EPC Contracts and Project Finance in Power & Water Projects The perspective of the sponsors … and lenders Sebastien BERNARD General Counsel, Middle East Veolia

The Basics of Project Finance

What is Project Finance? Project finance is the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure, in which project debt and equity used to finance the project are paid back from the cash flow generated by the project. PPPs – BOTs… Debt Equity 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Components of Project Finance Important to note: Fits large projects only (high development & structuring costs!) A business model well established in the Middle East A positive trend (budgetary constraints of GCC countries), but some challenges… Asset based Long term financing of infrastructure & industrial projects… …based upon the projected cash flows of the project rather than balance sheet of the sponsors Funding Investors (“sponsors”) providing equity Syndicate of banks or other lending institutions providing (non-recourse) loans to the operation, secured by the project assets SPV SPC created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure The SPV has no assets other than the project 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Some projects developed under PF (ME) Shuqaiq IWPP Location: 140 km north of Jizan, KSA Offtaker: Water & Electricity Company (WEC) Power: 850 MW Desalinated water: 212,000 cmd (RO) Project cost: $1,831 Mn Main private developer: Acwa Power Contract type: PWPA-BOO 20 years Sur IWP Location: Sur, Sharqiyah Directorate, Oman Offtaker: Oman Power & Water Procurement Company (OPWP) Desalinated water: 131,000 cmd (RO), incl. extension Project costs: $200 Mn Main private developer: Veolia Contract type: WPA-BOO 20 years Mirfa IWPP Location: 120 km from Abu Dhabi, U.A.E. Offtaker: Abu Dhabi Water and Electricity Company (ADWEC) Power: 1,600 MW Desalinated water: 238,665 cmd (RO) Project costs: $1,500 Mn Main private developer: GDF Suez (Engie) Contract type: PWPA-BOO 25 years 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Why Project Finance (sponsors perspective)? Cost of debt < cost of capital Highly leverage debt (hence little equity) Possibility to deconsolidate under IFRS Rules Non-recourse financing 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Simplified scheme for an IPP/ IWP (contracts) Authority/ Offtaker WPA/ PPA Shareholder 1 Facilities agreement Shareholder 2 Project Company Lenders Shareholder 3 EPC Contract EPC Contractor Shareholders agreement O&M Contract O&M Contractor Input supply agreements Input suppliers 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Typical scheme for an IPP/ IWP (cash flows) Authority/ Offtaker Payments Shareholder 1 Equity Loan Shareholder 2 Project Company Lenders Shareholder 3 Loan repayment EPC Contractor O&M Contractor Input suppliers 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

The criticality of the EPC component

General considerations Why such a criticality? Largest part of total project costs Bankability & risk allocation Securing revenue generation Lien given to the lenders on the assets 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Securing the overall economical equation Conformity of the output to the required specifications Generation of cash (revenues) as per the model/ LDs kept to a minimum Debt repayment Profitability for the sponsors (IRR/ ROE) A good quality asset is vital for the overall economical equation 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Weight of EPC in total project costs Insurance, bank guarantees, construction supervision, development costs Other costs (10%) Financing costs (ca. 20%) EPC (ca. 70%) Largest portion of the total project costs (Capex) 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

5. Security over the assets Lien over the assets 1. Loan 4. Debt repayment Lenders Sponsors An issue in the construction will negatively impact the value of the assets, hence the value of the lien given to the lenders 3. Revenues 5. Security over the assets 2. Capex The financing is typically secured by the project assets. Lenders are given a lien on these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Bankability & risk allocation A bankable EPC contract is a contract with a risk allocation between the EPC contractor and the EPC Project Company that satisfies the lenders Risks have to taken by each of the parties in the best position to do so Project Company Lenders EPC O&M Focus on O&M risks EPC risks Ability (or lack thereof) of the contractor to claim additional costs or extensions of time Security provided by the contractor for its performance + Technical risks; price to a lesser extent Contractual risks; range of different factors Result The less comfortable the lenders are with these provisions, the greater amount of equity support the sponsors will have to provide; worse case: the project becomes unbankable 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Key features of an EPC contract – lenders perspective

The difficult role of the project sponsors Lenders EPC Contractor Sponsors 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Back to back as a general matter EPC Contract Other project documents RFP WPA/ PPA 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Protection of the lenders Adequacy of the EPC contract with the RFP/ project documents Security & PCG Due diligence over the EPC contractor’s technical capabilities Direct agreement 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Balance of risks in EPC contracts Single point of responsibility Fixed contract price Fixed completion date Performance guarantees Liability Security Variations Defect liability Termination 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Conclusion

Success factors Transparence/ full picture Profile of the EPC contractor Making the lenders comfortable/ selection of the LLAs 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

What we want to achieve… 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

What we do not want to achieve… 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016

Q&A Questions? 2nd Annual Global EPC Contract & Risk Management Conference - London, 6-7 October 2016