9.0 FINANCIAL EVALUATION OF POWER PROJECTS

Transcription

1 9.0 FINANCIAL EVALUATION OF POWER PROJECTS 9.1 Objectives of Financial Evaluations The financing of power projects in Asia and elsewhere has been undergoing a transition over the last decade as the participation of the private sector increases. Historically, there has been a clear distinction in Lao PDR between EdL-owned, publicly financed power projects for domestic supply and privately owned, project financed export-oriented projects. As this blurs, the financial attributes of projects have assumed greater importance for domestic as well as export investments. As transmission infrastructure improves and the institutional and regulatory framework develops at both the domestic and regional levels, power markets will become more conducive to private investment and a continuing trend towards private sector involvement can be expected into the future. Transmission and distribution projects is continuing to attract support from multilateral and bilateral agencies but a significant involvement by private investors is needed to bring new generation capacity on-line in the amounts required. Commercial factors in competing for this capital will be investor returns and lender security. Financial analysis of generation projects indentified under the PSDP was undertaken to examine the viability of projects from a financial point of view. Specific objectives of this work were: (i) Projects for Domestic Supply: to determine the tariff that projects would need to meet hurdle rates of return on equity and debt service were they to be developed by IPPs; to provide an indication of the sensitivity of domestic IPPs to borrowing terms and conditions. (ii) Projects for Export Markets: to test whether a project is likely to meet hurdle rates of return on equity and debt service coverage at the current likely EGAT tariff; to estimate GOL/EdL s tax, royalty and net dividend receipts generated by these projects. 9.2 Financial Evaluation Methodology Financial Modeling Financial analysis using cash flow modeling is a tool for evaluating the financial performance of projects and refining their financing plans. Financial cash flow Final Report Vol A: Main Report 211

2 modeling of projects for the PSDP was carried out from the perspective of the project company 60 rather than from the broader country perspective of the economic evaluations. Thus, the cash flow inputs to the model include only the monetary costs spent and benefits received by the project company and exclude many of the losses and benefits affecting other stakeholders. Unless otherwise stated, financial evaluations assume that projects are financed on commercial terms without concessional lending. Evaluations of projects using EVALS software allows competing sites to be compared on the basis of their contribution at an economic level. This permits a decision to be made about the sequence and timing of investments. The financial analyses assess whether a project has the financial characteristics to generate the cash flows necessary to achieve a level of financial performance satisfactory to investors and lenders. The HPO Financial Model, with some adaptation, was employed in the evaluations (refer Figure 9.1). The HPO Model is a spreadsheet-based model that replicates the flow of money between participating parties to an IPP hydropower project in Lao PDR, namely the sponsor, power purchaser, lenders and GOL. Annex 4.1 provides a description of the model and a list of assumptions and parameters used in the modeling. Figure 9.1: HPO Financial Model : Schematic Diagram GENERAL REVENUE PROFIT Equity Loan INDEPENDENT POWER PROJECT GOL's LENDER GOVERNMENT OF LAO PDR CAPITAL STRUCTURE Equity Loan Finance (Debt) DEVELOPER EGAT EVN OPERATING FINANCE Interest Principal Operating Cost Loan Interest Loan Principal Royalties Taxes Dividends Project Income Payment for Electricity PROJECT BANKS Multilateral, ECA's Commercial Banks, Supplier Credits 60 The PSDP modelling also included GOL cash flows associated with the borrowing and repayment of loans for GOL equity contributions. Final Report Vol A: Main Report 212

