Off-Grid Power Sector Opportunities and Project Financing. October 2017

Transcription

1 Off-Grid Power Sector Opportunities and Project Financing October 2017

2 Contents 2 Section Page 1. Overview of the Power Value-Chain 3 2. Off-Grid - Key Investment Drivers & Consideration 5 3. Financing 8 4. PF Due Diligence 13

3 Private and confidential Section 1 Overview of Power Value-Chain

4 Challenges and Gaps in the Power Sector Only ~25% of Nigeria s 12,522MW of installed capacity reaches the end user. Thermal plants still plagued by gas supply disruptions and suboptimal gas supply & evacuation infrastructure Lack of cost reflective tariffs and resistance from consumers to tariff increases Transmission wheeling capacity far below installed capacity Frequent partial system collapses Distribution ATC&C losses above c.50% 15,012 MW self generation Gaps in the Power Value Chain Self Generation 15,012 Grid 12,522 Installed Capacity Note: 5,381 Non- Available Capacity 1 3,262 Nonoperational Capacity 1 3,879 Capacity operational for generation ~7.4% transmission loss 287 Transmission losses ~6.9% commercial and 36.5% collection losses ~12.5% technical loss 1,746 3,592 Capacity 2 transmitted 447 Distribution losses Generation Transmission Distribution 1 Refers to average daily capacity of units non-available and non-operational from Jan to Aug ; assumes peak demand 2 Effective capacity for transmission and distribution post losses; assumes peak demand 7,200 4,055 1,065 1,864 Capacity 2 distributed % Source: Nigeria Energy Power Report 2016 (Data as at 15 August 2015) Page 4

5 Private and confidential Section 2 Off-Grid

6 Opportunities in the Off-Grid Power Sector Key Considerations Significant supply gap to telecoms, financial and Industrial users Commercial, residential and SHS growth 10GWs 15GWs of Industrial Self Generation 27,576 telecoms towers spend $2.5bn annually on power 10,000 bank ATMs in operation Average of $10 billion spent on diesel annually 28 industrial clusters for mini-grid modular plants ranging from 5 to 50 MW in areas including Ogun and Lagos States alone. 2,700 community clusters for mini grid solar potential and about Gencos exploring Eligible Customers for bilateral PPAs SHS solutions leverage tech and telcos to enter market of up to 20 million homes Bankability Credible Developers there is a growing pool of experienced developers Quality Offtake Off-grid solutions to commercially viable Off Takers in telecoms, Industry DFI Support COP21/22 mandates have raised renewable energy as priority for DFIs Infracredit year long term local currency funding with DCM with 100% guarantee Regulatory & Fiscal Support Enactment of the off grid regulation by NERC in July 2017 Declaration of eligible customers by NERC in May year income tax holidays & Duty exemption for investment in renewables and off grid investments Off grid power listed on CBN priority list for access to FX Page 6

7 Solar + Storage Future Solar + Li-ion Battery Worldwide Growth of Solar PVs Predictions state solar could contribute 20% of total electricity consumption by 2030 System prices of residential and commercial PV systems declined 6% 7% per year, on average, from , and by 12% 15% from By the end of 2014, cumulative photovoltaic capacity had reached at least 178 GW, sufficient to supply 1 percent of the world's total electricity consumption of currently 18,400 TWh Africa is yet to register in the Solar Power development data Africa and Nigeria have opportunity to leapfrog global infrastructure gap with Solar and Battery Tech, as done with telecoms and Fintech Tesla installed PV + Li-ion Battery micro-grid in Hawaii at 13.5cents/KWH in 2016 Solar and Battery costs continue to drop at 5-10% per year, both are set to be cheaper than any other source by Nigeria could lead Africa in manufacturing of PVs and Li-ion Batteries All the basic raw materials for PV and Li-ion are readily available in Nigeria Requires government policy to attract investment in local production for future growth Auto industry will be major driver of li-ion battery demand Lithium-ion Battery Demand Outlook on a Capacity Basis (in MWh),

8 Private and confidential Section 3 Financing

9 Greenfield Project Finance Structure 9 Key points Limited/Non-Recourse Project Financing Structure SPONSORS Equity Investment 1 Mandated Lead Arranger/ Coordinator Syndicate of local and offshore banks *ECA Funding Naira DFI Funding IPP SPV Mezzanine Financing * depends on equipment source

