This presentation was delivered by representatives of RBC at the 2nd Annual National Aboriginal Energy and Power Association conference held in Calgary on Tuesday, October 18 to Thursday, October 20, 2011.
Strictly Private and ConfidentialFinancing Your ProjectOctober 20th, 2011
DisclaimerThis presentation was prepared exclusively for the benefit and internal use of the recipient for the purpose of considering thetransaction or transactions contemplated herein. This presentation is confidential and proprietary to RBC Capital Markets andmay not be disclosed, reproduced, distributed or used for any other purpose by the recipient without our express writtenconsent.The information and any analyses contained in this presentation are taken from, or based upon, information obtained from therecipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, andcannot be assured by RBC Capital Markets. The information and any analyses in these materials reflect prevailing conditionsand our views as of this date, all of which are subject to change.To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performanceprepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printedpresentation is incomplete without reference to the oral presentation or other written materials that supplement it.Any calculations or value ranges indicated herein (i) are preliminary and should not be construed as opinions of RBC CapitalMarkets or their individual members as to value, fair market value, or prices at which a transaction would be considered fairfrom a financial point of view, and (ii) have not been subject to the processes that we apply to fairness opinions and valuations,including our due diligence process and our internal opinion review process and, accordingly, must not be considered toconstitute a valuation, formal valuation, appraisal, professional opinion, or fairness opinion as contemplated under IIROC Rules29.14 to 29.25 or Multilateral Instrument 61-101 and must not be relied upon or disclosed as constituting such a document oropinion.Employees of RBC Capital Markets are expressly prohibited from offering directly or indirectly a specific price target, or offeringor threatening to change research, a rating or a price target, to a company as inducement for the receipt of business orcompensation.
Project Finance in Canada Get It Contracted, Get It Funded, Get It Built2
Project FundingAlternatives for Sources of Funds Corporate Balance Sheet Bank lines, commercial paper programs, cash on hand Liquidity Sources Suitable for projects that are small relative to the size of the sponsor Debt New Issuance New Issuance Equity Issuance Combination of Both Non-Recourse Project Finance Banks typically form a syndicate of multiple lenders to achieve debt quantum Bank Market Equity contribution necessary to create required capital structure Institutional Loans / Term Loan B Bond Market Project Bonds (public or private placement) Equity contribution necessary to create required capital structure Sponsor can achieve sufficient funding through multiple different alternatives3
Project Finance vs Corporate Balance SheetHighlighted Differences and Considerations Factor Non-Recourse Project Finance Corporate Balance Sheet Contracts fundamental to project entity Usually market demand driven Contract Structure Usually one backbone contract that underpins No single contract fundamental to business the financing SPV with limited ability to change scope of Scope of Business Few restrictions on scope of business business defined in contractual arrangements Can be sponsor managed construction; cost Construction Risk Fixed price turnkey contracts desireable plus etc. High level of structural protection including legal ringfencing, cash waterfall and restricted Structural Protection distributions Not applicable – treated as any other corporate for Lenders asset Lenders typically have step-in, cure and step- out rights under project contracts Reliance on asset specific future cash flows Cash to Repay Debt Sourced from overall corporate cash flow Ringfencing with non-recourse to sponsor Lender control and oversight over reporting Budgets and and monitoring practices Management discretion Financial Projections Reliance on independent consultants Debt service reserve account Liquidity Reserves Management discretion Major maintenance reserve account High leverage reflecting cash flow certainty Management’s focus typically on preservation under contractual arrangements of corporate level ratings Leverage Limits on additional indebtedness Few restrictions on additional indebtedness Debt typically repaid within contractual period / Assumption that corporate will continue to resource life refinance its overall indebtedness4
Non-Recourse Project FinanceIncentives and Advantages Off-Ratings for Sponsor Cheaper Debt than Sponsor Multiple Sponsors Mexico vs Alberta Mirant Marsh Landing Project Ruby Pipeline Project Mexico based power generation projects 760 MW natural gas fired peaking facility 1,086km gas pipeline with 1.5 bcf/d utilized a project financing to source located in the Bay area of California capacity running from Wyoming to Oregon funds and ringfence risks and preserve U$650mm project financing had implied to connect Rockies gas and the Western “walk-away” option IG rating higher than U$1.225Bn offering US Alberta based power generation projects of high yield notes rated B3/B by Mirant El Paso and Global Infrastructure Partners are financed using the corporate secured a U$1.5Bn project financing with balance sheet El Paso providing a construction guarantee Sponsor Debt Access Standalone Debt Costs Thin-Cap Sponsor Southern Lights Pipeline Mackenzie Gas Project Kitimat LNG Terminal Project 180,000bpd diluent pipeline connecting 1,196km gas pipeline system connecting 5mm tons/yr liquefaction facility located Manhattan, Illinois to Edmonton, Alberta Northwest Territories to Alberta and near the Port of Kitimat in British U$2.2Bn project had a significant debt North American markets Columbia requirement that would have affected $16Bn project is expected to be C$3Bn construction cost estimate well the corporate debt access of Enbridge contracted in a regulated, cost-of-service exceeded the access to capital of the basis, therefore important to show cost single asset privately-owned energy of capital development company on other than project finance basis5
