Project Finance Overview: Risk Allocation and Diligence for Infrastructure Projects

Vogtle Nuclear Generating Plant,
Southern Company
This power project finance primer draws upon the work of Esty,
Finnerty, and Sawhney – some the top financial engineers of our
time. It also builds from my experience in the sector and follows a
framework commonly used by infrastructure investors at large.
John Coletti ‘12
09.15.2015
Project Finance Overview
P o w e r P l a n t D e v e l o p m e n t P r o j e c t s

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Table of Contents
Limited & non-recourse finance for large-scale infrastructure projects
Project Finance Overview
1) Project finance vs. other types of finance
2) Pros and cons
3) Project types and structures
4) Risks and mitigation tactics
5) Optimal risk allocation
6) Credit rating components
7) Project asset classes and investors
8) Main diligence categories
9) Q&A
Norwalk Harbor Oil Generating Station
NRG Energy
Project Finance Exhibits
a) EPC and project management
b) Legal strategy
c) Finance and investments
d) U.S. Power market primer
e) Doing business in developing nations
1

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Project Finance / Not Project Finance
Project finance: investment product or investment method? That’s debatable.
Project Finance Not Project Finance
Involves recourse
 Secured debt
 Sub debt
 JVs
 Vendor debt
 Leases
Financial asset holdings (not capital asset)
 Asset backed securities
 Real estate investment trusts
No corporate sponsor
 Private or municipal development
 Leveraged or management buyouts
The creation and use of a legally
independent investment vehicle to finance a
single-purpose limited-life capital asset on a
non-or-limited recourse basis.
Project finance
 Off balance sheet
 Limited or no recourse to the sponsor
 Heavily contracted (financially & legally)
– Attempts to optimally allocate project risks
The special purpose vehicle (SPV)
is created to 1) remove, or mostly
remove sponsor recourse in the
event of default, 2) enable high
leverage/significant tax shields,
and 3) enable project cash flow-
based lending.
2
A d a p t e d f r o m E s t y , “ A n O v e r v i e w o f P r o j e c t
F i n a n c e – 2 0 0 6 U p d a t e ”

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Pros & Cons of Project Finance
Large-scale infrastructure project finance
Advantages Disadvantages
 Complexity of risk allocation
 Relatively high interest rates and fees
 Increased lender risk
 Increased lender reporting requirements
 Increased insurance coverage
 Encourages potentially unacceptable risk
taking
 Non/limited recourse financing
 Off balance sheet debt and risks
 High leverage and tax shields
 Enables a lower cost of capital
 Risk diversification and risk sharing
 Collateral limited to project assets
 Matches specific assets with liabilities
 Expands credit opportunities
3

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Project Types & Structures
Utilize the SPV to maximize tax, cash flow, and future benefits
SPV Company
(Power Plant)
Fuel Supply
Contract
Labor
Equipment
Contracts
EPC Contract
O&M
Contract
Licenses
Power Output
(PPA)
Equity Shareholders
Board of Directors
Non-recourse Debt
Inter-creditor Agreement
~70% ~30%
Local Government
Legal system, permits,
property rights, etc.
Project types will vary
 Build-own-operate
 Build-transfer-operate
 Rehabilitate-own-operate
 Rehabilitate-operate-
transfer
 Develop-operate-transfer
 Sale-leaseback
 Buy-build-operate
 Public and/or private–
feel free to get creative…
Project Types Typical Power Plant Project Structure
4
A d a p t e d f r o m E s t y , “ A n O v e r v i e w o f P r o j e c t F i n a n c e – 2 0 0 6 U p d a t e ”

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Risks & Mitigation Tactics
Diplomacy is the art of letting other people have your way…
Risks Mitigation Tactics
 Aligning incentives of the overall project consortium
 Tailoring the SPV to maximize (shield) political, legal,
economic, & tax benefits (risks)
 Contracting revenues and expenses
 Hedging – energy, fuel, currency, interest rates, etc.
 Security arrangements to ensure
– Project completion, even when facing cost overruns
– Sufficient cash generation for debt obligations
– Fulfilment of debt obligations when operations are interrupted,
suspended, and/or terminated
 Covenants
– Permitted investments, project expansions, debt levels, equity
dividends, other liens, etc.
– DSCR and ICR provisions
• financial support and cash deficiency agreements, capital
subscriptions, claw backs, escrow funds, step-up provisions, etc.
 Insurance requirements
– Lender’s hedge against force majeure and interruption risks
 Construction
 Technological
 Political
 Economic
 Financial
 Environmental
 Legal
 Regulatory
 Each project carries
its own unique risks
5