3 Performance measures are calculated to indicate the attractiveness and financeability of projects. The model provides projections (in nominal terms) of cash flow benefits, and calculates EBIT, net profit, debt service ratios, etc. Project rate of return and return on equity are calculated in nominal, after-tax terms. The model takes the perspective of GOL as well as the project company by including the raising and servicing of loans for GOL s equity and reporting GOL benefits from taxes, royalties and dividends Financial Modeling Parameters Standardized inputs for many of the project parameters are used to benchmark the sites so that comparisons of financial performance of projects are meaningful. Standardized parameters include, as applicable, tariff, fees, concession period, tax and royalty regime, financing terms and GOL equity. Financial modeling of projects is standardized on project configurations based on an ICF of 1.75 except where circumstances require a different configuration (e.g. run-ofriver projects). A number of the sites are covered by concession agreements defining project configurations and concession conditions different to those assumed but, for the most part, the concessions were awarded many years ago and there is reasonable doubt about the ability of the sponsors to implement their projects. Domestic off-take sales from projects built primarily for export attract a price equivalent to the opportunity cost of those sales to the owner; i.e. the export price as adjusted for differences in transmission losses and level of supply/off-take commitment. Thus, domestic off-take is not separately accounted for in calculating financial cash flows, as the cash flow effect is the same regardless of the purchaser. The principal parameters and assumptions used in the standardized modeling are set out in Table 9.1 and described in more detail in Annex Financial Effects of Environmental and Social Impacts The SESAMEE model generated monetary benefits and costs for all identified project impacts and these were internalized in the economic evaluations. Financial analysis has a project company perspective and therefore only those environmental and social impacts and mitigations with financial implications for the project company are considered in the financial modeling. Losses and benefits borne by other stakeholders (or by nobody) are excluded. Examples of impacts included in the the financial anlaysis include: costs associated with capital works with an environmental purpose (e.g. reregulation dam, variable level intake); payments made by the project owner for social mitigations during construction (e.g. resettlement, compensation for lost production systems); recurring mitigation costs paid by the project owner during project operation (e.g. watershed management payments, support for social infrastructure, ongoing compensations, etc). Final Report Vol A: Main Report 213

4 Financial cash flows associated with environmental and social impacts are calculated by extraction from the SESAMEE Local Market Model. The SESAMEE line items included in the project financial modeling are listed in Table 9.2. Due to the structure of the SESAMEE costs, some double counting of mitigations occurs with environmental mitigations that form a normal part of construction contracts and are priced into the capital cost estimates. The SESAMEE cash flows are in constant dollars for economic evaluation and these are escalated to current values before applying them in financial evaluations. Final Report Vol A: Main Report 214

5 Table 9.1: Standardized Parameters for Financial Modeling Parameter Value used in Modeling General: Operating concession COD Money values Discount rate 25 years According to Base Export Scenario, or 2003 as appropriate Nominal 10% (tariff levelizing) Tariff: Export price: primary energy = 4.4 /kwh in 2003 values 1/ Secondary energy = 2.5 /kwh in 2003 values 1/ Domestic off-take price: Opportunity cost of foregone export sales Tariff profile From 2003 to COD Escalate at 1.5% From COD onwards Flat Costs: Development costs 1.5% of base EPC cost EPC costs Escalation: 2% pa from 2003 to COD O&M costs Escalation: 2% pa from 2003 Financing Terms: Equity Debt / Equity ratio = 70 / 30 GOL equity share = 25% Average loan terms Tenor: 10 years Interest rate: 8% Loan fees: 3.5% Grace period: none assumed 2/ GOL equity loan 3/ Tenor: 12 years Interest rate: 6 % Concession Terms: Taxes Years 1 to 5 0% of net profit tax holiday Years 6 to 12 5% of net profit Years 13 to 25 15% of net profit Royalties Years 1 to 15 5% of sales revenue Years 16 to 25 10% of sales revenue 1/ Tariff value is escalated to the project s COD date in the Base Export Scenario. A flat tariff is assumed. Tariff profiling may be needed accoding to a project s debt service capacity. 2/ No grace period is assumed. This would be negotiated on a project-by-project basis according to need and would depend on a project s early debt service capacity. 3/ Terms of loan taken out by GOL to obtain its contribution towards the equity of the project Final Report Vol A: Main Report 215