10 Funding Sources 10 Key points Potential Sources of Term Debt Finance Nigeria finance sector has limited capacity to fund long tenors beyond 5 years Need to explore all possible sources of fundingdomestic, regional and international with a view to widening the liquidity pool FX risks - Revenues are mainly denominated in Naira, while cheap long tenured funds are largely in foreign currencies DFIs (FMO, DEG, PROPARCO, DBSA, IDC, IDA, Others) Commercial Lending (No PRI) Nigerian Banks Constrained POWER SPV / IPP MLAs (EIB, AfDB, Others) Commercial Lending (Plus PRI) International Banks Waiting to see! World Bank Group (IFC, IBRD) Sovereign Policy Lending CDB, China Exim, JBIC, KEXIM.. DCM & Other (Funds) ECAs COFACE, HERMES, KEXIM, JBIC, CDB, CH EXIM, US EXIM Need significant credit enhancement + follow their contractors Commercial Sources Others Islamic Finance, Insurance Cos, Pension Funds, etc Untapped / Yet to be developed

11 Loan Size Financing Sources 11 Key points The various local sources of finance available to power projects depending on individual project specifics Local Sources of Debt Funding Comparing Local Financing Options Bond Market Commercia l Banks Tenor Bond Market BOI PAI F Commercial Banks + Limited appetite for power projects (Captive Vs Grid) Good understanding of local market dynamics Lend in Naira thus projects can match currency of revenue with currency of debt loan - Preference for short term loan generally less than 5-7 years More expensive pricing due to high cost of funds Ability to participate in the financing of power projects is restricted by limited balance sheet sizes. BOI CBN Intervention Fund Infrastructure bonds could be issued in the Nigerian Debt Markets by the privatized power company to raise finance. + Medium to long term fund can be raised cost effectively Projects can secure finance at moderate pricing Funding can be structured to match project needs Bullet payment of bond on maturity reduces financial burden compared to Bank debt. - Stringent requirements of SEC or regulatory body must be fulfilled. N300 Billion Power and Airline Intervention Fund by the Bank Industry to fast-track the development of power and aviation Projects + Good understanding of local market dynamics and strong support for the power sector Provides low priced facility Single digit interest rate Lends in Naira Provide long tenured facilities up to 20 years - Current fund is almost fully disbursed and due to expire

12 Financing Sources 12 Key points DFI s provide subordinated loans and could lend in local currency Multilateral agencies provide guarantees and insurances which improve project attractiveness.. International Sources of Fund International Commercial Banks + Have capacity to finance large projects Offer lower pricing depending on project economics - Many have traditionally been reluctant to manage currency and term risk, thus may have lower appetite for power projects in Nigeria. Usually provide finance in foreign currency, thus the project being financed is exposed to exchange risk Longer execution time International Bond Investors + Provide tenors of 5-10 years Issuing a Eurobond provides access to international bond investor pool - Require clear, identifiable, steady cashflows from the underlying project Require issuing company to be rated by an international rating agency Require credit enhancements such as an FGN Guarantee or other political risk insurance Multilaterals and DFIs + DFI s service the investment shortfalls of developing countries. Examples include African Export-Import Bank, African Development Bank, IFC Provides options for disbursing facilities in tranches and provide subordinated loans Some DFI s have ability to provide local currency loans Multilateral Agencies provide insurance and guarantees against political risk. This makes deals more attractive to commercial lenders - DFI s often have onerous documentation and auditing requirement, which may extend closure times as lengthy negotiations ensue. Offshore Institutional Investors + Have some market appetite for infrastructure deals in emerging markets. The provision of World Bank PRG in to the Gencos is attractive to non-em dedicated funds with an interest in power and infrastructure - Investor concerns over enforcement risk of the legal documents often need to be addressed

13 Private and confidential Section 4 PF Due Diligence

14 Financiers Due Diligence Issues 14 Key points Consultants To Be Appointed Stanbic IBTC will assist in the identification, selection, appointment & management of all the consultants TECHNICAL / LENDERS ENGINEER To advise the Mandated Lead Arranger(s) (MLA) and potential lenders on all technical issues, with respect to the project design and construction plan, advising and identifying issues that could lead to delay, cost overruns, shortfall in performance or any other technical or operating risks that could impact the project s ability to service debt. Scope of work will typically include: comprehensive technical assessment of the project and implications of installation / and any integration issues technical review of design and technologies contracting strategy and project management review review of costs and schedule review of contracts (EPC, licensing etc) review of operating assumptions and parameters Following financial close (i.e. during the construction stage), the technical consultant will need to be retained by the lenders to monitor drawdown requests, physical and cost progress and will report periodically to the lenders LEGAL International and onshore Lenders legal counsel will be required to advise potential lenders on the legal structure of the facility, drafting and negotiating facility agreement in accordance with Nigerian and applicable foreign law (most likely English law), review/draft due diligence reports and security documentation, as well as drafting legal opinions with regards to the transaction and coordinating signing and completion of the Transaction, including all conditions precedent documentation.

