12/12/2011

The Bottom Line: How Uncertainty Affects

Project Financing
AWEAs Resource Assessment Information Conference
Seattle December 14, 2011

Presentation Contents

Overview of Project Financing

How Financiers Look to Mitigate WRA Uncertainty
Typical Wind Farm Project Finance Structures
Finance Sizing Parameters
Importance of the P99/P50 Ratio
Bottom Line.

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Overview of Project Financing

Project finance is primarily predicated on the
following sources of repayment:
Volatility of project cash flows
Uncertainty around future cash flows dictates the amount of
financing that a project can raise

Value of the collateral

Fair market value of project is based on projected future cash
flows

How Financiers Look to Mitigate

WRA Uncertainty
By engaging top-tier wind resource consultants
Over 1 year of on site data required
Ideally, 10+ years of long term reference data (third
party site)
Strong correlation (R2) between long-term data and site data

Appropriate number and configuration of met towers

High quality data (calibration, icing)

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How Financiers Look to Mitigate

WRA Uncertainty (contd)
The higher the quantity and quality of data, the
lower the variance, resulting in a tighter
dispersion around the base case cash forecast
By considering downside scenarios (P75, P95,
P99) when sizing their commitments

Typical Wind Farm Project Finance

Structures
Typically, US wind farms are financed through a
combination of the following sources:
Cash Equity Sponsors skin in the game
Tax Equity Institutional investors with tax capacity
Debt commercial banks

A number of project financing structures have

been used to date, including:
Construction loan (equity + construction lenders)
Project debt (equity + term lenders)
Unleveraged partnership structures (equity + tax equity)

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Typical Wind Farms Project Finance

Structures (contd)
Leveraged partnership structures (equity + tax equity + debt)
Back-leverage structures (equity + tax equity at the project level
and debt in the back, financing a piece of the sponsors equity)
Sample Back-Leveraged Structure:
25%

15%

Sponsor Equity
Tax Equity
Back-Leverage Debt
60%

Leasing structures (unleveraged, leveraged)

Others

Finance Sizing Parameters

Debt
Lenders size the loans to achieve certain
minimum debt service coverage ratios (DSCR):
D
DSCR = Cash Flow Available for Debt Service
Debt Payment
1.00x DSCR under the 1year-P99 pro forma model;
AND
1.40x 1.50x DSCR under the P50 base case model

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Finance Sizing Parameters

Tax Equity
Typically, tax equity investors size their
investments as follows:
To achieve their target return by year 10 under the
P50 base case model; and
To achieve their target return within acceptable
horizon under downside scenarios
Example: target return not delayed beyond year 15 under the
10year-P95 pro forma model

Finance Sizing Parameters

Government Subsidies
ITC/ Grant:
The amount of the subsidy is driven by project costs
instead of project performance
Less of the project overall economic return is derived from
production
Lenders bridge finance the anticipated grant proceeds

PTC:
Project performance is very important
Generally more valuable for high NCF projects
The lower the uncertainty, the more valuable the PTCs are

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Importance of the P99/P50 Ratio

Traditionally, the P99/P50 ratio has fluctuated
right around 70% for well studied sites
An improvement of this ratio would mean less
uncertainty. But would that always translate into more
profitability?

Importance of the P99/P50 Ratio

Equity Intensity
No P50 sizing constraint
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
60%

65%

70%

75%

80%

Equity Intensity

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Importance of the P99/P50 Ratio

Equity Intensity
With P50 sizing constraint - minimum 1.45x DSCR
5.0%
4.0%
3.0%
2.0%
1.0%

The amount of leverage becomes

constrained by the P50 sizing parameters

0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
60%

65%

70%

75%

80%

85%

Change in Equity Intensity (Limited)

Importance of the P99/P50 Ratio

Equity IRR
No P50 sizing constraint
0.8%
0.6%

0.4%
0.2%
0.0%
-0.2%

-0.4%
-0.6%
-0.8%
60%

65%

70%

75%

80%

Change in IRR

12/12/2011

Importance of the P99/P50 Ratio

Equity IRR
With P50 sizing constraint - minimum 1.45x DSCR
0.8%
0.6%

The amount of leverage becomes

constrained by the P50 sizing parameters

0.4%
0.2%
0.0%
-0.2%

-0.4%
-0.6%
-0.8%
60%

65%

70%

75%

80%

85%

Change in IRR (Limited)

Importance of the P99/P50 Ratio

Weighted Average Cost of Capital
Equity + Tax Equity + Back-Leverage Debt

0.3%
0.2%

0.1%
0.0%

The amount of leverage becomes

constrained by the P50 sizing parameters

-0.1%

-0.2%
-0.3%
60%

65%

70%

75%

80%

85%

Change in WACC (Limited)

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Bottom Line
Improvements in the P99/P50 ratio results in
lower equity requirements and better returns for
project sponsor
Allows project sponsor to raise more low cost debt
and tax equity financing versus relatively expensive
sponsor equity
But improvements might be limited to caps imposed
by financiers
It might take some time until financiers can give full value to
decreased WRA uncertainty

Thank You

windcapitalgroup.com

Daniela Shapiro
dshapiro@windcapitalgroup.com