Finance Lecture # 4

1. Finance Lecture # 4 Jan H. Jansen E-mail: jan.jansen@han.nl

2. Wind energy

3. Minor Wind Energy Project Management

4. Programme

5. DSCR • Debt Service Cover Ratio: CFADS / DS • DS (Debt Service) • Interest • Instalment or Repayment of the loan (12 - 15 years) • CFADS • Cash Flows Available for Debt Service • CFADS = Revenues – Costs – Taxes • Costs • O&M costs (Operations & Maintenance) • Insurance costs • Management & Concession Costs

6. Recap lecture # 3

7. Project Financials (1) • Investment amount (A) • Trade off’s: • Financial structure: • e = E : A • l = L : A • Currency Risks • Transaction Risk • Economic Risk • Translation Risk • Discount factor (d) • d = wacc + π + σ • Cash Out Flows • Cash In Flows

8. Structure Excel model

9. How to build an Excel model • Worksheet 1 (Project name) • Project name • Version & Date • Authors • Worksheet 2 (Results) • Investment amount • Economic life • Decision criteria • Worksheet 3 (Data) • Data • Assumptions • Worksheet 4 (COF) • Cash Outflows • Worksheet 5 (CIF) • Cash Inflows • Worksheet 6 (NCF) • Net Cash Flows

10. Decision Criteria Capital Budgeting • Pay Back Period (PBP) • Return on Investment (ROI) • Net Present Value (NPV) • NPV Investment Ratio (NPV / INV) • Internal Rate of Return (IRR) • Break Even Time (BET)

11. Investment case • Investment € 50,000,000 • Expected economic life: 10 years • Equity / Asset Ratio: 0,6 • Required ROE: 5% • Expected Interest rate: 3% • Expected Inflation: 2.5% • Risk mark up: 2.9% • Annual Revenues: € 10,000,000 • Increase electricity prices: 6% • Annual Maintenance Costs: € 2,000,000 • Increase maintenance costs: 4%

12. Results

14. Literature • Management Accounting for Decision Makers, Atrill cs • Management Accounting, Kaplan cs • Advanced Management Accounting, Kaplan cs • Cost Accounting, Horngren cs • Fundamentals of Corporate Finance, Ross cs • Fundamentals of Corporate Finance, Brealy cs • Multinational Business Finance, Eitman • Wind Energy (Fundamentals, Resource Analysis and Economics), Sathyajith • Wind turbines (Fundamentals, Technologies, Application, Economics), Hau • Principles of Project Finance, Yescombe

15. Project Finance • A method of raising long-term debt financing for major projects through “financial engineering” based on lending against the cash flow generated by the project alone. • It depends on a detailed evaluation of a project’s construction, operating and revenue risk, and their allocation between investors, lenders, and other parties through contractual and other arrangements • Project Finance ≠ Financing Projects

16. Features of Project Finance • Ring-fenced project (Separate Project Company) • New project / New Business • High Equity Debt Ratio • No guarantees form the Project Company (non-recourse finance) • Lenders rely on future cash flow for debt service payments (interest + repayment) • Main security for lenders: • Contracts • Licenses / ownership natural resources • Project has a finite life

17. Forms of Projects • BOOT • Built-Own-Operate-Transfer • BOT • Built-Operate-Transfer • BTO • Built-Transfer-Operate • BOO • Built-Own-Operate

18. Financial structure (leverage)

19. Financial leverage effect on costs

20. Why project finance? • High leverage • Tax benefits • Off-balance sheet financing • Borrowing capacity • Risk limitation • Risk spreading • Long-term finance • Enhanced credit • Unequal partnership

21. Project Structure (1) Source : Project Finance, Yescombe

22. Ring-fenced project Source : Project Finance, Yescombe

23. Project Structure (2) Source: www.vestas.com

24. Project Structure (3) Source: www..worldbank.org

25. Wind Farm Finance Structure http://www.wind-energy-the-facts.org

26. Project Risks