Green Energy Finance
ACEF Deep Dive Workshop
Volker Bromund, 5th / 6th June 2017
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Agenda – DDW “Green Energy Finance”
1. Introduction to the Green Banking Programe
09:00 – 09:30h, speaker: Octavio B. Peralta (ADFIAP)
AGENDA
2. Introduction to Wind Energy
09:30 – 09:50h, speaker: Pramod Jain, (Innovative Wind Energy, Inc.)
3. Project Structure and Financing Sources for Wind Farms
09:50 – 10:30h, speaker: Volker Bromund (RENAC)
4. Wind Farm Cash Flow Planning Case Study
11:00 – 11:45h, speaker: Volker Bromund (RENAC)
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5. Panel Discussion: “Changing Landscape of Wind Energy
Tariffs”
11:45 – 12:30h, chair: Pramod Jain, (Innovative Wind Energy, Inc.)
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Project structure and financing sources for
wind farms
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Financing options for commercial projects
Three types of financing typically used for RE projects
Corporate Finance
Project Finance
Capital Market Finance
Different markets have different financing standards
The decision for a financing form typically depends on the maturity of
the financial sector
the energy market
project developer´s experience
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Corporate Finance vs. Project Finance
Corporate Finance (on-balance lending)
Information about management,
performance etc.
Investment in
Lender Company RE project
Loans based on company cash
flows, company assets as
collateral
Project Finance (off-balance lending)
Sponsor develops the
project
Detailed due diligence, Sponsor/ Equity
Lender
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Loan based on project cash flow only, Project SPV
collateral based on project cash flows and project assets
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Corporate vs. Project Finance
Corporate Finance Project Finance
Loan paid back by
Sponsoring company Cash flows generated by project
the...
The liability of the company
The sponsor may / must tap all
Liability comprises only the equity invested
possible sources of liquidity
in the project
Last year‘s balance sheet, P&L
Expected cash flows and risks of
Bank‘s DD focus statement, company strategy and
project
market development
Bank decision
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Volume, reliability and projectability
depends on the ... Creditworthiness of the sponsor
of the project‘s future cash flows
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Project Finance for commercial projects
Project Finance without / with limited recourse to the sponsor
Project debt is provided by banks and other financial institutions, project equity is
paid-in by the sponsor(s) or external Investors
The project‘s creditworthiness and debt capacity exclusively depends on the
project cashflows
“Non- or limited recourse”- financings without or with limited recourse to the
sponsor’s balance sheet
Characteristics: requires stable, forecastable project cash flows, ideally from a
reliable public support scheme (e.g. feed-in tariff) or a long-term power
purchasing agreement, “growth engine” for green energy markets in many
developed countries, knowledge-intensive, transaction costs can be high
The broad access to non-recourse Project Finance forms the “financial
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foundation“ of the unprecedented RE success story in Germany!
It enables not only big corporates, but especially SMEs to carry out
sizeable projects without requiring strong balance sheet support
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Risks in Project Finance
Technical Risks
Construction Risk Operation & Maintenance Technology Risk
EPC Contractor Manufacturer Proven Technology
Financial Risks
Resource Risk Country Risk Market Risk
Availability (resource Insurance - Feed in Tariff
study e.g. on wind
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availability)
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RE – project finance structure
Project Finance
Loan Agreement
Transformer Station
Definition / characteristics Grid connection
Legally-independent
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Cash flow of the project is the main source of collateral and loan repayment
Long-term contractual relationship
Higher degree of leverage compared to corporate finance
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Contracts in the investment phase
Investment
Project Finance
Loan Agreement
Transformer Station
Engineering, procurement, construction (EPC) Grid connection
Turbine supply agreement
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Project development-/ BoP-contract alt. „Multi-Contracting“ (attention: interfaces !)
Grid connection-/ Grid usage agreement
Capital procurement contracts (if any)
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Contracts in the operating phase
Project Finance
Loan Agreement
Transformer
Operating agreements Operating Financing
Grid connection
Offtake-agreement
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/ PPA
Land rights contracts Financing agreements
O&M-/ operating agreements Project finance loan agreement
Insurance contracts Shareholder agreement
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Wind farm cash flow planning case study
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Introduction to the case
Super Wind Investor Ltd. (“SWI”) got the opportunity to acquire a used
Vestas V44 600kW turbine that has been installed in Northern Germany 14
years ago.
The turbine is operating under the German renewable energy feed-in tariff
scheme (EEG–Renewable Energy Act) which is remunerating the turbine
for a period of at least 20 years from the commissioning date.
SWI can operate the turbine for at least 6 additional years under the same
conditions as before (same feed-in tariff).
SWI considers an investment under the pre-condition that it can raise a
bank loan for co-financing.
Turbine acquisition date shall be 01 January 2017.
Let’s show SWI how to evaluate the project from a banker’s perspective!
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Overview of project input parameters
Turbine purchase cost: EUR 230,000
Average historic energy production: 1,100 MWh p.a.
Availability losses: 5.0% p.a.
Electrical losses: 2.0% p.a.
