful DC services

51. Lower probability of demand-supply mismatch due to planned requirements

52. Can take the financial onus of inconsistent projections due to strong balance sheets

53. Higher probability of demand-supply mismatch as basic infrastructure for medium-term demand to be created upfront

54. Demand linked to ability to sell (real estate risk)

55. Further offtake subject to start of utilization.

61. Or failure to receive DC services?

62. 9 Challenge: Capacity Planning and Utilization…2/2 Case Study * * Only Elaborative in Nature

65. Can favorably influence regulatory aspects

66. May not ensure a water tight contractual framework leading to increased project risk

67. Has little influence on the laws of regulations

71. Acceptable protection for client risks events

76. Can support adequate and timely supply of utilities to keep the plant operational (utilities a part of overall development)

77. Can support payments even if plant is un-operational

78. Generally do not take any obligations related to utilities

79. Cannot guarantee adequate and timely utility supply

84. May result in higher overall costs ?

86. Public Sector entities tend and have the ability to fulfill their financial obligations

87. Onus of tariff collections from End Users on Project Company

88. Developers tend to back-end payments to ensure lower upfront to encourage sales. Thus higher risk

92. Or, no district cooling services?

94. In order to make the project viable, the revenues may need to be able to meet debt service i.e. meet DSCR requirements

95. Thus for higher revenue levels, higher tariffs should be required (as compared to Long Term debt transaction)

96. Due to higher and sometimes unbalanced risks, equity investors may need higher return

97. Lender’s requirements of Corporate Guarantees for debt may result in increased equity risk (and thus pricing)

99. Debt interest rate is assumed to be 10% for the computations

100. Leverage of 70% and tariff is set while ensuring that the debt is serviced in the required tenor

101. EFLH of 4,000 Hrs

103. The viability increases with the availability of longer term debt

107. Cooling Capacity of 27,000 TR expandable to 32,000 TR

108. Developed under Offtaker’s initiative towards energy conservation & environment protection since District Cooling consumes half the electrical energy as compared to traditional cooling.

109. First District Cooling Project to be financed under long term non-recourse project financing structure.

111. Tariff components covered all underlying costs and thus assured returns on equity.

113. Cost of utility supply accepted as a pass-through cost

116. Ensured low project risk with other supporting aspects for project financing such as termination payments, force majeure coverage, etc Lower Tariff for End Users

117. 18 The Conclusion Projects with Private Off-takers May Not Be Viable

119. Should not be treated as a Construction Contract and consider importance over Concession Term (15-20 Yrs)

120. Important to balance between lower tariff & viability

121. Work with the Project Company in defining the Project configuration (capacity, schedule, tariff , payments etc)

122. Hold partial stake in Project to ensure balanced approach by Project Company

123. Treat District Cooling like any other utility concession thus lower risk

124. The risk of non-payment is lower as DC alike any other utility is a minimum requirement. Thus disconnection of DC services to End Users is not a likely option

125. Maintain balance between the profitability and viability of the project as this is a utility

126. Should budget temporary plants to avoid phasing risk

127. Should implement a granular design to avoid phasing risk, the additional cost is a reflection of reduced risk

128. Should maintain transparency by involving all stakeholders in sharing both, the appropriate risks and the benefits

129. Realize the benefit of District Cooling over In-house Cooling

130. Should accept a level of “Take or Pay” as may exist in any other utility (similar to power or water)

132. 21 Abbreviations

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