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Optimal Risk Allocation
Project finance is sometimes referred to as contractual finance
EPC Legal
Structure contracts to allocate
risks to the most qualified party.
 The legal structure should
– Optimize the project’s
business, legal, accounting,
tax, and regulatory profiles
– Attract investors
 The goal of each contract is
to protect the project’s cash
flow as an “asset”… it’s
basically the only source of
repayment and a significant
component of credit
 Project finance strives to be
non-recourse but can also
involve recourse on a limited
basis
Example
– Parent guarantee during the
construction phase
Turnkey EPC contracts cover the
entire development process.
 Manages design, technology,
and construction risks
 The important things here
are the liquidated damage
(LD) provisions.
– Insurance
– Bonus provisions
– Delay & performance LDs
– Contractor liability caps
 The LD protection and bonus
incentives of the project and
the EPC consortium must
align.
Examples
– Bonuses for under budget
or early completion, or
– Pay lost revenue and costs
incurred due to delays, or
– Pay the NPV of operating
performance shortfall effects
Financial
Ensure returns on and returns of
the investment – always.
 Highest leverage possible
– Large tax shields
– Higher returns on equity
 Align debt amortization with
the life of the project
 Choose financial partners
wisely – strive for capital and
relationships or expertise
that you don’t have in house
 It’s all about credit – really,
it’s all about credit
– Test the project’s ability to
service debt under a variety
of scenarios – especially
downside scenarios
6

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Credit Rating Components
A standardized measure of EPC, legal, and financial stability
Credit addresses uncertainty around scheduled debt payments
S t a n d A l o n e C r e d i t P r o f i l e ( S A C P ) C r i t e r i a
P r o j e c t F i n a n c e F r a m e w o r k M e t h o d o l o g y
S o u r c e : S t a n d a r d & P o o r ’ s
Operations Profile
Operations
Phase SACP
Modifiers
Performance Risk
Market Risk
Country Risk
DSCR
Forecast
Downside Analysis
Liquidity
Refinancing Risk
Comparative Analysis
Counterparty
Construction Profile
Construction
Phase SACP
Modifiers
Technology Risk
Construction Risk
Project Management
Funding Adequacy
Construction Funding
Counterparty
Parent Linkage
Structural Protection
Government Support
Sovereign Rating Limits
Full Credit Guarantees
Modifiers
Project
SACP
Project Finance
Issue Credit Rating
7

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Project Asset Classes & Investors
Can include a full suite of debt and equity products
Asset Classes Investors
Any entity with the risk appetite and a
large balance sheet.
 Corporations
 Banks
 Insurance Funds
 Pension Funds
 Mutual Funds
 Endowment Funds
 Hedge Funds
 Private Equity Funds
 Governments
 Multilateral Agencies
Project finance: Investment product or
investment method? That’s debatable.
 Power Generation
 Transmission & Distribution
 Gas, Gas Pipeline, and LNG facilities
 Oil, Petrochemicals
 Mining, Smelting
 Air and Maritime Ports
 Highways
 Waste Disposal
 Telecom, Information Technology
 Other – Paper, Chemical, Production, and
Manufacturing Facilities, etc.
8

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Main Diligence Categories
Threshold items
Just the Benchmark
Diligence is a dynamic, iterative, and overall robust process…
 Financial model
– Continual updates
 Independent engineer review
– Environmental review – market requirements and operating emissions
– Opine on technology, capital budget, and construction timeline
– Opine on projected operational assumptions, operating expenses, and maintenance capital
 Market review
– Opine on base capacity, merchant power price assumptions and/or commercial contracts
 Firm capital budget and EPC contract
 Receipt of material permits and satisfying regulatory requirements
 Certainty on fuel and project capital requirements
– Commitment on capital draw schedule
 Agreement from the overall project consortium
– Agreement launches in tandem with construction and debt financing
9

Q & AQuestions & Answers
Any Questions?