Project Finance Sources Overview Project Finance Bank Market Institutional Non-Bank Market Life insurance companies. Larger and/or rated Canadian relationship banks and international Investor Base deals can also bring in mutual funds, pension project finance banks funds etc. Rating not required but if investment grade rating is achievable a formal rating could bring Ratings lower debt pricing Rating not required Requirements Moody’s, S&P and DBRS are preferred rating agencies Shorter tenors attractive. Limited appetite Longer tenors more attractive with a focus on Tenor beyond ~5 to 10 years all-in (construction period aligning the tenor with length of the offtake and some portion of operational period) agreements Not fully amortizing Repayment Fully amortizing Typically results in bullet maturity Floating rate debt. Priced at a spread over Fixed rate debt. Priced at a spread over Bankers Acceptances or US Libor Government of Canada bond yields Underlying Rate Lenders typically require a floating-to-fixed Investors typically price debt with an all-in swapped underlying rate to remove rate coupon exposure Shorter tenor and limited amortization creates a bullet maturity that typically requires refinancing Not applicable as loan is typically fully Refinancing Risk Bullet maturity is subject to future interest rates amortizing risk and refinancing transaction execution risk6 Pre-payable at par. Swap termination will Early pre-payment typically results in make- Break Costs require mark-to-market settlement whole penalties
Industry Analysis Factor Power Generation Pipeline Oilsands / Refinery PPP Predictability of cash Size and scale Construction risk flows Market position (diseconomies) Contractor support Key Factors to Project and contract Quality of supply Sensitivity to commodity Capital structure Determine competitiveness sources prices Recovery on Credit Risk Technical and Contract quality Financial flexibility concession operating risks Financial strength Ability to offload termination Key financial metrics construction cost risk Offtaker credit quality Leverage Up to 80% Up to 70% 40-50% Up to 90% Return on 12-15% 10-14% 20+% 8-12% Equity Long term fixed price Fixed price, fixed power purchase Long term fixed price term design-build- Large commodity price Lenders’ agreement shipping agreements operating-maintain risk Financing Lump sum date certain Tolling mechanism agreement Inability to fix Expectations turnkey EPC contract with cost-of-service Availability based construction costs Subsidies if renewable passthrough concession revenue power profile Increase FEED and Contractual Strong contractual construction cost modifications to re- framework with estimates to increase allocate typical project comprehensive perceived accuracy of risks to notch up Shipper / sponsor provisions for Project budget (Class II) implied rating backstops mitigate allocation of risk Management Early procurement on Streamline contracts basin and / or end- Performance / Considerations long lead items, explore so that scope of market risks Insurance based fixed price contracts for responsibilities and support commodity sensitive financial rewards / Liquid / financial materials, EPC on same penalties are aligned support modular elements7
Project Finance Best PracticesRisk / Mitigant Considerations Risk Concern Mitigant / Best Practice Cost overruns have Experienced construction contractors been prevalent in Front-end engineering and design completed project financings Advancement along construction schedule prior to execution of debt financing Cost Overrun Rating agencies, Project needs to show adequate funds to complete the project. This test is lenders, and performed upon every draw prior to paying project costs (sufficient funding test) investors all recognize this risk Fixed price EPC contracts and / or cost of service mechanism in offtake contract to be a key concern Independent determination that contingency in budget is sufficient given complexity Availability of debt would be restricted if the projected completion date were to Lenders must extend beyond a ‘date certain’ ensure that The ‘date certain’ is determined by applying a buffer against any outside dates material contracts incorporated into the material project contracts are not at risk of Delay Cost overruns associated with delays falling away as a result of missing Other mitigants include appropriately sized delay related Liquidated Damages date certain (“LDs”) in EPC contracts to materially offset delay related interest incurred and LDs milestones payable under offtake contract Review of construction schedule by the independent engineer Construction contracts structured with performance LDs and warranties to align Construction incentives of the stakeholders and ensure the project is compensated for any Performance complexity of the additional costs required to complete the project according to design specifications project Review of design and technical aspects of the project by the independent engineer The credit strength of the project will be determined by how well the ‘best practices’ are achieved8