6 Table 9.2: Impacts with Financial Implications SESAMEE Line Items Environmental and Social Impacts Downstreams Impacts: Infrastructure / Developments Loss during filling Severely affected persons on Main River during filling Infrastructure / Developments Loss during operation Resettled affected persons on main river during operation Severely affected persons on main river during operation Transmission Line Impacts: Infrastructure / Developments Loss Resettled affected persons Severely affected persons Transmission line camp management costs (sanitation effluents, epidemics) Civil works management (erosion, drainage changes, fires) Access Road Impacts: Infrastructure/Developments Loss Resettled affected persons Access road line camp management costs (sanitation effluents, epidemics) Civil works management (erosion, drainage changes, fires) Reservoir Impacts: Infrastructure / Developments Loss Resettled affected persons Severely affected persons Drowning and loss of property during filling (wildlife, humans, domestic animals) Biomass clearance (water quality mitigation) Catchment Management Variable level intakes Destratification system Thermocline distortion devices Bottom Outlet Floating Debris and Macrophyte Management Construction Impacts: Infrastructure/Developments Loss Resettled AP's Severely AP's Labour Camp Management Costs (sanitation effluents, epidemics) Civil Works Add Management (erosion, drainage changes, fires) Final Report Vol A: Main Report 216

7 9.3 Financial Modeling of Projects for Domestic Supply Required Tariffs for Bankability Domestic generation projects could be financed either privately or publicly. Proposals from private developers are being received for domestic projects (e.g. Nam Bak 2B, Nam Pha). It is still too early to know whether medium and large IPP projects selling wholly or primarily to EdL would interest lenders; to be bankable, projects would need to meet hurdle rates of return and debt service, and to obtain cover for country and credit risks. Small grid-connected projects less than, say, 10 to 20 MW could be financed off the balance sheet and built cheaply by regional developers and they might provide a means of accessing private capital to begin with and could help warm the market for larger limited recourse financings. Financial modeling of shortlisted projects has been carried out to determine the wholesale tariff each project would require to achieve these hurdle rates under normal commercial terms. The modeling employed the following sequential steps: 1. Generation characteristics and base costs for each project were extracted from the EVALS outputs and entered into the HPO financial model. 2. Financing assumptions as described in Section 9.2 and Annex 4.1 provided other model inputs. 3. The model was used reiteratively to determine the financial tariff a project would require for it to achieve a rate of return on equity of 17% (nominal, aftertax). The results of this modeling are set out in Table 9.3 and Annex 4.4. Corresponding minimum Debt Service Coverage Ratios (DSCR) are also listed to indicate whether the projects could meet loan commitments in all years of operation at the stated tariff. If the projects were to be financed on a limited recourse basis, the financing plans of those projects with a minimum DSCR less than 1.3 would have to be structured to overcome early cash flow difficulties. 4. The projects and their calculated financial tariffs were then arranged into a supply curve (refer Figure 9.2) to indicate for any given tariff those projects best suited to private financing. Of the projects modeled, eleven would be attractive candidates for private financing at a tariff of 8 /kwh, but this reduces to only seven if the offered tariff were 6 /kwh. The cash flow simulations assume limited recourse financing on standardized commercial terms. For those projects above the tariff cut-off, individual structuring of a project s implementation and financing plans could improve its financial standing and help it overcome rate of return and debt service hurdles. Final Report Vol A: Main Report 217

8 Table 9.3: Supply Curve of Candidate Lao Projects (Financial Tariff) Project MW Primary Energy Tariff (c/kwh) ROE nominal (%) Minimum DSCR Theun Hinboun Expansion Nam Mo Xe Kaman Thakho Xe Kong Nam Sane Xe Kaman Houay Lamphan Gnai Nam Ngiep 1 + rereg dam Nam Ngum 3B Nam Pot Nam Ngum Nam Sim Nam Bak 2B Nam Long Xe Katam Nan Ngum 2B / Secondary tariff is 56.3% of the primary tariff in all cases. Final Report Vol A: Main Report 218

