AZURA-EDO IPP THE BENCHMARK FOR IPP DEVELOPMENT IN NIGERIA

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1 AZURA-EDO IPP THE BENCHMARK FOR IPP DEVELOPMENT IN NIGERIA KEY HIGHLIGHTS Experienced project development consortium Bankable offtake contract Supranational, federal and state government support Reputable EPC contractor Solid gas supply arrangements Strong bench of advisers for the government, lenders and the Project Overview The Azura-Edo independent power project (the Project) is the first large scale, private sector driven project financed, greenfield independent power project under development in Nigeria. In the recently reformed power sector in the country, the Project is regarded as a pathfinder of sorts, with developers and investors already considering the Project as a platform for similar developments in the market. From a wider policy perspective, the Project plays a crucial role as well. It signals to private investors that despite challenges facing the country, bankable power projects can be successfully developed in Nigeria. It also expected to boost power generation, (providing electricity to an estimated 14 million people) stimulate infrastructural development and economic growth, while creating in excess of 1,000 jobs during its construction and operation. The Project will be developed in three phases, starting with a 459MW open cycle gas turbine power station and a short underground gas pipeline connecting the power plant to the Escravos- Lagos Pipeline System, and a subsequent ramp up over two phases to bring the total capacity of the plant up to 1,500MW.

2 The Project Framework KEY PLAYERS In executing a project of this scale and complexity, the structure of the financing was critical, a factor driven by the experience of the finance parties as much as the quality of the co-sponsors and advisers selected by the Project s sponsor. The sponsor consortium was led by Amaya Capital and included American Capital Energy and Infrastructure, Aldwych International, African Infrastructure Investment Managers, Asset & Resource Management. The sponsors were supported by a syndicate of 15 international and local lenders including IFC, Standard Chartered Bank, Siemens Bank, Rand Merchant Bank, KfW, Proparco, Swedfund, and the United States Overseas Private Investment Corporation. The EPC contractors were Siemens, an internationally recognized and experienced contractor, and Julius Berger, Nigeria s preeminent construction company. The Project company had gas supply arrangements with Seplat, an indigenous petroleum company with a strong operational track record, and the Nigerian Petroleum Development Company (NPDC). Other key protagonists in the financing included the World Bank Group and a team of experienced advisers, including the Olaniuwun Ajayi team, who demonstrated their commitment to execute the project, burn the midnight oil where required and bring their significant experience and intellect to midwife the Project. FINANCING STRUCTURE As would be expected for a project with no direct precedent in this market, the financing structure was rather complex. There was senior debt, provided by a group of Lenders comprising DFIs and some local and international commercial banks. This included a Nigerian Power and Aviation Intervention Fund (PAIF) naira-denominated facility (equivalent to about US $120million) provided to First City Monument Bank Limited (FCMB), for on-lending to the Project. Certain DFIs, in addition to senior debt, also provided a mezzanine tranche to the Project. In all, these amounted to approximately US$687 million. The sponsor side also contributed total equity of approximately US$190million (including in-kind contributions from the Edo State Government of Nigeria). One of the Lenders also provided a letter of credit to backstop the payment obligations of the Borrower under the gas supply agreement (as against the more familiar structure where the LC is procured by the equity side under a collateral arrangement). Ultimately, documenting this financing structure involved a complex, bespoke inter-creditor and accounts framework designed to address different scenarios, reflecting the different phases of the project especially determining in advance the potential exposure of other senior lenders in the project at all relevant times over the life of the Project.

3 Belts, Braces and Cummerbunds The complexity and novelty of the Project meant that there were a number of key challenges on the business side for which there were no easy solutions. Also, the unique nature of some of the commercial and legal issues thrown up in the course of the financing phase required some creative structuring and a vast suite of documentation. Some of these issues and the measures to address them are highlighted below. THE AZURA PCOA At the heart of most IPPs is a power purchase agreement (PPA), which represents the project s primary revenue stream. Azura signed a PPA with the Nigerian Bulk Electricity Trader (NBET), the first IPP to do so NBET s only PPAs at this time had been with the unbundled PHCN generation companies. However, because NBET was a new government-owned industry offtaker with relatively thin capitalization and no track record of performance under its PPAs, there were concerns regarding NBET s creditworthiness. This was a fundamental concern as it touched directly on whether the Azura PPA was a sufficient basis for lenders to lend to the Project. Therefore, to provide a firmer assurance of revenues under the PPA or recovery in the event of breach or termination, it was necessary to have a more creditworthy entity such as the Federal Government of Nigeria (FGN) backstopping NBET s obligations under the PPA. The initial proposal was for the FGN to provide a letter of support or a guarantee, a fairly typical structure in project financings in this market. However, to deal with some of the government s concerns while managing political, credit and some operational risks for the Project side, the parties finally settled on a put/call option agreement (PCOA). Essentially, the PCOA provides for a compensation mechanism in the event of an early termination of the PPA. Under the PCOA, the Project company (or its shareholder) may put the plant (or its shares) to the government in nearly all circumstances where the PPA is terminated early (or there is prolonged gas failure), upon which the FGN would be obliged to pay a sum at least equal to the debt outstanding from the Project to the Lenders. The fact that the PCOA structure ensures that the government receives the Project assets in exchange for its termination payout makes it more attractive to the government side than the traditional letter of support/guarantee, and, on the front end, also gives the government an added incentive to see the project actualized.

