O F F I C I A L S P O N S O R

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3 O F F I C I A L S P O N S O R

4 Capital Project risk - Bankers Perspective KAPIL KUMRA Head of Project Finance- Foreign Corporate Group National Bank of Kuwait w w w. k u w a i t e r m. c o m

5 w w w. k u w a i t e r m. c o m Contents Capital Projects Risks & Mitigation Case Study Q&A

6 w w w. k u w a i t e r m. c o m Capital Projects Capital project and infrastructure spending in the Middle East is expected to more than double from $207 billion in 2011 to $510 billion in 2025, growing at a pace generally in line with the global market and retaining about a 5% share of it. Countries in the region are making improving power and water supplies a priority to meet increased demand.

7 Basis of Financing Corporate Finance- Balance Sheet Financing Project Finance: Cash flow generated by the entity as the primary source of repayment Mainly due to large size of project and debt envisaged, Private sector Capital Projects are generally financed as Project Finance facilities. w w w. k u w a i t e r m. c o m

8 Risk Allocation Project finance structuring is an exercise in risk allocation/mitigation Risks are either transferred to project parties (sponsors/owners, suppliers, governments, insurers, etc.) or accepted by the lenders and priced w w w. k u w a i t e r m. c o m

9 w w w. k u w a i t e r m. c o m Contents Capital Projects Risks & Mitigation Case Study Q&A

10 w w w. k u w a i t e r m. c o m Risks The probabilities and possibilities of a deviation from an expected outcome

11 16 RISKS Supply/Traffic/Reserve Market Foreign Exchange Operating: Technical Operating :Cost Operating : Management Environmental Infrastructure Force Majeure Completion Engineering Political Participant Funding/Interest Syndication Legal RISK MATRIX Output Number/Qty times: Price equals Revenue Less: Raw material cost Variable Operating expense Fixed Operating expense equals Earnings before Interest, taxes and depreciation(ebitda) Plus : Project loan Equity equals Total Sources Less: Capex Change in Working Capital Interest(I) Income tax Principal repayment(p) equals Total Uses Total Sources-Total Uses= Net Net Cash Flow(NNCF) NNCF+I+P = Available Cash flow w w w. k u w a i t e r m. c o m

12 w w w. k u w a i t e r m. c o m RISKS Within the Company's Control Outside the Company's Control Operating: Technical Supply/Traffic Syndication Cost Market Funding Management Infrastructure Legal Sponsor/Participant Environmental Engineering Political Completion Force Majeure Foreign Exchange Within the Financier's Control

13 w w w. k u w a i t e r m. c o m RISKS WITHIN THE COMPANY S CONTROL OPERATING RISK(Also known as Production or Performance Risk) Operating Risk Technical Component Tested and proven New technologies are difficult to finance Operating Risk- Cost Component Cost Curve Sales Contract Operating Risk- Management Component Management Agreement Training Agreements

14 RISKS WITHIN THE COMPANY S CONTROL Participant Risk(Also known as Sponsor Risk) Joint Venture Agreement Contingent Equity Engineering Risk(Also known as Design Risk) Independent Certification w w w. k u w a i t e r m. c o m

15 RISKS WITHIN THE COMPANY S CONTROL Completion Risk( Also known as Construction, Development or Cost Overrun Risk) Cost overruns Project sponsors commitment and ability to meet cost overruns completion guarantees Delay Lumpsum-turnkey contracts with delay LD s w w w. k u w a i t e r m. c o m

16 Supply Risks Traffic Studies Supply Undertaking Market Risk RISKS OUTSIDE THE COMPANY S CONTROL Long-term offtake arrangements Market studies Price floors Infrastructure Risk w w w. k u w a i t e r m. c o m

17 Environment Risk RISKS OUTSIDE THE COMPANY S CONTROL Pollution Control Board Environmental Warranties Political Risk(Nationalisation, Intervention, War) Insurance Government undertakings Participation of national or super national lenders w w w. k u w a i t e r m. c o m

18 Force Majeure Risk Insurance Foreign Exchange Risk RISKS OUTSIDE THE COMPANY S CONTROL Matching currencies of revenues and debt Hedging w w w. k u w a i t e r m. c o m

19 RISKS WITHIN THE FINANCIERS CONTROL Syndication Risk(Also known as Underwriting Risk) Underwriting Agreement Funding Risk(Interest rate risk) Hedging Legal Risk Legal Opinion w w w. k u w a i t e r m. c o m

20 Contractual Structure The contractual structure is a key for risk mitigation/allocation The project is the sum of the contractual arrangements that form it w w w. k u w a i t e r m. c o m

21 The Anatomy of a Capital Project Feed Stock Supply Agreements Offtake Arrangements Technology Licensing Agreements Feasibility Study Project Company EPC Contracts Consultants Appointments Completion Security Operating Arrangements ECA Contracts Shareholders Agreement w w w. k u w a i t e r m. c o m

22 w w w. k u w a i t e r m. c o m Contents Capital Projects Risks & Mitigation Case Study Q&A

23 w w w. k u w a i t e r m. c o m CASE STUDY Al Zour North IWPP(Phase I) Power generation and desalination project in Kuwait NBK was mandated a lead arranger Total cost US$1800MM, total debt US$1400MM Developer: GDF Suez one of the largest private power operator in the world, Sumitomo Corporation and Al Sagar group

24 w w w. k u w a i t e r m. c o m AL ZOUR NORTH RISK AND MITIGATION Completion Risk: Quality EPC contractor and bonding to cover delay LD s. LD s payable to the government offset by LD s payable by EPC contractor. Cost overrun: Lumpsum turnkey contract Lenders engineer monitoring progress The facility committed included a standby debt facility and the equity committed included a standby portion to be drawn in case of cost overrun.

25 Al Zour Risk and Mitigation (cont.) Technology Risk Using GE frame 9 turbines to generate power. GE frame 9 are the most popular gas turbines in the world. Warranties from the EPC contractor and GE Sidem provided water technology proven in the Middle East Source of gas: Gas supply agreement with the Kuwait government If gas is not available, gas fuel would be used and the heat rates would be adjusted accordingly w w w. k u w a i t e r m. c o m

26 w w w. k u w a i t e r m. c o m Al Zour Risk and Mitigation (cont.) O&M/Quality of output Experienced operator Market Demand Power and Water Purchase Agreement for 40 years. Price Capacity payment for power and water designed to cover all fixed costs and return to investors (in addition to payment for the output) Force Majeure Insurance

27 Al Zour Risk and Mitigation (cont.) No. Risk Category Absorbed By : 1 Fuel/Supply Fuel Contract 2 Construction / Completion Contractor (LDs etc), Insurers Operating 3 - Cost O&M Contract 4 - Management O&M Contract 5 - Technology O&M Contract, 6 Market PPA 7 Environmental Financier, Company 8 Infrastructure Government 9 Foreign Currency PPA 10 Sponsor Financiers 11 Force Majeure Insurance, 12 Interest Financiers 13 Engineering EPC Contractor 14 Legal Financiers w w w. k u w a i t e r m. c o m

28 w w w. k u w a i t e r m. c o m Current Status Al Zour financing was a great success Al Zour is in advanced stage of completion Kuwait is in the process of awarding Al Zour North IWPP phase 2 another IWPP (its second) which will be same size as Al Zour North Phase I.

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