Feed-in tariff: EUR 91 / MWh until 31 December 2022 (for 6 years)
Operating cost per year:
O&M contract Vestas: EUR 20,000, indexed with 2.0% p.a.
Caretaker / maintenance man: EUR 2,400, indexed with 2.0% p.a.
Electricity consumption cost: EUR 1,200, indexed with 2.0% p.a.
Land leases: 8.0% of the electricity revenues
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Insurance cost: EUR 2,200, indexed with 2.0% p.a.
Accounting / annual report: EUR 1,500, indexed with 2.0% p.a.
Dismantling cost: EUR 40,000, accumulated in years 5 & 6
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Cash flow estimation
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Incremental project cash out- and inflows
Principle of Cash Flow (CF) planning Case Study: Investment Cost Budget
Initial investment outlay. The up- The total upfront investment cost
front cost of the renewable energy for the used wind turbine is
technology and all other fixed EUR 230,000.
assets.
The investor can provide
Operating cash flows over the EUR 90,000 of equity.
project life. To be evaluated…
He needs a bank loan of
EUR 230,000 Investment
– EUR 90,000 Equity
= EUR 140,000 Bank loan
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Step 1: Revenue calculation
Principle of cash flow planning Case study: Revenue calculation
Annual energy production:
1,100.0 MWh Gross production
Under the project finance – 55.0 MWh 5.0% Availability loss
approach, cash flow positions – 20.9 MWh 2.0% Electricity loss
follow a hierarchy called cash flow
= 1,024.0 MWh Net output
waterfall.
Feed-in tariff: EUR 91.0 / MWh
This concept requires annual
revenues to cover periodical costs Electricity revenues p.a.:
in a strict order. 1,024 MWh x EUR 91.0 = EUR 93,193
Step 1: No revenues for green energy
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Interest income depends on
reserve account size
* CADS: Cash Available for Debt Service
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Step 2: Calculation of operational costs and taxes
Case study: operational costs, taxes
Principle of cash flow planning
Detailed cost schedule for all six
operating years:
Year 1 2 3 4 5 6
2017 2018 2019 2020 2021 2022
Under the project finance O&M Contract Vestas 20,000 20,400 20,808 21,224 0 0
approach, cash flow positions Maintenance Man
Electricity Consumption
2,400
1,200
2,448
1,224
2,497
1,248
2,547
1,273
2,598
1,299
2,650
1,325
follow a hierarchy called cash flow Land Leases
Insurance
7,455
2,200
7,455
2,244
7,455
2,289
7,455
2,335
7,455
2,381
7,455
2,429
waterfall. Dismantling costs
Accounting 1,500 1,530 1,561 1,592
20,000 20,000
1,624 1,656
Total Operating Costs -34,755 -35,301 -35,858 -36,426 -35,357 -35,515
This concept requires annual Trade Tax -6,745 -6,682 -6,617 -6,552 -6,676 -6,657
EBITDA 51,693 51,210 50,717 50,215 51,160 51,020
revenues to cover periodical costs Income Tax -7,936 -7,855 -7,773 -7,688 -7,833 -7,806
in a strict order. All costs increase at 2% p.a., except
land leases.
Step 2:
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years before the project ends.
Taxes are calculated from P/L
statement.
*EBITDA: Earnings Before Interest, Tax, Depreciation and Amortization
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Step 3: Summing up all positions to receive CADS
Case study: cash flow available for debt service (CADS)
Year 1 2 3 4 5 6
2017 2018 2019 2020 2021 2022
Park Output Potential 1,100 1,100 1,100 1,100 1,100 1,100
Availability Losses 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Electrical Losses 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Net Output 1,024 1,024 1,024 1,024 1,024 1,024
Electricity Price 91.00 91.00 91.00 91.00 91.00 91.00
Electricity Revenues 93,193 93,193 93,193 93,193 93,193 93,193
Total Income 93,193 93,193 93,193 93,193 93,193 93,193
O&M Contract Vestas 20,000 20,400 20,808 21,224 0 0
Maintenance Man 2,400 2,448 2,497 2,547 2,598 2,650
Electricity Consumption 1,200 1,224 1,248 1,273 1,299 1,325
Land Leases 7,455 7,455 7,455 7,455 7,455 7,455
Insurance 2,200 2,244 2,289 2,335 2,381 2,429
Dismantling costs 20,000 20,000
Accounting
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1,500 1,530 1,561 1,592 1,624 1,656
Total Operating Costs -34,755 -35,301 -35,858 -36,426 -35,357 -35,515
Trade Tax -6,745 -6,682 -6,617 -6,552 -6,676 -6,657
EBITDA 51,693 51,210 50,717 50,215 51,160 51,020
Income Tax -7,936 -7,855 -7,773 -7,688 -7,833 -7,806
CADS 43,757 43,355 42,945 42,526 43,327 43,215
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Step 4: From CADS (Cash Available for Debt
Service) to ECF (Equity Cash Flow)
Principle of cash flow planning Case study: Debt service
The bank loan of EUR 140,000 is to
be repaid in annual installments:
Year 1: - EUR 20,000 EUR 120,000
CADS is predominantly used to Year 2: - EUR 40,000 EUR 80,000
meet the project’s annual debt Year 3: - EUR 40,000 EUR 40,000
service.