4 FIRM GAS SUPPLY ARRANGEMENTS Gas supply risk is a major issue plaguing the Nigerian power sector, where gas dominates the power supply mix, and this was a concern at the planning stages of the Project. To deal with this concern, the Project, in addition to being strategically located close to the country s main gas pipeline highway, had the benefit of a fixed (or ascertainable) price gas sales and purchase agreement with NPDC and Seplat for an initial 15 year term (extendable by a further 5 years). This ensures that the Project is largely guaranteed access to gas over the life of the financing and for much of the operational life of the Project. WORLD BANK PARTIAL RISK GUARANTEE While most seasoned international investors nowadays approach countries such as Nigeria as known quantities with relatively stable polities, the complex and novel nature of this Project was such that some additional multilateral support was required. This was especially so because certain key aspects of the structure of the Project relied on government dispensations and waivers, which reflected the strong political will (of the administration at the time) to see the Project reach financial close, but also exposed the Project to a significant degree of political risk. This additional multilateral support came in the form of the partial risk guarantee provided by the World Bank the first for any project in the Nigerian market as well as MIGA political risk insurance. CENTRAL BANK DISPENSATION The regulatory flavor of the PAIF facility also presented some challenges. In particular, the PAIF guidelines provided: (i) a requirement for FCMB to comply with the PAIF guidelines applicable from time to time; and (ii) a right for the BOI to step into FCMB s position under the financing documents, where FCMB breached its obligations to the BOI, or upon revocation of FCMB s banking licence. This caused some concerns among the lenders, especially given the unpredictability of the scope and nature of changes in the PAIF guidelines and a lack of clarity as to how an exercise of BOI s step-in rights would impact the mechanics of the intercreditor arrangements. To address these concerns, the lenders sought and obtained certain special dispensations from the CBN including a freeze the PAIF guidelines, as well as a clarification of BOI s step-in rights.

5 In addition, the Nigerian currency was witnessing sharp declines in value at that time, due in part to dwindling oil revenues. As a result, the Federal Government began to implement foreign exchange regulations which were designed to shore up the currency s value, but would also have adverse effects on the Project as structured. The Central Bank of Nigeria also granted additional special dispensations to enable the Project company source foreign exchange to meet its other obligations to its suppliers and contractors. This support and flexibility is believed to be indicative of the attitude of key Nigerian regulators to important infrastructure projects and hopefully should signal the trend going forward. MEZZANINE TRANCHE STRUCTURING Having the DFI s provide mezzanine financing on this project added another layer of complexity to the financing, mainly due to the need to accommodate their standard policies at the mezzanine level. Extensive negotiations between the senior and mezzanine lenders ultimately resulted in a full raft of special rights available to the DFI mezzanine lenders on the transaction.

6 Lessons Learnt, Looking Forward Closing the Project was an epoch-making event in the Nigerian power sector, where it is expected to help in bridging the demand-supply gap. From the perspective of parties considering similar projects, the experiences in structuring the Project have informed that where limits previously existed in infrastructure project development in Nigeria and much of sub- Saharan Africa, the walls might be coming down. The success of the financing phase of the Project underscores, among other things, the crucial role that government support can play in pushing through complex transactions in frontier markets. While it is uncertain whether subsequent IPPs will receive a similar level of support, the Azura blueprint can help guide project developers in engaging governments assuming, of course, that the political will remains strong. Another significant observation from this Project was the flexibility of DFIs on some key policy issues this could signal to the market that, going forward, these multilateral institutions might be willing to consider relaxing some of their standard requirements if necessary to push through bankable projects that could positively impact African economic landscape. The financing structure and risk allocation for the Project involved a lot of thought, negotiation and broad stakeholder engagement. We expect to see similar documentation and risk allocation/mitigation structures adopted in subsequent gas-fired and solar IPPs in the coming years. For instance, the Azura PCOA was extensively negotiated to address most lender, sponsor and government concerns, resulting in a comprehensive framework that is already being adopted across sub-saharan Africa. Lastly, the innovative structures deployed to eliminate some of the otherwise rigid bottlenecks on this Project reflected the value-add of local advisers with a practical understanding of the issues and the standing/capacity to negotiate favorable results from regulatory bodies. With a number of major IPPs and similar projects in the pipeline, each of which will present its peculiar challenges, it remains imperative for potential developers/investors to engage with key stakeholders from the early stages, while enlisting the support of skilled and experienced advisers to help navigate this potentially complex course.

7 Contacts Konyin Ajayi, SAN Managing Partner Wolemi Esan Partner Ibi Ogunbiyi Partner Jonathan Aluju Senior Associate Joba Akinola Associate Damisola Akolade Associate Olaniwun Ajayi LP Olaniwun Ajayi With nearly 60 years' experience in helping organizations and individuals achieve their goals, Olaniwun Ajayi LP has a track record of involve ment in some of the largest and most complex transactions in dynamic sectors of the Nigerian economy. Our unparalleled capacity to handle intricate legal issues is the bedrock of our practice, and our clients depend on us to help translate their opportunity into reality