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Project Finance Exhibits
Additional details…
Putting it all together
Contents
1. EPC and project management overview
2. Legal overview
3. Finance and investments
4. Domestic power market primer
5. Doing business in developing nations
Ivanpah Solar Electric Generating System,
NRG Energy
11

Exhibit 1 – EPC & Project Management
Aligning EPC and the overall project consortium
Overview Session
Contents
1. EPC Overview
2. Typical Project Schedule
3. Site Planning & Cost Analysis
4. EIA U.S. Plant Cost Data

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EPC Overview
Plan, initiate, monitor, and execute the project as scheduled
 Project milestones – timing and cost
– Mechanical completion – All mechanical
components are installed
– Substantial completion – All performance
guarantees are met
– Final completion – The project is ready for
commercial operation; applicable LDs paid
 Operational & environmental guarantees
– Pass a series of tests to ensure the asset
can meet its intended parameters
– Structure the contract with corrections clauses
 EPC / parent security
– Bank guarantees (~10% of contract price)
– Project extension and cost restrictions
– Payment retention clauses
Key Engineering, Procurement, and Construction Factors
 Contractual obligations
– Firm price and timeline
– Subject to delay and performance liquidated
damage provisions
– Liability caps and dispute resolution plans
– Bonus incentives for early completion
Budget
Time
Project
Scope
Quality
Project
Management
13
Tip: Structure EPC bonuses (penalties) on an NPV scale. Project completion 3-6-9
months early (late) should be valued the same as a scheduled completion.

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Example Solar Development Schedule
Projects can take several years to plan, finance, and construct
Typical Development Timeline
G e n e r i c S o l a r P r o j e c t D e v e l o p m e n t S c h e d u l e
S o u r c e : F i r s t S o l a r
The above chart provides a generally accurate depiction of the events leading to
commercial operation. However, each project is unique and the requirements will
vary across markets and asset classes.
Development Dollars at Risk Project Financed
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
EXECUTE PPA ->
EXECUTE INTERCONNECTION AGREEMENT ->
SECURE PROJECT FINANCING ->
COMMERCIAL OPERATION ->
Year 5
PPA Bid & Negotiations
Establish Site Control Secure Land
Year 4Year 1 Year 2 Year 3
Permitting
Interconnection Agreement
Procurement/Construction of Interconnection
Substation & Network Upgrades
Project Financing
Site Prep Construction of PV Plant
14

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Site Planning & Project Cost Analysis
It’s extremely important to deal with an EPC management firm of repute
Power Project Development Cost – General EPC Considerations
 Market penetration of the technology in consideration
– Examples of successes, failures, and why? Similar technologies and comparisons?
– What guarantees and warranties are provided?
– Technology and material transport to the site – process, timeline, and cost?
 Logistical efficiency of the site
– Urban or rural environment and how does that affect the overall schedule and cost?
– Brownfield or greenfield (existing vs. new site)? Are any and/or all cost synergies accounted for?
– Grid interconnection – how much transmission line needs to be built and over what type of land?
– Fuel – does a pipeline, rail track, or other delivery system need to be built and on what type of land?
– Labor – availability and is it union or non-union?
– Overall siting process – scope, hurdles, and timeline?
 Government / regulatory / environmental / permitting requirements – process and timeline?
 EPC schedule and cost estimate
– Are the quotes in real or nominal dollars? The difference can be significant.
– What do similar projects cost and how long do they take to build? Why?
– What costs are firm vs. best estimate and where are the potential cost overruns / savings?
– How much contingency is embedded in the estimate? Where and why? 15

