KDC11- Anand Rohatgi, Synergy Consulting
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KDC11- Anand Rohatgi, Synergy Consulting

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Kuwait District Cooling Summit 2011

Kuwait District Cooling Summit 2011

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KDC11- Anand Rohatgi, Synergy Consulting KDC11- Anand Rohatgi, Synergy Consulting Presentation Transcript

  • 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
    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
    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
    View slide
  • 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
    View slide
  • 5
    Revenue Sources : For Recovery of Costs
    Tariff Components
    Connection Charge
    Capacity Charge
    Fixed O&M Charge
    Variable O&M / Consumption Charge
    • Payable to compensate Project Company for Capital Expenditure incurred.
    • May include coverage for costs like:
    • Service Line Costs
    • Distribution System Extension Costs
    • Some Portion of Other Capex
    • One time Upfront fee payable on connection date
    • No Offtaker or End User = no Connection Charge
    • Payable by Offtaker to Project Company to compensate for Capital costs.
    • Is a function of Contracted Capacity
    • Includes coverage for:
    • Debt Service i.e. Interest + Principal
    • Equity returns for investors i.e. ROE
    • Paid From Date of Connection of Load
    • No End User / load = no Capacity Charge
    • Payable to compensate Project Company for Fixed O&M cost
    • Includes coverage for costs like:
    • Plant O& M
    • Overhaul & Replacement
    • Plant G&A
    • Other Fixed Expenses
    • Paid from Date of Connection of Load
    • No End User / load = no Fixed O&M Charge
    • Payable to compensate PC for Variable O&M cost
    • Is a function of Actual Cooling provided, EFLH
    • Includes coverage for costs like:
    • Water
    • Electricity
    • Sewage
    • Chemicals
    • Variable O&M
    • No Impact on Economics if Pass -Through
  • 6
    Requirements for a Bankable Transaction
    Key Success Factors
    A Bankable Transaction
    Interpretation
    • Provides comfort to Lenders that Debt Service shall be met within schedule
    • Ensures balanced recovery of all project costs
    • Ensures appropriate equity returns
    • Ensures proper risk allocation
    Credit Worthy Offtaker
    Take or Pay
    Risk Allocation
    Tariff Structure
    • A credit worthy Offtaker ensures lower payment risk
    • Thus enables access to competitive, long term and high level debt funding
    • Capacity planning should be such that complete capacity is utilized at commissioning
    • In case of under-utilization, proper debt repayment should be ensured thru fixed revenues
    • Contractual framework should be such that proper risk allocation is made to the entity who is best positioned of handling the risk
    • Tariff structure should be designed so as to cover 100% of underlying costs (Fixed & Variable)
    • Should be properly indexed to inflation
    Impact
    • Ensures availability of economical debt
    • Ensures rationale equity return requirements
    • Financial viability over the concession term
    • Successful DC services
    • Rationale tariff levels for the End Users
  • 7
    Profiling of Private Developer / Offtaker vs. Public Offtaker
  • 8
    Challenge: Capacity Planning and Utilization…1/2
    • Not Guaranteed Capacity Requirement Forecast
    • No Fixed Schedule + level for such capacity utilization
    Capacity Planning / Forecast
    Public Sector Offtaker
    Private Sector Offtaker
    • In a better position to project the demand figures as planning based on Captive requirements
    • Lower probability of demand-supply mismatch due to planned requirements
    • Can take the financial onus of inconsistent projections due to strong balance sheets
    • Higher probability of demand-supply mismatch as basic infrastructure for medium-term demand to be created upfront
    • Demand linked to ability to sell (real estate risk)
    • Further offtake subject to start of utilization.
    • May have to infuse extra equity impacting overall Project IRR
    Impact on Stakeholders
    Impact on Stakeholders
    Developer
    • Takes the financial onus of unachievable projections
    Developer
    • Nil as generally may not take any obligation
    Project Company
    • Undesired increase in costs absorbed by Public Offtaker
    • Thus no impact
    Project Company
    • Bears increase in costs due to incorrect projections
    • Thus Higher contingency requirements or failure to meet obligations
    Lenders
    • Strong Balance Sheet ensures timely debt repayment, thus provides required comfort
    End User
    • Financial onus of wrong projections on Offtaker
    • Tariff not prone to changes
    Lenders
    • May face a risk of delay in debt repayments
    • Thus Project may not be bankability
    End User
    • Increase in tariff due to, if borne by end users may lead to increased Tariff
    • Or failure to receive DC services
    ?
