Project Finance

January 8, 2013

CONTACT Kenneth W. Hansen Washington, D.C. +1 (202) 974-5656 khansen@chadbourne.com

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Issues:

• Could the project financing of a nuclear power project provide a “reasonable assurance” of adequate funding to construct and operate a project? Yes.

• How?

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Project Finance

• Project financing entails lending against the assets of a project and the cash flow expected from its operations, without (or with limited) reliance on credit support external to the project.

• Those assets include not only physical assets but also, and critically, the project contracts that provide the basis for construction and operation of the project.

• Those contracts must be in force, in form and substance satisfactory to the lenders, before financial close.

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Project financing assures the availability of adequate funding for construction with …

• Committed equity, which will be:

• pre-funded; or • promised pursuant to an Equity Contribution

Agreement from an investment grade company; or

• assured by an investment grade guaranty or a letter of credit.

• Committed lenders, who will be legally obligated under the credit agreement to make disbursements.

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Project financing assures the availability of adequate funding for operations with …

• Lenders’ due diligence on project agreements. • Financial model (demonstrating adequate investment

committed to cover construction costs and adequate revenues to cover operating costs, debt service and the projected return on equity).

• Revenue waterfall, which allocates revenues: • first, to operating and maintenance costs; • second, to debt service payments; • third, to fund other requirements; and • lastly, to fund dividend payments upon

satisfaction of related requirements, so that loan payments are subordinated to operating costs.

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Fig. 1: Power Project Financing – Contractual Structure

= contracts

= expected cash flows

= guaranties/insurance

Project Company

(S.P.V.)

Utility

Fuel Supplier

Power Purchase Agreement

Fuel Supply Agreement

Sponsors

Shar

es

EPC Contractor

EPC

Cont

ract

O&M Contractor

O&

M

Cont

ract

Lender(s) (Banks, bond market, ECAs)

Loan Documents

Collateral Security

Documents

Collateral Account Bank

equi

ty in

vest

men

t

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Fig. 2: Power Project Financing – Flows of Funds

= contracts

= expected cash flows

= guaranties/insurance

Project Company

(S.P.V.)

Utility

Fuel Supplier

Power Purchase Agreement

Fuel Supply Agreement

Sponsors

Shar

es

EPC Contractor

EPC

Cont

ract

O&M Contractor

O&

M

Cont

ract

Lender(s) (Banks, bond market, ECAs)

Loan Documents

Collateral Security

Documents

Collateral Account Bank

revenues fuel

cos

t operating costs

loan payments

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Three phases of arranging and implementing a project financing

• Development phase • Assembling project fundamentals (e.g., licenses to build,

own and operate the project) • Arranging debt and equity investment

• Construction phase • Drawdown of committed debt and equity commencing at

financial close • Ends with achievement of “Project Completion”

• Operating phase • Implementation in accordance with project and financing

documents

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Development Phase – Project Fundamentals The developer:

• assembles assorted pre-conditions to a power generation project, such as licenses to build, own, operate the plant.

• recruits technical advisers, including engineers, legal counsel, a financial advisor and a lead arranger to place project debt.

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Development Phase – Financial Structuring

The financial advisor will develop for the lenders’ scrutiny a financial model showing sources and uses of funds required to build and to operate the project for at least as long as the term of the debt, projecting for the: • Construction period:

investment resources vs. construction costs • Operating period:

project revenues vs. operating costs

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Development Phase – Due Diligence • Prospective lenders and their advisers review the

project documents (including licenses), regulatory regime and other relevant conditions.

• Results are reflected in the terms commitment letters and, subsequently, the credit agreement and other financing documents, including an extensive package of representations, covenants and conditions precedent (“CPs”) to financial close.

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Development Phase – Negotiation of Financing Documents

The developer, together with any other equity investors, negotiates with prospective lenders the financing documents, including debt commitment letters and credit documents that will include:

o identification of all sources of investment required to complete the project;

o extensive CPs financial close, including all permits then required to build and operate the project;

o terms of any required sponsor support, including for project completion; and

o completion conditions to be met prior to the lenders’ release of agreed sponsor support .

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Construction Phase

• Financial close (upon satisfaction of CPs)

• Multiple disbursements to fund construction costs

• Achievement of “Commercial Operation”

• Achievement of “Project Completion” (and release of sponsor support) upon physical completion, operational completion, financial completion and legal completion