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EIA U.S. Plant Cost Data ($2012)
Benchmarking plant costs
Coal
Single Unit Advanced PC 650 8,800 $3,246 $37.80 $4.47
Dual Unit Advanced PC 1,300 8,800 $2,934 $31.18 $4.47
Single Unit Advanced PC with CCS 650 12,000 $5,227 $80.53 $9.51
Dual Unit Advanced PC with CCS 1,300 12,000 $4,724 $66.43 $9.51
Single Unit IGCC 600 8,700 $4,400 $62.25 $7.22
Dual Unit IGCC 1,200 8,700 $3,784 $51.39 $7.22
Single Unit IGCC with CCS 520 10,700 $6,599 $72.83 $8.45
Natural Gas
Conventional CC 620 7,050 $917 $13.17 $3.60
Advanced CC 400 6,430 $1,023 $15.37 $3.27
Advanced CC with CCS 340 7,525 $2,095 $31.79 $6.78
Conventional CT 85 10,850 $973 $7.34 $15.45
Advanced CT 210 9,750 $676 $7.04 $10.37
Fuel Cells 10 9,500 $7,108 $0.00 $43.00
Uranium
Dual Unit Nuclear 2,234 N/A $5,530 $93.28 $2.14
Biomass
Biomass CC 20 12,350 $8,180 $356.07 $17.49
Biomass BFB 50 13,500 $4,114 $105.63 $5.26
Wind
Onshore Wind 100 N/A $2,213 $39.55 $0.00
Offshore Wind 400 N/A $6,230 $74.00 $0.00
Solar
Solar Thermal 100 N/A $5,067 $67.26 $0.00
Photovoltaic 20 N/A $4,183 $27.75 $0.00
Photovoltaic 150 N/A $3,873 $24.69 $0.00
Geothermal
Geothermal – Dual Flash 50 N/A $6,243 $132.00 $0.00
Geothermal – Binary 50 N/A $4,362 $100.00 $0.00
Municipal Solid Waste
Municipal Solid Waste 50 18,000 $8,312 $392.82 $8.75
Hydroelectric
Conventional Hydroelectric 500 N/A $2,936 $14.13 $0.00
Pumped Storage 250 N/A $5,288 $18.00 $0.00
Plant Plant Costs (2012$)
Nominal
Capacity
Heat Rate
(Btu/kWh)
Overnigh
t Capital
Fixed
O&M
Variable
O&M
Source: http://www.eia.gov/forecasts/capitalcost/
These are average costs and should only serve as benchmarks
16
Notes
1) Nominal capacity quoted in megawatts
(MW)
2) BTU = British thermal unit
3) KWh = Kilowatt hour (power generation
is quoted in hours)
4) KW = Kilowatt
5) 1 MW = 1,000 KW
6) Overnight capital quoted as $/KW.
Example:
Natural gas conventional CC =
620 MW * 1,000 = 620,000 KW * $917
= $568.54mm Overnight capital
7) Fixed O&M quoted as $/KW
8) Variable O&M quoted as $/MWh
(megawatt hour)
9) You cannot calculate generation hours
from this table.
10) Additional calculations to know:
A: Generation (MWh) = Capacity (MW) *
365 [or 366] * 24 * capacity factor %
/
B: MMBTU consumption = Generation
(MWh) * Heat Rate (BTU/KWh) / 1000

Exhibit 2 – Legal Overview
Protection, tax, and accounting treatments
Protecting the project’s cash flow as an asset
Contents
1. Legal structure of the SPV –
Corporation, LLC, Partnership,
Undivided Joint Interest
2. Common commercial contracts
and arrangements

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SPV Structure – Corporation
Corporations are the most common legal structure for SPVs
 Typically funded by the
sponsor’s equity and the
issuance of debt and/or
quasi debt securities
 Sponsor liability for “New
Co.” obligations is limited
to the equity contribution
 Corporations are burdened
with double taxation
Attributes Corporation
18
Sponsor B
40%
Project Corporation
“New Co.”
Sponsor A: 40% Participation
Sponsor B: 40% Participation
Sponsor C: 20% Participation
Sponsor C
20%
Sponsor A
40%
Ownership Ownership Ownership
No RecourseNo Recourse No Recourse
Accounting Treatment
 > 80% Ownership: Sponsor can opt for tax consolidation: Sec.1501 (IRC)
 > 50% Ownership: Full-Consolidation
 20% - 50% Ownership: Equity Method
 < 20% Ownership: Cost Method
A d a p t e d f r o m F i n n e r t y , “ P r o j e c t F i n a n c i n g – A s s e t - B a s e d F i n a n c i a l E n g i n e e r i n g ”

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SPV Structure – Limited Liability Company
 Owners are not liable for
obligations beyond capital
contributions
 Qualifies for partnership
tax treatment where the
project pre-tax income
flows directly to the
sponsors
 No restrictions on number
of sponsors or managers
Attributes Limited Liability Company
19
Be cognizant of state-by-state regulations for LLCs
LLCs make sense when the sponsors want limited liability and a claim on tax losses
during the construction phase. They’re simple and don’t require general partner risk.
Sponsor B
40%
Project LLC
“New Co.”
Sponsor C
20%
Sponsor A
40%
No RecourseNo Recourse No Recourse

