Finance
Lecture # 4
Jan H. Jansen
E-mail:
jan.jansen@han.nl
Wind energy
Minor Wind Energy Project Management
Finance
Law
Energy
Project
Supply Chain
Management
Mechanical
Engineering
Construction
Programme
Lecture
Topic
1
Overview Energy Market
2
Annual Reports & Management Accounting
3
Management Accounting &Project Financials
4
Project Financials
5
Project risk & DOSIT Methodology
6
Business plan & Case study WEPM
7
Business Model & Case study WEPM
8
Written Exam
DSCR
• Debt Service Cover Ratio: CFADS / DS
• DS (Debt Service)
– Interest
– Instalment or Repayment of the loan (12 - 15 years)
• CFADS
– Cash Flows Available for Debt Service
– CFADS = Revenues – Costs – Taxes
• Costs
– O&M costs (Operations & Maintenance)
– Insurance costs
– Management & Concession Costs
Recap lecture # 3
Project Financials (1)
• Investment amount (A)
– Trade off’s:
– Financial structure:
– e=E:A
– l=L:A
• Currency Risks
– Transaction Risk
– Economic Risk
– Translation Risk
• Discount factor (d)
– d = wacc + π + σ
• Cash Out Flows
• Cash In Flows
Structure Excel model
Cash
Outflows
Data
Assumptions
Cash
Inflows
Results
How to build an Excel model
– Worksheet 1 (Project name)
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Project name
Version & Date
Authors
– Worksheet 2 (Results)
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Investment amount
Economic life
Decision criteria
– Worksheet 3 (Data)
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Data
Assumptions
– Worksheet 4 (COF)
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Cash Outflows
– Worksheet 5 (CIF)
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Cash Inflows
– Worksheet 6 (NCF)
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Net Cash Flows
Decision Criteria Capital Budgeting
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Pay Back Period (PBP)
Return on Investment (ROI)
Net Present Value (NPV)
NPV Investment Ratio (NPV / INV)
Internal Rate of Return (IRR)
Break Even Time (BET)
Investment case
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Investment € 50,000,000
Expected economic life: 10 years
Equity / Asset Ratio: 0,6
Required ROE: 5%
Expected Interest rate: 3%
Expected Inflation: 2.5%
Risk mark up: 2.9%
Annual Revenues: € 10,000,000
Increase electricity prices: 6%
Annual Maintenance Costs: € 2,000,000
Increase maintenance costs: 4%
Results
Investment
Economic life
Pay Back Period (PBP)
Return on Investments
Net Present Value
€
50.000.000,00
10years
6years
23,12%ROI
€ 14.294.531,75 NPV
NPV Investement Ratio
0,29
Internal Rate of Return
15,19%IRR
Break Even Time
8BET
Literature
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Management Accounting for Decision Makers, Atrill cs
Management Accounting, Kaplan cs
Advanced Management Accounting, Kaplan cs
Cost Accounting, Horngren cs
Fundamentals of Corporate Finance, Ross cs
Fundamentals of Corporate Finance, Brealy cs
Multinational Business Finance, Eitman
Wind Energy (Fundamentals, Resource Analysis and
Economics), Sathyajith
• Wind turbines (Fundamentals, Technologies, Application,
Economics), Hau
• Principles of Project Finance, Yescombe
Project Finance
• A method of raising long-term debt financing
for major projects through “financial
engineering” based on lending against the
cash flow generated by the project alone.
• It depends on a detailed evaluation of a
project’s construction, operating and revenue
risk, and their allocation between investors,
lenders, and other parties through contractual
and other arrangements
• Project Finance ≠ Financing Projects
Features of Project Finance
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Ring-fenced project (Separate Project Company)
New project / New Business
High Equity Debt Ratio
No guarantees form the Project Company (nonrecourse finance)
• Lenders rely on future cash flow for debt service
payments (interest + repayment)
• Main security for lenders:
– Contracts
– Licenses / ownership natural resources
• Project has a finite life
Forms of Projects
• BOOT
– Built-Own-Operate-Transfer
• BOT
– Built-Operate-Transfer
• BTO
– Built-Transfer-Operate
• BOO
• Built-Own-Operate
Financial structure (leverage)
Low leverage
Investment (=A)
High leverage
$ 1,000
$ 1,000
Debt or Loans (=L)
$ 300
$ 800
Equity (=E)
$ 700
$ 200
Net Revenues
$ 100
$ 100
5%
7%
Interest payable
$ 15
$ 56
Profit
$ 85
$ 44
Return on Equity (ROE)
12%
22%
Interest rate
Financial leverage effect on costs
Low leverage
Investment (=A)
High leverage
$ 1,000
$ 1,000
Debt or Loans (=L)
$ 300
$ 800
Equity (=E)
$ 700
$ 200
Return on Equity (15%)
$ 105
$ 30
5%
7%
Interest payable
$ 15
$ 56
Profit
$ 85
$ 44
$ 120
$ 86
Interest rate
Revenues Required
Why project finance?
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High leverage
Tax benefits
Off-balance sheet financing
Borrowing capacity
Risk limitation
Risk spreading
Long-term finance
Enhanced credit
Unequal partnership
Project Structure (1)
Finance
• Equity
Investors
• Lenders
Contractor
(Construction)
Operator
(O&M)
Project
Company
Government
Support
Agreement
Input Supplier
Off taker
(Power
Distributer)
Government
Concession /
License
Source : Project Finance, Yescombe
Ring-fenced project
Finance
• Equity
Investors
• Lenders
Contractor
(Construction)
Operator
(O&M)
Project
Company
Government
Support
Agreement
Input Supplier
Off taker
(Power
Distributer)
Government
Concession /
License
Source : Project Finance, Yescombe
Project Structure (2)
Source: www.vestas.com
Project Structure (3)
Source: www..worldbank.org
Wind Farm Finance Structure
http://www.wind-energy-the-facts.org
Project Risks
Project Risks
Commercial
Risks
Macroeconomic
Risks
Political Risks
Inflation Risk
Currency
Convertibility
Risk
Transfer Risk
Revenue Risk
Interest Rate
Risk
Expropriation
Risk
War & Civil
Disturbance Risk
Input Supply
Risk
Force majeure
risk
Exchange Rate
Risk
Change of Law
Risk
Quasi-political
Risks
Contract
mismatch risk
Sponsor support
Risk
Completion Risk
Environmental
risk
Operating Risk