9 Figure 9.2: Project Supply Curve (based on nominal ROE of 17%) Financial Tariff (c/kwh) Theun Hinboun Extension Nam Mo Xe Kaman 3 Thakho Xe Kong 5 Nam Sane 3 Xe Kaman 1 Houay Lamphan Gnai Nam Ngiep 1 + rereg Nam Ngum 3B Nam Pot Nam Ngum 5 Nam Sim Nam Bak 2B Nam Long Xe Katam Nan Ngum 2B Such structuring could take a number of forms, for instance: Each financing could be individually arranged to overcome particular weaknesses. For instance, early debt service performance could be boosted by tariff profiling, loan grace periods and tax holidays; tax breaks could be offered to elevate investors returns; etc. Public private partnership (PPP) models could be used to share costs between the public and private sectors. PPP models are many and varied, for instance: - Some ancilary works such as infrastructure (e.g. roads and communications) could be undertaken publicly. - Where a project has multipurpose potential, civil works such as dams could be provided by by the public sector to reduce the risk profile and lower the capital cost. - The Theun Hinboun project, with 60% public ownership, provides a successful PPP model for hydropower development. This project was too difficult for either the public or private sector to develop alone but acting together, a bankable plan was devised. Final Report Vol A: Main Report 219

10 Backing from multilateral and bilateral agencies could be enlisted to share costs, manage risks, contribute finance and assist in other ways to promote projects to instors and lenders. The role of development agencies in promoting domesticprojects is discussed in more detail in the next section. Hydropower projects, being renewable generators, may receive a revenue boost through some form of carbon credit. The problem of financing the development of the Lao power system, and particularly Lao generation projects, is being considered under a separate study, the Power Sector Financing Strategy Study, currently being undertaken under World Bank funding Role of Development Agencies in Financing of Projects Multilateral agencies and some of the larger bilateral agencies are in a position to play a key role in financing generation projects for domestic supply either through direct lending or by encouraging private lenders and investors to commit capital. Examples of such support include: providing concessional funding to EdL for constructing new plants; assisting with the further development of the legal, regulatory and institutional framework to better facilitate IPP strategies; providing funding for consultants to assist EdL in the preparation of projects for solicitation to the private sector (e.g. undertake project studies, obtain permits, prequalify developers, prepare Requests for Proposals, and evaluate and negotiate proposals). contributing to the development of bankable security packages by: - providing political risk cover (expropriation, currency convertibility, war, civil disturbance) in the form of a partial risk guarantee, and facilitating extended political risk cover (breach of contract) through cofinancing arrangements with bilateral agencies; - facilitating refinancing of completed projects (perhaps underwriting refinancing before construction commencement) to free up finance for other projects; - by assiting in the development of the local capital market (e.g. through establishment of an IPP development fund drawing on GOL s IPP dividends and applying them to new projects). The challenge for multilateral agencies is therefore in the formulation of policies and development of products that tailor their assistance to remedy specific market weaknesses. Their support should specifically target those risks that that market is unable to absorb and lenders will not tolerate. Final Report Vol A: Main Report 220

11 Over the last decade, EdL has had considerable difficulty obtaining finance for domestic generation projects. Of immediate interest, therefore, is the role of multilateral agencies in lending to such projects. International commercial lenders have been unable to bridge the funding gap they are too risk averse and their money too expensive and conditional. Multilateral agencies and regional development funds, with their greater tolerance of country and credit risks, can make an important contribution to a project s financing plan. The benefits of multilateral agency participation were explored by modeling a project under several different financing plans. Using the Houay Lamphan Gnai project as an example, cash flow projections were prepared using the HPO financial model assuming loan conditions that typify: Commercial terms IBRD terms GOL on-lending terms to EdL China Exim Bank Other terms and conditions remained the same as those described in Section 9.2. The tariff needed to achieve a 17% (nominal) return on equity was determined reiteratively for each of the above financing plans and the results are summarized in Table 9.4 and Annex 4.5. They provide an indication of the sensitivity of a bankable tariff to a softening of the financing terms and conditions. Table 9.4: Houay Lamphan Gnai: Required Tariff under Different Loan Terms Commercial Terms IBRD terms GOL onlending terms China Exim Bank 1/ Average interest rate (% pa) 8% 7% 6% 2% Loan term 10 years 20 years 20 years 15 years Grace period (from COD) - 5 years 4 years 5 years Calculated ROE (% nominal) 17.1% 17.1% 17.0% 17.0% Calculated minimum DSCR Primary Tariff ( /kwh) / In the China Exim Bank case, no allowance is made for the possibility of higher maintenance costs or shorter service life often associated with Chinese equipment. 9.4 Financial Modeling of Projects for Export Markets Marketing of Project Output The bankability of a project for export supply is linked to a number of factors, among them the creditworthiness of the power purchaser and the reputation and substance of the investors. Of crucial importance is the intrinsic quality of the site. Final Report Vol A: Main Report 221