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SPV Structure – Partnership
Project must contain at least one General Partner that faces unlimited project liability
 There is a risk of liability
permeating the sponsor if
a court finds that the
subsidiary does not serve
a valid business purpose
 Sponsors either directly
or indirectly (subsidiary)
become General or
Limited Project Partners
 Partnerships are separate
legal entities for tax
purposes but do provide
pro-rata tax shields
 Accounting treatment is
similar to a corporation
Attributes Partnership
20
Project Partnership
“New Co.”
RecourseRecourse Recourse
Ownership Ownership
No RecourseNo Recourse
Subsidiary B - LP
Corporation
40%
Subsidiary A - GP
Corporation
40%
Sponsor B
100%
Sponsor A
100%
No Recourse
Ownership
Debt Subsidiary
Corporation
100%
Recourse
Sponsor C
100%
Subsidiary C - LP
Corporation
20%
GP = General Partner
LP = Limited Partner
General partners face unlimited liability under a
partnership structure. They should strive to negotiate
loan agreements that limit recourse to project assets.

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SPV Structure – Undivided Joint Interest
 Sponsors own undivided
joint interests in the
project’s real & personal
property and share pro-
rata benefits and risks
 Project is not recognized
as a separate entity for
accounting purposes and
each participant reflects a
pro-rata share of the
assets and liabilities on
their books
 Participants can decide
between partnership and
Sec. 761(IRC) treatment
Attributes Undivided Joint Interest
21
Sponsor B
40%
Project
Sponsor C
20%
Sponsor A
40%
RecourseRecourse Recourse
Liabilities are not off balance sheet but there can be benefits to this
On-balance-sheet financing is attractive when the project sponsors have credit
dissimilarities. Sponsors with strong credit may be able to borrow at lower-priced
rates and if they can not benefit from the project’s tax shields – or can not benefit in
a reasonable timeframe – then there may be motivation to structure an UJI.

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Commercial Contracts & Arrangements
Gross magin structure
Contracts can be issued privately or through a bid process. They’re generally
structured for a fixed time period and have set terms around insurance, escalation
indexes, non-performance penalties, termination payments, and re-contracting options.
 Power purchase agreement
– Contract is structured to cover the plant’s fixed costs and debt service
– Purchaser typically covers the plant’s fuel and other variable costs
 Tolling agreement
– Plant converts fuel into electricity at a defined heat rate with regularly scheduled true-ups
 Feed-in tariff
– Straight forward arrangement set up to feed electricity into the system (contract or tariff-based)
 Cogeneration agreement
– Sale of electricity generated by the plant’s waste steam or heat
 Merchant plan (uncontracted assets)
– Sale of electricity into a wholesale or bilateral electricity market (aka open energy margin)
– Auction-based or bilateral fixed payment capacity sales (not available in all markets)
– Merchant plants often hedge electricity sales, fuel costs, and/or enter into short-term third-party
contracts such as call options or ancillary service agreements
Common Structures
22

Exhibit 3 – Finance & Investments
Return on and return of investment
Structuring the balance sheet
Contents
1. General investment motivations and concerns
2. Capital sources
3. Risk Management – Derivative Contracts
4. Project Finance Lead Arrangers – 2014

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General Project Investment Concerns
This is more art than science and relationships are key
General Investor Motivations & Concerns
Equity Motivations & Concerns
 Price, ownership levels, and partners
 General organization and capitalization
 Alignment with portfolio
 Cash flow profile
 Synergies leading to multiple arbitrage
 Exit strategy (time and return)
 Size and return of forward commitments
 Potential to cross-sell products – account
management, trustee roles, bolt-on debt
products, hedging services, etc.
 Transparency around security arrangements
 Credit quality and standing
 Marketability of public debt
Debt Motivations & Concerns
 Project legal structure
 Project contracts and tenors
 Investor dispute resolution strategies
 Project profitability and leverage levels
 Management and control
 Overall risks and risk assignments
24
Debt motivations and concerns vary among investors – multilateral v. corporation.
Likewise, equity motivations and concerns will vary – strategic v. financial investors.