15 Financiers Due Diligence Issues 15 Consultants To Be Appointed (cont d) ENVIRONMENTAL The Environmental Consultant reviews the comprehensive Environmental and Social Impact Assessment undertaken by the Sponsors of the project so as to ensure that it complies with local and international environmental standards and the Equator Principles, and advises the lenders accordingly This consultant will also provide guidance & recommendations on environmental issues that need to be addressed to ensure that such (local and international) environmental standards are complied with at all times INSURANCE In addition, lenders will need to retain their own Insurance Consultant to provide a review of the adequacy of the insurance arrangements proposed by the Sponsors. Said consultant will identify and summarize the risks of the Transaction, including physical damage, property damage, construction, business operation, environmental & public health, uninsurable, existing or potential claims, etc The Insurance Consultant will also comment on the market insurance standards for similar projects and the current state of the insurance market for the cover sought by the Sponsors and advise the MLA and potential lenders accordingly TAX, ACCOUNTING & MODEL AUDIT Typical scope of work would include: audit of the financial model advice on all matters related to tax, capital allowances advice on accounting treatment, if required, for the proposed Project Structure, particularly for complex structures advice on depreciation requirements

16 Financiers Due Diligence Issues 16 Initial Due Diligence Questions An initial list of due diligence questions are required for our better understanding of the Project and its current status in order to provide a tailored solution. The clarification and information request detailed below is not comprehensive, and additional questions may follow as discussions progress. A). GENERAL STRUCTURE 1 What is the expected total cost of the power plant? 2 What forms of credit enhancement / security structures / undertakings will the Sponsors be able to provide e.g. completion support guarantees, standby equity. 3 What is the proposed capital structure the Sponsors envisage for the Project? B). PROJECT SPV & SPONSORS 1 Please provide 3 years audited financial statements for each of the Sponsors. Please provide an organogram of the current ownership and shareholding structure of the sponsors and include 2 details of any additional equity shareholders that the sponsors may or intends to invite to participate in the Project. 3 Please provide the detailed profile of each Sponsor, which includes its credentials and track record. Please provide the CVs of the SPV and the Sponsors Directors and Senior Management who will be involved in either 4 the construction and / or operation of the Project. Please provide an overview of any other key Project parties, such as the EPC Contractor, Gas Supplier, O&M 5 Contractor etc. C). CONSTRUCTION 1 Please provide a detailed breakdown of the estimated Project cost, including working capital requirements once available. 2 Does the estimated Project cost include pre-completion costs (i.e. fees to third party consultants, interest during construction, etc)?

17 Initial Due Diligence Cont. 17 C). CONSTRUCTION Cont. 3 Please provide details of the construction contracts and confirm if they include the validation of the following: (a) construction schedule, (b) estimated total Project costs, including site clearance, (c) plant technical assumptions and (d) Equator Principles compliance? 4 Please provide the detailed track record and credentials of the main contractors including experience in Projects in Nigeria and the African continent. 5 Who are the debt providers / DFIs / development banks that the Sponsor is currently in discussions with? 6 Who are the providers of the construction period insurances? 7 Please provide the procedures for commissioning, testing and handover of the plant. These will need to be documented once available. 8 Please provide details of construction timelines including proposed timing for utilization of funds (debt and equity). D). OPERATION PERIOD 1 Please provide the detailed track record and credentials of the O&M contractors, including experience in Projects in Nigeria and the African continent. 2 Has the O&M contract been finalized? If not, what is the proposed nature of the contract (i.e. fixed price turnkey, cost plus basis?) If yes, please provide a copy of the contract. 3 Who are the prospective operating period insurance providers? 4 How will the Project be staffed (pre and post completion)? Please set out recruitment plans and training strategy and expected total number of staff including associated costs for each. 5 Will all revenues be for the account of the Project Company or is there a sharing mechanism with third parties and / or Shareholders? To the extent there is a revenue sharing mechanism, please provide details of this to us. 6 Please provide detail on the ramp up of electricity production.