  • 9
    Challenge: Capacity Planning and Utilization…2/2
    Case Study *
    * Only Elaborative in Nature
  • 10
    Challenge: Not Very Strong Contractual Framework
    Weak Contractual Framework
    • Un-clear / un-balanced risk allocation
    • Generally offtaker sided contracts
    Public Sector Offtaker
    Private Sector Offtaker
    • Ensure tight contractual framework with adequate penalties and remittances for appropriate events
    • Can favorably influence regulatory aspects
    • May not ensure a water tight contractual framework leading to increased project risk
    • Has little influence on the laws of regulations
    • May tend to execute not very strong contracts
    Impact on Stakeholders
    Impact on Stakeholders
    Developer
    • Water tight framework ensures lower but defined / balanced risk
    Developer
    • Mostly nil, as offtaker takes no obligations
    Project Company
    • Well defined rights and obligations
    • Lower risk thus lower debt and equity costs
    Project Company
    • Exposed to risks as rights and obligations not clear and balanced
    • May fail to be viable in long term
    Lenders
    • Well defined contractual obligations
    • Acceptable protection for client risks events
    • Acceptable project risk
    End User
    • Well defined rights and obligations
    • Lower tariff due to lower overall project risk
    Lenders
    • Exposed to substantial project risk
    • Thus project not financeable
    End User
    • Unfavorable clauses may lead to higher obligation or higher tariff or failure to receive district cooling
    ?
  • 11
    Challenge: Utilities - Minimal Control and Full Risk
    Utility Guarantees
    • Utilities may not guarantee
    adequate and timely supply
    Public Sector Offtaker
    Private Sector Offtaker
    • Public Offtaker has better control over the public utilities
    • Can support adequate and timely supply of utilities to keep the plant operational (utilities a part of overall development)
    • Can support payments even if plant is un-operational
    • Generally do not take any obligations related to utilities
    • Cannot guarantee adequate and timely utility supply
    • Poses high risk to the viability of the project
    Impact on Stakeholders
    Impact on Stakeholders
    Developer
    • Nil
    Developer
    • Nil
    Project Company
    • Adequate utility supply thus plant operational
    • No cash flow risks
    Project Company
    • May not be able operate due to unavailability
    • Loss of revenue for such periods
    Lenders
    • No Impact as defined revenues to the Project for debt service
    End User
    • Lower tariff due lower risk on Project, Lenders and Shareholders
    Lenders
    • May impact ability for timely debt service
    • Thus project not bankable
    End User
    • No district cooling service for periods when plant does not receive utilities
    • May result in higher overall costs
    ?
  • 12
    Challenge: High Payment / Credit Risk
    Non Payment by End Users
    • Risk of delay or non payment by end users
    Public Sector Offtaker
    Private Sector Offtaker
    • Generally payments guaranteed by the Public Sector entity
    • Public Sector entities tend and have the ability to fulfill their financial obligations
    • Onus of tariff collections from End Users on Project Company
    • Developers tend to back-end payments to ensure lower upfront to encourage sales. Thus higher risk
    • Exposing Project to credit risk from non-payments later
    Impact on Stakeholders
    Impact on Stakeholders
    Developer
    • Minimal impact as Public Offtaker have the financial strength to make such payments
    Developer
    • Nil
    Project Company
    • No impact as payments are received in full
    Project Company
    • Reduction in anticipated revenues
    • Eventual failure to provide service if cost unrecovered
    Lenders
    • No Impact as defined revenues to the Project for debt service
    End User
    • May face disconnection (if End User not same as Developer)
    Lenders
    • May put debt service at risk
    • Thus project not bankable
    End User
    • If recovered from existing users - increase cost of services
    • Or, no district cooling services
    ?