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Capital Sources
Who invests in the project is an underrated aspect of the capital strucuture
Equity Funding
 Ordinary shareholder capital
 Shareholder loans
– Provides an attractive tax shield
– Payments not restricted by the project’s
retained earnings requirements
 Equity bridge loans
– Requires sponsor guarantee and is repaid at
project completion
– Heightens shareholder returns by delaying
the investment
 Hybrid / quasi-equity products
 Commercial bank loans
– Syndications or club deals
– Domestic or international
 Bond financing
– Project bonds require significant sponsor
support / guarantees
– Good source of liquidity when refinancing
existing project loans
 Multilateral agencies
– Emerging markets focused and motivated
by socio-economic benefits
– Provide direct lending, political insurance,
and/or equity investments
 Export credit agencies (ECA)
– Absorb commercial and/or political risks
– Provide trade finance services – coverage,
guarantees, loans, and/or insurance
 Lease Financing
 Municipal debt structures
 Private debt structures
Debt Funding
Notes
1) Investors often provide relationships and
expertise that may not be available in-
house.
2) It is important to study the investor’s tax
position. They are often motivated by the
ability to monetize the benefits.
25

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Risk Management – Derivatives
A good risk management strategy provides flexibility
 Credit default swaps (CDS) – the lender’s insurance
– Lenders purchase credit swaps in exchange for a counterparty’s obligation to provide a make-whole payment in
the event of default (based on debt value)
– CDS products function like insurance, credit lines, and/or surety bonds – they isolate credit risk from other
market risks
 Options and warrants – the right, but not obligation – and a stronger negotiation basis
– Debt products often have options, warrants, and/or convertible provisions wrapped around the term sheet –
agreeing to these provisions provides leeway for negotiating lower interest rates and more favorable terms
Derivative Contracts – Project Flexibility
 Interest-rate swaps – swap floating rates to
fixed or vice-versa – or floating rate indexes
– Very useful when a floating rate syndication is the
most economic source of debt but the sponsors
want fixed rate foresight
 Hedging – Energy margin, interest rates,
and/or foreign exchange rates
– The purchase or sale of a financial instrument
that negatively correlates with the project’s value
(mitigates volatility). Perfect hedges are great in
theory but hard to execute in practice – do your
diligence and let an experienced trader execute.
26A d a p t e d f r o m F i n n e r t y , “ P r o j e c t F i n a n c i n g – A s s e t - B a s e d F i n a n c i a l E n g i n e e r i n g ”
Project value
Interest rates, commodity
prices, and/or forex
Value of the hedge position
Value of the project unhedged
Value of the project hedged
(represents a perfect hedge)

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Project Finance – 2014 Top Arrangers
Global Infrastructure Advisors
Top Arrangers League Table
P r o j e c t F i n a n c e – A l l C a t e g o r i e s b y V o l u m e
S o u r c e : P r o j e c t F i n a n c e I n t e r n a t i o n a l
27
Rank Company Volume ($mm) Transactions 2013 Rank
1 Mitsubishi UFJ Financial
Group
16,227 139 1
2 Sumitomo Mitsui Financial
Group
13,451 112 4
3 Mizuho Financial Group 9,848 80 5
4 BNP Paribas 9,003 73 18
5 Credit Agricole 8,054 80 7
2014 Project Finance Lead Arrangers

Exhibit 4 – Power Market Primer
Example market: PJM
A very high-level overview of the system
Contents
1. United States RTO & ISO Map
2. PJM Capacity Market –
Reliability Pricing Model Overview
3. PJM Electricity Market –
Location Marginal Price Overview
4. Supply & Demand Overview
5. Helpful Links

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RTOs & ISOs coordinate the movement of wholesale electricity
http://www.ferc.gov/industries/electric/indus-act/rto.asp
Regional Transmission Organizations (RTO) &
Independent System Operators (ISO)
29

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PJM Capacity Market – RPM
Forward capacity markets are designed to promote investment
http://www.pjm.com/~/media/about-pjm/newsroom/fact-sheets/rpm-fact-sheet.ashx 30

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PJM Electricity Market – LMP
Supply & demand economics are highly evident in electricity markets
PJM – Typical Generation Stack
Note
The above chart is dated. Natural gas prices have
declined rapidly over the past several years and gas is
now cheaper than coal generation in many instances.
http://www.pjm.com/~/media/about-pjm/newsroom/fact-sheets/locational-marginal-pricing-fact-sheet.ashx 31
https://www.e-education.psu.edu/ebf200wd/node/151

