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Dc summit presentation 170209

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Dc summit presentation 170209

  1. 1. Financing District Cooling Projects presented by Tim Griffiths BSc FCA MSI Executive Director, Chescor Capital 17 February 2009
  2. 2. Agenda Page of 16 <ul><li>Economics of District Cooling </li></ul><ul><li>Project financing </li></ul><ul><li>Optimizing the project </li></ul><ul><li>Lender’s Perspective </li></ul><ul><li>Arranging Debt </li></ul><ul><li>Bank Debt versus Bonds </li></ul><ul><li>Conclusions </li></ul>
  3. 3. Economics: comparison with alternative Page of 16 Capital costs (one-off) <ul><li>Redundancy </li></ul><ul><li>Diversity Factor </li></ul><ul><li>Thermal Storage </li></ul><ul><li>Capital Cost per ton </li></ul><ul><li>Distribution System </li></ul><ul><li>Connection </li></ul><ul><li>Overall </li></ul>Opex costs (continuing) <ul><li>Energy Usage </li></ul><ul><li>Water consumption </li></ul><ul><li>Overall </li></ul>Impact on cost
  4. 4. Page of 16 Attractive to Capital Intensive Capex Opex Equity Debt Strong Predictable Cash Flows Investors Lenders Typical Returns 10 – 15 % 15 – 20 % Project IRR Equity IRR Economic characteristics of district cooling
  5. 5. Project financing versus corporate financing Page of 16 Corporate financing Equity investors Lenders debt Company Project assets Project financing Project assets Special Purpose Vehicle Lenders debt Equity investors Limited recourse security security Company Project assets
  6. 6. Conditions for project financing <ul><li>Project cash flows must be sufficient to service debt </li></ul><ul><ul><li>interest and principal </li></ul></ul><ul><ul><li>=> Long term financing (10 + years) </li></ul></ul><ul><li>All risks to lenders must be eliminated </li></ul><ul><ul><li>Construction risk </li></ul></ul><ul><ul><li>Market risk </li></ul></ul><ul><ul><li>Consumption risk </li></ul></ul><ul><ul><li>Credit risk </li></ul></ul><ul><ul><li>Operating risks </li></ul></ul><ul><ul><li>Inflation risk </li></ul></ul><ul><ul><li>Other risks as applicable – Refinancing, Interest rate, Exchange rate </li></ul></ul>Page of 16
  7. 7. Advantages/disadvantages of project financing <ul><li>Advantages </li></ul><ul><li>Enables high debt to equity ratio </li></ul><ul><ul><li>Releases equity for other projects </li></ul></ul><ul><ul><li>Maximizes shareholder value </li></ul></ul><ul><li>Enables equity risk sharing in projects </li></ul><ul><ul><li>Funds (usually prohibited from giving guarantees) can invest into SPV </li></ul></ul><ul><li>Avoids refinancing risk </li></ul><ul><li>Disadvantages </li></ul><ul><li>More restrictions in use of funds </li></ul><ul><li>Restrictive covenants (debt service cover ratios etc) </li></ul><ul><li>More complex documentation (risk mitigation) </li></ul><ul><li>Less flexible administration (most changes require lenders’ consent) </li></ul>Page of 16
  8. 8. Page of 16 Consider financing at the outset
  9. 9. Optimizing phasing Page of 16
  10. 10. Page of 16 Lender’s Perspective Customer View <ul><li>Essential service </li></ul><ul><li>Economic advantages </li></ul>Contractual Arrangements <ul><li>Capacity (covers debt service) </li></ul><ul><li>Consumption </li></ul><ul><li>Connection </li></ul>Tariff Structure <ul><li>Build to customer demand </li></ul><ul><li>Modular expansion </li></ul><ul><li>EPC lump sum contracts </li></ul><ul><li>Opex predictable </li></ul>Capex/Opex <ul><li>Long-term (20–25 yrs) contracts </li></ul><ul><li>Take or pay from fixed date </li></ul><ul><li>Creditworthy customers </li></ul><ul><li>Irrevocable contracts </li></ul>Strong Predictable Cash Flows Inflation Linked