Year 4. - EUR 40,000 EUR 0
Debt service consists of the
Loan tenor is usually shorter than
scheduled annual interest and
project tenor (here: 4y < 6y)
debt repayments.
risk buffer
Debt holders usually demand an
additional
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Account (DSRA).
DSRA: 6-months debt service.
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Step 4: From CADS to ECF
Case Study: Equity Cash Flow (ECF)
Year 1 2 3 4 5 6
2017 2018 2019 2020 2021 2022
CADS 54,791 54,210 53,443 52,667 53,110 52,998
Redemption -20,000 -40,000 -40,000 -40,000 0 0
Interest -4,900 -4,200 -2,800 -1,400 0 0
Debt Service -24,900 -44,200 -42,800 -41,400 0 0
Cash before DSRA 29,891 10,010 10,643 11,267 53,110 52,998
Cash incl. DSRA 29,891 32,110 32,043 31,967 53,110 52,998
DSRA Target 22,100 21,400 20,700 0 0 0
DSRA Actual 22,100 21,400 20,700 0 0 0
Equity Cash Flow (ECF) 7,791 10,710 11,343 31,967 53,110 52,998
Interest rate is only applied to the outstanding loan amount.
DSRA (Target) is calculated as 50% of next year’s debt service.
DSRA (Actual) is the actual (”real”) cash reserve amount that the turbine was
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able to accumulate in the respective period.
Annual ECFs can be distributed to the equity investor.
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Key financial project ratios
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Key financial project ratios - DSCR
CADSt Case study: DSCRs
DSCRt = ---------------------------
Debt Service t To calculate the DSCRs for the
sample project, we divide the
PV of CADSt over Loan Life annual CADS by the total debt
LLCRt = -------------------------------------- service.
Debt Outstanding t
Sample calculation for year 1:
PV of CADSt over Project Life DSCR1 = EUR 54,791 / EUR 24,900
PLCRt = ---------------------------------------
Debt Outstanding t DSCR1 = 2.20
The Debt Service Cover Ratio All DSCR values need to be >1 for
(DSCR) indicates, to what extent a project to be bankable.
CADS exceeds the scheduled debt
service in a given period.
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Key financial project ratios – LLCR, PLCR
CADSt Case study: LLCR, PLCR
DSCRt = ---------------------------
Debt Service t Sample LLCR calculation (year 3):
53,443 52,667
+
1,035 1,0352
PV of CADSt over Loan Life LLCR3 =
80,000
LLCRt = --------------------------------------
Debt Outstanding t LLCR3 = 1.26
PV of CADSt over Project Life Sample PLCR calculation (year 3):
PLCRt = --------------------------------------- 53,443 52,667 53,110 52,998
+ + +
1,035 1,0352 1,0353 1,0354
Debt Outstanding t PLCR3 =
80,000
The Loan Life Cover Ratio (LLCR) PLCR3 = 2.44
and the Project Life Cover Ratio
(PLCR) take an aggregated view on LLCR >1: project surpluses more
the project putting the present value than sufficient to cover aggregate
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of the respective CADS values debt service over the loan life.
into relation to the outstanding debt.
PLCR shows additional potential to
loan life considered for LLCR stretch tenors in case a loan
project life considered for PLCR
restructuring is needed.
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Evaluation of case results
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Evaluation of case results
Case study: Overview of all project ratios
Year 1 2 3 4 5 6
2017 2018 2019 2020 2021 2022
CADS 54,791 54,210 53,443 52,667 53,110 52,998
Redemption -20,000 -40,000 -40,000 -40,000 0 0
Interest -4,900 -4,200 -2,800 -1,400 0 0
Debt Service -24,900 -44,200 -42,800 -41,400 0 0
Cash before DSRA 29,891 10,010 10,643 11,267 53,110 52,998
Cash incl. DSRA 29,891 32,110 32,043 31,967 53,110 52,998
DSRA Target 22,100 21,400 20,700 0 0 0
DSRA Actual 22,100 21,400 20,700 0 0 0
Equity Cash Flow (ECF) 7,791 10,710 11,343 31,967 53,110 52,998
DSCR 2.20 1.23 1.25 1.27 n/n n/n
LLCR 1.41 1.25 1.26 1.27 n/n n/n
PLCR 2.04 2.01 2.44 3.71 n/n n/n
All minimum values observed in year 2.
Key results of ratio analysis
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Ø-DSCR 1.49 Ø-LLCR 1.30 Ø-PLCR 2.55
Min-DSCR 1.23 Min-LLCR 1.25 Min-PLCR 2.01
>1.0 >1.0 >1.5
Project looks financially feasible from a lender‘s perspective!
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Do you have any questions?
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Thank you!
Renewables Academy (RENAC)
Schönhauser Allee 10-11
D-10119 Berlin
Tel: +49 30 52 689 58-85
Fax: +49 30 52 689 58-99
[email protected]