  • 13
    Result: High & Un-Competitive Capital – Debt & Equity
    Un-Competitive Debt Financing
    High Returns for Equity
    • Due to higher and sometimes unbalanced risks, lenders may not provide Long Term Debt but will only provide Short Term Corporate Finance
    • In order to make the project viable, the revenues may need to be able to meet debt service i.e. meet DSCR requirements
    • Thus for higher revenue levels, higher tariffs should be required (as compared to Long Term debt transaction)
    • Due to higher and sometimes unbalanced risks, equity investors may need higher return
    • Lender’s requirements of Corporate Guarantees for debt may result in increased equity risk (and thus pricing)
    • In order to meet such return requirements, the revenues may need to be higher and thus higher tariffs
  • 14
    Result: High Cost of Capital – Debt + Equity
    To Make Tariff Attractive for End Users
    For Public Off-taker / Developer
    For Private Off-taker / Developer
    Assumptions:
    • In house cooling capex of SR 13,400 per TR of cooling with SR 2200 / TR as O&M each year
    • Debt interest rate is assumed to be 10% for the computations
    • Leverage of 70% and tariff is set while ensuring that the debt is serviced in the required tenor
    • EFLH of 4,000 Hrs
    • A typical in-house cooling consumption charge of SR 0.481/TR-HR whereas for DCP of SR 0.187/TR-HR
    Inferences:
    • DC is viable in the long run due to better efficiency which can be observed by comparing the consumption charges
    • The viability increases with the availability of longer term debt
    • In the above, DCP becomes viable if debt tenor is >9 years
    Assumptions:
    • Leverage of 70%.
    • Various combinations of IRRs are used and the increase in tariff required to meet the IRR is normalized and displayed
    Inferences:
    • To double the IRR from 8% to 16% a 33% increase in tariff is required in this particular example
  • 15
    Dhahran Area DCP – A Case Study
  • 16
    About Project
    Showcasing the first scheme of its kind in the MENA region
    • Saudi Tabreed as Project Developer is required to develop, own & operate a district cooling system to provide cooling services for offices at Dhahran.
    • Cooling Capacity of 27,000 TR expandable to 32,000 TR
    • Developed under Offtaker’s initiative towards energy conservation & environment protection since District Cooling consumes half the electrical energy as compared to traditional cooling.
    • First District Cooling Project to be financed under long term non-recourse project financing structure.
    • Project under “Take or Pay” Structure to ensure commercial viability of the Project
  • 17
    Advantage All – With Public Offtaker
    PublicOfftaker
    Public Offtaker Support
    • Credibility and strong balance sheet of Public Offtaker lead to Long Term Non-Recourse debt funding
    • Tariff components covered all underlying costs and thus assured returns on equity.
    • Lower IRR requirements by equity as assured of repayment thus leading to lower tariff
    Adequate Utility Supply
    • Offtaker agreed to pay capacity payments to Project Company in case of failure of availability of utilities
    • Cost of utility supply accepted as a pass-through cost
    • Lead to lower risk of increase in tariff due to non availability of essential utilities
    Take or Pay Tariff Structure
    • The Public Offtaker understood the consequences of demand supply mismatch and agreed on a Take-or-Pay structure to ensure commercial viability of the project
    • Essential so that Project Company can meet its debt obligations on time
    Water Tight Contractual Framework
    • Ensured water tight contractual framework assuring appropriate risk sharing mechanism
    • Ensured low project risk with other supporting aspects for project financing such as termination payments, force majeure coverage, etc
    Lower Tariff for End Users
  • 18
    The Conclusion
    Projects with Private Off-takers May Not Be Viable
  • 19
    The Solution: Support from All Stakeholders
    From Developers
    From Lenders
    From Shareholders
    From End Users
    • Consider DC as any other Utility
    • Should not be treated as a Construction Contract and consider importance over Concession Term (15-20 Yrs)
    • Important to balance between lower tariff & viability
    • Work with the Project Company in defining the Project configuration (capacity, schedule, tariff , payments etc)
    • Hold partial stake in Project to ensure balanced approach by Project Company
    • Treat District Cooling like any other utility concession thus lower risk
    • 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
    • Maintain balance between the profitability and viability of the project as this is a utility
    • Should budget temporary plants to avoid phasing risk
    • Should implement a granular design to avoid phasing risk, the additional cost is a reflection of reduced risk
    • Should maintain transparency by involving all stakeholders in sharing both, the appropriate risks and the benefits
    • Realize the benefit of District Cooling over In-house Cooling
    • Should accept a level of “Take or Pay” as may exist in any other utility (similar to power or water)
    • Should accept that DC service in the initial period might cost more due to the presence of temporary chillers (ramp-up period) but should be beneficial over long term .
  • 20
    Thank You
  • 21
    Abbreviations
  • 22
    About Synergy…1/2
  • 23
    About Synergy…2/2
    An International Financial Advisory Services Company with experience in projects across 36 countries spanning across most of the continents
    Across All Infrastructure Sectors
    Boutique of Services Offered
  • 24
    Disclaimer