Prepared by the students of corporate finance at the MBA program of IE Business School, this presentation provides an introduction to project finance and analyzes two case studies involving project finance.

1. PROJECT FINANCE •Anurag Jaiswal
•Akanksha Agarwal
Corporate Finance •Alessio Tixi
•Diego Castañeda
•Leidy Suarez
•Prateek Singh

2. A TYPICAL PROJECT FINANCE STRUCTURE

3. PROJECT FINANCE OVERVIEW
What Who
How When

4. WHY PROJECT FINANCE?
• All flows separated and debt is non recourse
Flexibility • Obtains capital while preserving control. Opportunity cost.
• Project is spun-off as a separate company
Risk • Creditors have no recourse and risk is allocated to
shareholders
• Lower agency costs and more efficient valuation and risk
control
Income • Reduced bankruptcy costs and possibly higher debt tax
shields
• Increased accountability to investors
Control • Management remains in control and is accountable
• Financing lifetime is finite and highly structured
Timing • Slow to put together
Other • Failure of parent posses less risk to project
• New conflicts of interest can develop

5. PROJECT FINANCE OR CORPORATE FINANCE?
COMPARISON OF STRUCTURAL ATTRIBUTES
Attribute Project Finance Corporate Finance
Organizational Structure -Separated Legal Entity -Secured Debt/Corporate
(SPV) Obligation
-Facilitate Asset
Securitization
Capital Structure -High Leverage -Median Debt/Total Cap:
-Resembles LBO 33%
Ownership Structure -Highly concentrated D&E -Recourse to parent
ownership
-Syndicated Nonrecourse
Loans
-Equity: 2-3 sponsors,
privately held
Board Structure -Affiliated board members -In large Public firms: 10%
-(83%) of sponsor firms affiliated directors
-no. of members proportional
to size of project
Contractual Structure -Large no. of agreements -Limited Contracts

6. DISADVANTAGES OF PROJECT FINANCE
 Higher transactions costs involved
 Contracts can be very complex and allow
less managerial flexibility
 Takes more time to structure and negotiate
 Project debt can be more expensive
 Requires greater disclosure of proprietary
information

7. PROJECT FINANCE EVOLUTION
• Began in the 80’s to build new power plants
• Became the first choice for Governments, NGO’s, and
Municipalities to fund new plants
• By the 90’s, integrated with the public sector activities: roads,
schools, prisons, and roads.
• PPP’s- Public Private Partnerships were used to expand the
availability of funds.
• Today: Used in both developed and developing countries across
a broader range of sectors.
• Bank loans provide the majority of debt. In 2009 banks financed
461 projects with over $139 Billion while bonds financed 31
projects with $8B.

8. RECENT TRENDS IN PROJECT FINANCE
Geographical Breakdown of Project Finance Volume
12% 21% 33% Western Europe
Asia
Middle East
16% 18% North America
Others

9. PROJECT FINANCE IN DEVELOPING COUNTRIES
GDP is driven by is boosted by
Productivity Infrastructure
per capita
Enables funding
for
Project
Finance

10. CASE STUDY– DABHOL POWER
Electricity
D/E Ratio:
70:30 India
Dabho
l
Power
Biggest
foreign Plant 1993
investment
in 1992
$2.9b

11. WHY THIS EXAMPLE?
• To understand the typical risks of a
plant set-up in an emerging economy
• Review reasons of failure of a project -
all parties affected, finally exited
• Evaluation of a backup plan

12. DABHOL – PROJECT STRUCTURE
Project Sponsor
Enron Corp
(65%)
Dividends
+ Capital Banks
Interest ANZ, Credit
Administration Principal + Interest Suisse First
Payment + Cash Project Company boston, ABN-
Maharashtra Flows Amro, Citibank.
State Electricity Dabhol Power State Bank of
Board (15%) Corporation Debt Financing India, ICIC, IFCI,
IDBI, Canara
Bank
Payment Construction
and OM
Agreements
Guarantors
Govt. of Operation &
Project Maintenance
Maharashtra, G Developer
ovt. of India Company
Enron Corp Bechtel (10%)
General Electric
(10%)
Suppliers

13. DABHOL – ANALYSIS OF RISKS
Type of Risk Concerns Stakeholders Inappropriate Conclusion
Actions
Resource Risk •Contamination of DPC, GOM, -DPC ignored public -Terrible publicity
(Water & Land) salt water, used by Enron complaints - Pressure to
fishermen -Government severely change practices
•Diversion of fresh ignored public -Delay in project
water permission and
•Land acquisition environmental impact
- Enron denial
Political Risks -Changing state GOM, GOI, - New govt. dismissed -MSEB rescinded
govt. DPC, Enron the contract the contract in
-Slow moving -MSEB renegotiated 2001
admin. the deal for higher -Enron halted
-Conflicts of stake. phase II project,
contract terms - Govt. refused for any issued a notice to
state owned to buy the sell is stake for
stake $1bn.
- Enron had to
settle for a discount
Commercial Risk -Default on MSEB, GOM, -Forced MSEB to buy -An arbitration
payments GOI power at higher price notice
-payments in US$ - Evoked political
Force Majeure

14. DABHOL – ANALYSIS OF RISKS
Type of Risk Concerns Stakeholders Inappropriate Actions Conclusion
Technology Risk None DPC, Bechtel - Legal notice from
MSEB for inadequate
capacity as a counter to
DPC’s invocations
Legal Risk None DPC, Enron - MOU includes clauses - Unclear nature of
in conflict with Indian PPA, DPC accused
law of fraud
- Price in USD, against
the Indian norms
- Allowed ROE of 31%
with a limit of 16% for
power generating
companies
Human Rights Risk - Protest from local DPC, Enron -Ignored public -Delayed
activists/bodies complaints - Damages payable
-Protestors harassed threatened the
-Political risk finances of the
- Insurance from OPIC project