12 The viability of those projects forming the Base Export Scenario was tested by cash flow modeling at the assumed export primary tariff of 4.4 /kwh (2003 values) and using other assumptions as listed in Table 9.1). The modeling was in nominal terms with the project cash flows calculated according to the project s COD as stated in Table 8.1. The results of the modeling are presented in Table 9.5 and indicate whether a project is likely to meet hurdle rates of return on equity and debt service coverage under the assumed tariff and financing conditions. The performance figures listed in Table 9.5 should only be taken as a guide. The cash flow simulations from which the Table 9.5 results derive assume financing on standardized assumptions and commercial terms. As outlined at the end of Section 9.3.1, the potential exists for improving the financial viability of projects by individually structuring their implementation models and financing plans. 61 Table 9.5: Base Export Scenario - Project Financial Performance Project COD 3/ Concession Period (25 years) Project Equity IRR IRR Service Life (50 years) Project IRR Equity IRR Minimum DSCR Nam Mo % 20.0% 16.2% 20.3% 1.44 Nam Theun % 20.3% 17.0% 20.5% 1.33 Xe Kaman % 18.7% 15.5% 19.0% 1.38 Xe Kaman % 14.5% 13.3% 15.2% 1.09 Xe Kong % 14.4% 13.3% 15.1% 1.14 Nam Ngum 3B % 9.2% 10.3% 10.8% / Modeling is in nominal values. 2/ Theun Hinboun Expansion project is assumed to involve the addition of a single unit dedicated to the domestic market. 3/ COD is taken from the Base Export Scenario. Projects implemented later in the planning period are slightly disadvantaged due to assumptions that costs escalate at 2% while the levelized tariff escalates at 1.5% to COD. 4/ Minimum DSCR values are low in some cases. Modeling assumptions are common to all projects and in practice the each project would be individually structured to boost DSCR values to acceptable levels GOL Net Revenue Benefits The Lao IPP export program is promoted by GOL to earn revenues for pursuing its development objectives. Projects proposed for export development under the Base 4/ 61 This important point should also be borne in mind in considering the prospects of some major IPP projects that were excluded from the project shortlist and the Base Export Scenario (e.g. Xe Pian-Xe Namnoy, Nam Ngum 2, and Hongsa). With market improvement and careful packaging, such projects could be viable and should not be discounted. Final Report Vol A: Main Report 222

13 Export Scenario are listed in Table 8.1, i.e. Nam Mo, Nam Theun 2, Xe Kaman 3, Xe Kaman 1, Xe Kong 5 and Nam Ngum 3B. 62 The GOL net revenue stream (taxes and royalties) and EdL net revenue stream (dividends less debt service payments) were derived from the modeling of export projects to determine their financial performance (refer Section 9.4.1). The project costs and energy production figures calculated using EVALS have been consistently applied for all projects in estimating the GOL receipts. These may differ in some cases from official estimates. For instance, the official GOL estimate of Nam Theun 2 receipts is based on a more conservative estimate of primary energy production (i.e. 4,406 GWh, versus 4,883 GWh as calculated using EVALS). The cash flow projections assume project CODs as specified in the Base Export Scenario. Individual project cash flows are escalated accordingly and aggregate cash flows therefore replicate the GOL receipts in nominal terms for each year of the modeling period. The estimated annual and aggregate cash flows for each project are presented in Annex 4.3 and are summarized in Table 9.6. Table 9.6: GOL IPP Revenues - Net Receipts from Base Export Scenario Year Royalties ($ mill) Taxes ($ mill) Dividends ($ mill) Total Receipts ($ mill) The Theun Hinboun Expansion project is assumed to comprise a single new unit dedicated to supplying EdL but it could be configured with additional units for export service. These have not been taken into account in the calculation of GOL receipts. Final Report Vol A: Main Report 223