18 Initial Due Diligence Cont. 18 E). CONSENTS, PERMITS & THIRD PARTIES 1 Please provide copies of all consents, permits and approvals obtained for executing the Project. 2 Please provide an overview of any additional third parties with which Developers/ the Sponsors will need to interface during the construction and operation of the Project. 3 Please confirm if any resettlement / relocation plan needs to take place; and if yes have any resettlement / relocation plan been prepared and provide a Community Engagement Plan. F). INDEPENDENT CONSULTANTS & STUDIES 1 Please send us copies of all studies undertaken in respect of the Project. 2 We advise for the following consultants to be appointed and would like to arrange a meeting to discuss this as soon as possible: (a) Lenders Technical Advisor/Independent Engineer, (b) International and Onshore Lenders Legal Counsel, (c) Lenders EIA Consultant, (d) Model Auditor. 3 Has a Project Manager been appointed? If yes, please can you provide details of the project manager. 4 Please confirm status on the Environmental Impact Assessment (EIA) exercise. If a report is available, please provide a copy. G).THE PLANT 1 What is the estimated useful economic life of the plant and when are the required major maintenance of the units expected to take place? 2 Please provide an estimate of the historical operating rate of identical plants in other parts of the globe. 3 What are the intended level of warranties and performance guarantees to be provided by the equipment provider? 4 Will all components of the plant be imported? Please provide a list of the long-lead items. 5 When is first delivery of the plant equipment expected to take place? 6 Will Developers / the Sponsors enter into a technical services agreement / training contract with the equipment provider? If so, what is the expected duration of such contracts? Copies of the foregoing contracts will be required.

19 Initial Due Diligence Cont. 19 H). EQUITY FUNDING 1 How much is the Sponsors total equity funding base case and standby? How much is expected from additional equity shareholders (if applicable)? (notwithstanding, we expect to revert on this after the financial model has been finalized) 2 How is equity being raised? If not already secured, please advise when this is expected to be in place and whether Standard Bank s services would be required to help secure necessary equity funding or hybrid debt/ quasi-equity products (which are both less dilutive than equity and junior to debt.) 3 Do the Sponsors expect to bring in additional shareholders prior to formal launch of the debt process? 4 What is the current equity percentage of each of the existing Sponsors? I).KEY PROJECT AGREEMENTS / CONTRACTS We would appreciate being provided drafts of the following contracts for our review once available: 1 EPC Contract 2 O&M Contracts 3 Technical & Support Services Contract 4 Consultancy Contract 5 Shareholders Agreement (if applicable) 6 Draft Power Purchase Agreements 7 Gas Supply Agreement J). FINANCIAL MODEL 1 Please send us the projects key technical and operating assumptions. 2 Is the debt funding expected to be in US$ or Naira? We can provide additional guidance on this as part of the financing plan to be provided by the MLAs. 3 Please provide a financial model on the Project, if available.

20 Financiers Due Diligence Issues 20 Know Your Customer ( KYC ) Due Diligence Requirements An initial list of documents required under the Know Your Customer guidelines is provided below. These requirements are regulated by the Central Bank of Nigeria under the CBN AML/CFT Regulation 2009 and therefore required by all banks when entering into a transaction. The process can take a considerable amount of time, therefore we suggest that the SPV assign an officer to the process and begin discussions with the Bank as soon as possible. KYC Documentation & Information Requirements 1 Certificate of Incorporation 2 Board resolution authorizing the relationship with the Bank and the transaction (a template can be provided) 3 Memorandum and Articles of Association/Founding documents 4 Form CO7 Particulars of Directors 5 Form CO2 Allotment of Shares 6 Proof of address of the corporate entity (a utility bill no more than 3 months old that is sighted by a staff member of the Standard Bank Group is preferred) 7 Proof of address for All Directors (a utility bill no more than 3 months old that is sighted by a staff member of the Standard Bank Group is preferred) 8 Proof of identity of All Directors (i.e. A certified true copy of either the data page of their International passport, Drivers License or National ID Card that is sighted by a staff member of the Standard Bank Group is preferred) 9 A copy of the residence permit for all non-nigerian residents sighted by a staff member of the Standard Bank Group Note: i. The copies of the documents required for corporate entities must be certified by the relevant governmental department (i.e. Memart, the Form CO7 and CO2) or by a notary public (i.e. the proof of identity and address of the directors or the corporate documents, where the entity being KYCed is a non-nigerian entity). ii. Copies of the foregoing documents (save the documents stated in Nos. 7 & 8 above) will also be required for every shareholder that holds more than 5% of shares of the Borrower.

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