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Supply & Demand Analysis
Remember – An SEC reporting document is the least amount of permissible disclosure.
 Existing infrastructure – power assets,
transmission system, and fuel delivery
logistics
– Composition – X% baseload, Y% intermediate,
and Z% peaking generation facilities — why?
– Asset ages and operating capabilities (regulatory
constraints, ramping capabilities, capacity, and limits)
– Federal and state regulations that affect
operations (emissions, etc.)
– Financial condition of the owner
– Outage schedules
 New builds
– Timeline and do you believe it?
– Roughly 75% of the queue never reaches
commercial activity – check to see if the asset
is in construction
 Retirements
– If an asset is set to retire check the benefits
and consequences to form an opinion
• Check SEC reporting document footnotes for financial
commitments (leases, etc.)
• Private companies often have public debt – again,
check the SEC reports
Supply Demand
 General economic activity
 Population growth and contraction
 Geography and weather
 Force majeure events
Market
 Commodity prices
– The stack measures up against variable
costs – it’s pretty much all commodity…
In the U.S. there is a queue process for
new builds that requires various studies
and approvals. Consider purchasing a
position to bypass the process.
32

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The PJM Power Supply Stack
Historic Dynegy SEC filing
Basic StructuresChart is dated but provides a good example of a stack shift
33
http://www.sec.gov/Archives/edgar/data/1379895/000110465913003053/a13-3008_1ex99d2.htm

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Energy & Power – Helpful links
Follow links for publications, rulings, training, and other relevant information
 The Brattle Group
http://brattle.com/industries
 PA Consulting
http://paconsulting.com/industries/energy/
 SNL Financial
http://www.snl.com/
Consulting & Research Firms Domestic RTOs/ISOs
 ISO-NE (New England)
http://www.iso-ne.com/
 NYISO (New York)
http://www.nyiso.com/public/index.jsp
 PJM (Pennsylvania-Jersey-Maryland)
http://pjm.com/
 MISO (Midcontinent)
https://www.misoenergy.org/Pages/Home.aspx
 SPP (Southwest Power Pool)
http://www.spp.org/
 ERCOT (Texas)
http://www.ercot.com/
 CAISO (California)
http://www.caiso.com/Pages/default.aspx
 FERC
http://www.ferc.gov/
 NERC
http://www.nerc.com/Pages/default.aspx
 EIA
http://www.eia.gov/
Government Agencies
34

Exhibit 5 – Doing Business in Developing Nations
Structure, structure, structure
Making risky business less risky
Contents
1. Transnational Guarantees &
Implementation Agreements
2. Helpful links

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Doing Business in Developing Nations
Structure a project that the local economy relies on…
Transnational Guarantees Implementation Agreements
Implementation agreements (IA) are
contractual arrangements with the host
country and the project company.
 Common IA uncertainties
– Sovereign guarantees
– Expropriation
– Timing of government approvals
– Approval of political risk insurance
– Constitutionality considerations of IAs
– Legislative protection
– Enforcement and dispute resolution
– Double jeopardy
– War, insurrection, general strikes, and
political violence
– Permits and other government approvals
– Exclusive project development rights
– Damages
– Tax benefits and customs duties relief
– Tax holidays
 If in a developing nation, strive to:
– Enforce guarantees through foreign law
provisions
• Incorporate in a country governed by a
western court – search for tax benefits
• Obtain a Waiver of Sovereign Immunity
– Award local governments and/or institutions
a minority interest – do not leave pathways
for project control
– Strive to involve a multi-lateral institution –
local gov/econ may rely on the relationship
– Do not rely on any one party too much –
political regimes/distinction can change
quickly in developing nations
• Past guarantees may quickly turn void
 Mitigate currency and inflation volatility
– Choose project currency wisely
– Integrate a sound hedging strategy
 Be cognizant of tax implications
– Check local law for withholding provisions
36S o u r c e : I n t e r v i e w w i t h S a w h n e y

of 37
Developing Nations – Helpful links
Follow links for publications, rulings, training, and other relevant information
 The World Bank Group
http://www.worldbank.org/
 Inter-American Development Bank
http://www.iadb.org/
 Asian Development Bank
http://www.adb.org/
 African Development Bank
http://www.afdb.org/en/
 European Bank for Reconstruction & Development
http://www.ebrd.com/home
 Islamic Development Bank
http://www.isdb.org/
Select Multi-lateral Institutions
37

Project Finance Overview: Risk Allocation and Diligence for Infrastructure Projects

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