www.Kuwai tERM.com

MASTERING RISKS FOR BUSINESS SUCCESS

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

KAPIL KUMRA Head of Project Finance- Foreign Corporate Group National Bank of Kuwait

Capital Project risk - Bankers Perspective

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Contents

• Capital Projects

• Risks & Mitigation

• Case Study

• Q&A

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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.

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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.

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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

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Contents

• Capital Projects

• Risks & Mitigation

• Case Study

• Q&A

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Risks

The probabilities and possibilities of a deviation from an expected outcome

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RISK MATRIX

16

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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

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RISKS

Within the Company's Outside the Company's Within the Financier's

Control Control Control

Operating: Technical Supply/Traffic Syndication

Cost Market Funding

Management Infrastructure Legal

Sponsor/Participant Environmental

Engineering Political

Completion Force Majeure

Foreign Exchange

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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

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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

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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

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RISKS –OUTSIDE THE COMPANY’S CONTROL

Supply Risks

– Traffic Studies

– Supply Undertaking

Market Risk

– Long-term offtake arrangements

– Market studies

– Price floors

Infrastructure Risk

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RISKS –OUTSIDE THE COMPANY’S CONTROL

Environment Risk

– Pollution Control Board

– Environmental Warranties

Political Risk(Nationalisation, Intervention, War)

– Insurance

– Government undertakings

– Participation of national or super national lenders

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RISKS –OUTSIDE THE COMPANY’S CONTROL

Force Majeure Risk

– Insurance

Foreign Exchange Risk

– Matching currencies of revenues and debt

– Hedging

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RISKS –WITHIN THE FINANCIERS CONTROL

Syndication Risk(Also known as Underwriting Risk)

– Underwriting Agreement

Funding Risk(Interest rate risk) – Hedging

Legal Risk – Legal Opinion

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Contractual Structure

• The contractual structure is a key for risk mitigation/allocation

• The project is the sum of the contractual arrangements that form it

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The Anatomy of a Capital Project

Feed Stock

Supply

Agreements

Offtake

Arrangements

Shareholders

Agreement

Completion

Security

EPC

Contracts

ECA

Contracts

Feasibility

Study

Project

Company

Consultants

Appointments

Technology

Licensing

Agreements

Operating

Arrangements

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Contents

• Capital Projects

• Risks & Mitigation

• Case Study

• Q&A

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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

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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.

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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

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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

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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

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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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Q&A