  11. 11. Page of 16 Arranging Debt Project Activity Efficient Financing Credit Crunch Financing Construction/Capex Operations/Revenues 10 – 15 year debt 10 – 15 year debt 24 – 36 months 10 – 12 year debt 10 -12 year debt 20-25 years Project Timeline Cash flows predicable, but modest returns require 10+ years to repay principal Construction finance only > refinancing risk > sponsors guarantee required
  12. 12. Page of 16 Arranging Debt Markets return to normal Long-term loans Reasonable rates District Cooling one of first to benefit
  13. 13. Page of 16 Arranging Debt – A Structured approach Prepare Information Memorandum Mandate Compare Responses & Negotiate Formal Request for Proposal Key factors Tenor Interest Rate Fees Responses from banks vary widely Debt markets are not efficient Comprehensive IM aids banks understanding of projects, esp. risk mitigation Cost + terms depend on - <ul><li>Availability of funds to bank </li></ul><ul><li>Perception of risks involved </li></ul>
  14. 14. Page of 16 Bank debt versus Bonds <ul><li>District Cooling assets need long term debt – either </li></ul><ul><ul><li>Bank loans, or </li></ul></ul><ul><ul><li>Bonds/Sukuk </li></ul></ul><ul><li>Banks are currently reluctant to lend long term. The solution may lie in issuing bonds to investors </li></ul><ul><li>Bonds/Sukuk are </li></ul><ul><ul><li>Tradable debt-type instruments </li></ul></ul><ul><ul><li>Investors can be funds, individual investors or banks </li></ul></ul><ul><li>The project financing structures described above are largely applicable to both bank debt and bonds </li></ul>
  15. 15. Page of 16 Bank debt versus Bonds <ul><li>Significant pools of liquidity, with funds and individual investors, still exist </li></ul><ul><li>Especially Islamic investors </li></ul><ul><li>Corporate bonds/sukuk are attractive to investors, and are currently being recommended by private wealth managers </li></ul><ul><li>District Cooling assets are particularly attractive to Islamic investors – asset backed - strong cash flows - Shariah compliant </li></ul><ul><li>If the banks continue to have problems lending long-term  then bonds/sukuk will become the best method of financing </li></ul><ul><li>Liquidity may remain an issue, but many bond investors hold to maturity. </li></ul>
  16. 16. Conclusions <ul><li>Re-establishment of infrastructure growth is important to most economies – especially now </li></ul><ul><li>District Cooling is economically advantageous in the right conditions </li></ul><ul><li>District Cooling projects require long term funding </li></ul><ul><li>Financial System currently broken </li></ul><ul><li>Either </li></ul><ul><ul><li>The banks will start to lend long term, </li></ul></ul><ul><ul><li>or </li></ul></ul><ul><ul><li>District Cooling providers will need to go round the banks – issue bonds /sukuk </li></ul></ul>Page of 16
  17. 17. Conclusions <ul><li>To maximize shareholder value we need to finance district cooling projects efficiently by - </li></ul><ul><ul><li>Planning the financing as an integral part of the project </li></ul></ul><ul><ul><li>Identifying and mitigating all project risks – construction, market, credit, operational and financial (refinancing, interest rate, exchange rate) </li></ul></ul><ul><ul><li>Ensuring appropriate contractual arrangements are in place </li></ul></ul><ul><ul><li>Matching the capex to meet customer demand (just-in-time) </li></ul></ul><ul><ul><li>Planning comfortable and achievable debt service ratios by - </li></ul></ul><ul><ul><ul><li>Setting appropriate debt/equity ratio </li></ul></ul></ul><ul><ul><ul><li>Obtaining long term finance, </li></ul></ul></ul><ul><ul><ul><li>Sculpting repayment schedules </li></ul></ul></ul><ul><ul><li>Competing the banks to ensure optimal terms </li></ul></ul>Page of 16