Project Finance Best Practices (con’t)Risk / Mitigant Considerations Risk Concern Mitigant / Best Practice Potential problems may Counterparty credit rating and scale relative to project obligations cause the project to Contract is likely to remain commercially viable to counterparty Counterparty become uneconomic for a contract counterparty Very strong contractual take-or-pay (or similar) obligation from financially stron (default / abrogation risk) and motivated counterparty Operational diligence and vetting by independent engineer Strong contractual arrangement with operator Review of insurance program by independent insurance consultant Can the project withstand Operating period cash flows are put through a ‘cash flow waterfall’ prior to Operating short-term operating being available for distribution to sponsors issues If minimum DSCRs (Debt Service Coverage Ratio = Cash Flow Available for Debt Service / Debt Service) are not met, free cash flows from operations are put into a separate account and could be used to make mandatory debt repayments Resource profile is Resource sufficient for planned Capacity forecast is supported by the resource consultant operations Lenders that look solely to the project assets and cash flows for repayment will need to be confident that the entire structure is sufficient to provide long term certainty of cash flows and risk mitigation9
Project Finance Best Practices (con’t)Risk / Mitigant Considerations Risk Concern Mitigant / Best Practice FM risks allocated to party best able to wear and price them, typically not the project company, in the short term Business interruption and loss insurance reviewed by an independent Unplanned outages and Force Majeure insurance consultant effect on debt service Material contracts are also reviewed to ensure they ‘line-up’ against each other to ensure no gaps exist with regards to which party is responsible under what scenario Detailed review of first nations engagement, consultation and any resulting First Nations First nations support benefits agreements Detailed review by lenders’ counsel of all material permits, licenses, statutes Regulatory Regulatory compliance and other regulatory matters Offtake contracts exist to cover full implied amortization of debt – often well beyond the expected maturity of the original debt The risk that lenders Refinancing cannot be refinanced ‘Cash sweep’ analysis which may kick in if project fails to recontract Refinancing structure to include long-term interest rate hedge Risk management techniques utilized by the project will have a direct impact on the ability to secure financing10
TimelineOverall Project Schedule Project Development Period Financing Process Marketing Process Obtain regulatory licenses, Finalize financing strategy Bank meeting permits and approvals Lenders’ consultants diligence − Approach potential lenders Determine construction − Independent engineer − Request financing schedule and cashflow profile commitments − Resource consultant Develop financial model Bond roadshow − Insurance consultant Execute material project Receive lender / investor contracts Rating agencies commitments − Offtake Contract / Negotiation of credit terms and Financial close Purchase Agreement conditions − Allocate down financing − Construction EPC / BOP / Finalize credit documentation commitments to determine Equipment supply final holds − Operating and Develop marketing materials − Funding Maintenance 6-12 Months ~2 Months ~1 Month The overall project schedule is highlighted above with specific activities required and gating items to advance the process11
Lenders’ Independent ConsultantsRoles, Responsibilities and Timing Considerations Provides an independent review of technical aspects of the project Independent engineer reviews material project contracts (including construction, offtake contract, O&M agreements, etc), inputs to financial model and environmental studies The independent engineer will usually provide guidance on what ‘down-side case’ lenders Independent Engineer should evaluate in order to determine the project risks Provides project owner with a second review of the project Generally requires at least 4 - 6 weeks from receipt of documents until delivery of draft report The consultant’s scope of work will be determined by the degree to which the construction contracts and offtake contract mitigate resource risks and the degree to which resource dependent revenues are incorporated into the project model Resource Consultant Provides an independent review of the resource characteristics and expected capacity profile of the project site Typically is teamed with independent engineer and works closely with them or work could be sourced from the same firm The consultant’s scope of work will be determined by the degree to which the supply and offtake agreements mitigate markets risks and the degree to which any merchant Market Consultant revenues are incorporated into the project model Provides an independent review of the commodity / supply / offtake market Typically is teamed with independent engineer and works closely with them Provides a view on adequacy of insurance provisions during construction and operations Insurance consultant reviews insurance requirements in all material project documents as well as certificates of insurance to confirm that insurance is adequate, in line with industry Insurance Consultant norms and that the required insurance has been put in place Shorter timeline than other consultants, however receiving all certificates of insurance can lengthen time required12
Debt Arranger and Financial AdvisorRoles, Responsibilities and Considerations Construction Financing Execution Advise the borrower on the most effective structure that will achieve their goals Manage the creation and production of marketing material Manage the rating agency process as required Lead discussions with counsel Coordinate with various financial institutions involved in the process Act as administration agent on behalf of the lenders Manage and guide independent engineers / consultants Serve as point in the negotiation of credit documents Guide pricing of the transaction in the capital markets Be the credible voice in the debt capital and syndicated bank markets when marketing and pricing a transaction RBC Project Finance would typically coordinate the construction financing and also assist with refinancing to a permanent capital structure13