15. DABHOL – LESSONS LEARNT
 Reduce dependence on MSEB, by allowing Central
Govt. owned utilities to buy power
 Involve the World Bank or multilateral financing
agency, to avoid political risks
 Detailed study on the financial credibility of the host
country
 Rigid contractual framework, with the right to sell
electricity to other customers
 Financial updates/status reports on the customer
 Alternate sources of financing
 Communication and transparency
 Take local law into account

16. CASE STUDY– ABENGOA
High
leverage
Expen
Size
diture
Abengoa
Time Location

17. AN INTRODUCTION
1940 1970 1990
Founded in Seville
The company grew
in 1940 as a small
in the Spanish
engineering From the 1990’s the
market and, from
company company started to
the 1970’s it started
specialized in invest in
to diversify its
electric assembly infrastructure
activities
projects assets, both in
internationally
Spain and abroad
Today has geographically diversified activities, in 2010 EBITDA of 942 mio
Euros
Abengoa is a diversified group that focuses on three activities:
Require
Know-how
• Engineering and construction Operational efficiency
• Concession-type infrastructures Proprietary assets
• Industrial production

18. GROWTH STRATEGY
Non-
recourse
Infrastructure debt
I2
Assets*
CF1** Abengoa
E&C Infrastructure
I1*** Project Activities Assets*
CF1** company
Infrastructure
Assets* Abengoa I1***
CF1** Abengoa
Project Infrastructure
E&C Assets*
Infrastructure company Activities
Assets* I2
Non-
recourse
debt
*Governed by long term sales contracts and hence source of stable revenues.
**CF = Dividends + Cash Flows from O&M activities
***I1= Equity + Corporate Debt

19. INVESTMENT STRATEGY
New concession-type project
assets, built by Abengoa’s Engineering
companies.
FINANCIAL STRATEGY
• Access to long term, corporate debt at
the Abengoa companies level
• Use of non-recourse debt at SPC
(Special Purpose companies, i.e. Project
Finance vehicles) level
• Stabilization of cash-flows for parent
companies

20. IMPACT ON CAPITAL STRUCTURE
Covenant for Debt
Net Corporate Debt/
Corporate EBITDA
Stable under 1.85
throughout 2009
in Million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total Debt 696.6 881.0 877.8 1,108.2 1,561.0 2,790.2 4,538.8 4,780.7 6,415.5 9,211.7
Corportate Debt 495.0 611.1 608.1 743.4 890.1 1,536.4 2,849.7 2,688.0 3,482.1 5,161.6
Project Finance 201.6 269.9 269.7 364.8 670.8 1,253.9 1,689.2 2,092.7 2,933.4 4,050.1
Equity 363.1 351.6 377.9 522.2 526.2 541.1 797.5 627.5 1,171.0 1,630.3
Debt/Equity Ratio 1.9 2.5 2.3 2.1 3.0 5.2 5.7 7.6 5.5 5.7

21. CONSEQUENCES ON COST OF EQUITY
Greater total
financial leverage
 higher beta
higher Ke
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
D ebt/Equity R atio 1.9 2.5 2.3 2.1 3.0 5.2 5.7 7.6 5.5 5.7
B eta 0.30 0.33 0.52 0.71 0.85 1.55 1.22 1.05 1.20 1.60
K e real 5.4% 5.2% 5.4% 5.9% 6.1% 9.7% 8.1% 5.7% 7.2% 9.6%

22. CONSEQUENCES ON CASH FLOW
The stabilization of
cash flows brought a
substantial
decrease in the
financial cycle at a
corporate level
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Fin.Cycle (days) 2.4 (9.7) (20.0) (17.4) (34.6) (43.5) (91.3) (133.0) (149.3) (164.8)
Work.Capital 9 (41) (91) (84) (195) (323) (815) (1,392) (1,720) (2,547)
Cash 320 376 426 357 567 1,136 1,698 1,334 1,546 2,983

23. PERFORMANCE
 Peformance improved
consistently
 Stock prices and
shareholders value
grew continuously
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ROE 13.1% 14.0% 14.2% 12.7% 16.7% 25.7% 19.5% 34.5% 21.2% 17.4%
Ke real 5.4% 5.2% 5.4% 5.9% 6.1% 9.7% 8.1% 5.7% 7.2% 9.6%
EVA (in Million) 24.3 27.4 29.2 27.9 41.9 62.4 70.6 117.3 112.3 92.8
Stocks (in ) 7.7 6.9 5.1 7.1 10.7 21.6 29.1 17.7 16.2 18.5

24. CONCLUSIONS
 Abengoa successfully evolved from a business strategy focused
on heavy engineering to include both construction activities and long term
investments in infrastructure assets
 Abengoa fully explores all synergies between construction business and
infrastructure services by:
 Using project finance for projects with a higher risk profile, thus also
reinforcing corporate’s ability to raise more debt.
 Using corporate financing to finance non-cyclical activities
 Construction budgets are managed to produce payables with long
maturities. As a consequence, working capital is a source of cash in
Abengoa’s financial model.
Abengoa is able to be very competitive in public auctions through a low
ROA (4-6%). This would translate into a low return on investments if the
company wasn’t able to make use of high leverage, achieving an ROE of 17-
26%.

25. THANK YOU!
QUESTIONS?