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

2. The Basics of Project Finance

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. The criticality of the EPC component

10. 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

11. 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

12. 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

13. 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

14. 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

15. Key features of an EPC contract – lenders perspective

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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. Conclusion

30. 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

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

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

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