So let's sum up here, project financings are cash flow, they're all about contracts, allocation of risks, and these contracts are the basis of risk allocation. You're going to have a project document to start with. This determines the revenue, how it's going to work, the concession, the development agreements. The project agreement is really the overall agreement, it's with either between the sponsors, but somebody has to define what the project is. Somebody has to build the project in nearly every case, the engineering, procurement, and construction. So the EPC contractors, we've got off take and supply agreements, we've got operating and maintenance agreements, sometimes you've got government support agreements, explicit or implicit. Every project has insurance agreements. These insurance agreements are renewed on an annual basis. They're expected to meet certain standards. There is an independent party that reviews these insurance agreements every year, to make sure that the insurance agreements meet what is the project documents are expecting. And what the financiers and sponsors are expecting to see in those project documents. So it's insurance agreements, and sometimes it's a direct agreement between various counterparties. So for instance, there will possibly be a direct agreement between a government that's given a concession, and lenders. And the government will agree with the lenders, they'll say well, we've got all these rights against the project, but we know you as lenders would like to be known in advance that we're going to exercise these rights. So we'll have a direct agreement that says we won't exercise these rights, except for certain carve outs, until we've given you 30 days notice or 90 days notice. So that you have got a chance to rectify the situation, if the project hasn't rectified the situation by themselves. So we have this picture of all of these different agreements, and this is really how we allocate risk in project financing. And it's putting all of these agreements together in a comprehensive fashion that allows project financing to raise large amounts of capital long term, to be able to successfully finance stand alone entities. Who provides this debt capital in a project financing? Well, there are a number of different parties. We have Senior Debt, to date it pretty much been bank debt, banks have provided by far the predominant amount of project financing debt. They have the staff, they have the skills, they have the experience, and they have the ability to manage term risk. So these are ideal suppliers for project financing. That being said, the advent of certain regulatory requirements and capital requirements makes longer term debt not as attractive to banks as it used to be. So we're seeing a larger amount of insurance companies and institutional investors, especially in the infrastructure and power segments, taking on project financing. They're building teams themselves, they've got advisors that review projects, and then encourage institutional investors to invest. But insurance companies and pension plans are becoming increasingly important in the infrastructure and power segments. There are private placements, there is some public debt, 144a typically in the US, and some public bonds now, something that really wasn't considered in the past. And of course there's a lot of, in developing countries, multilateral and development banks, and export credit agencies providing capital to project financing. Sometimes there's a space between what is equity sponsors are capable, or willing to put into a project, and the amount of money that Senior Debt will provide. And the space between that demand is often provided by mezzanine or subordinate debt providers. Some of the risks in a project that the Senior Debt doesn't want to take, they can share some of that risk with mezzanine or sub debt providers. And denominate the returns that those investors get by commodity price, or some other aspect to performance of the project. How do we deal with how much debt a project can have? Projects are all about cash flow lending, and projects need to determine what their cash flow is before they determine what their debt capacity is. The project should drive the financing point forward, not the other way around. So as you put a project together, you will look at the cash flow available for debt service, which is the cash flow after the money has been available for paying expenses. And after the project expenses, there is a cash flow available to debt service. Looking at that cash flow, that cash flow is to cover the debt service. Your project needs to repay its debt and have a certain margin for dealing with unexpected eventualities. So there's a ratio that project financiers put together called the Debt Service Coverage Ratio. Which is very simply, the amount of cash flow available for debt service divided by the debt service for that period, maybe 6 or 12 months, and that became the debt service coverage ratio. And looking at the volatility of the cash flow, financiers will come up with a number for that industry and that particular project. So for a very predictable cash flow for project, maybe an availability type infrastructure project, you may end up with a 1.2 debt service coverage ratio. On the other hand, if you've got a very volatile, commodity-type financing, financiers may want to see a two, or two and a half times coverage. Once you've determined what that coverage needs to be, and that's based upon the volatility of the cash flow, you can then, by modeling the cash flow available for debt service. By changing the total of the repayment streams, the interest of the repayment streams, you as project financiers can determine what the debt capacity is. And you do that using a mathematical model, the mathematical model that drives the project. And the amount of debt that you can raise in a project is then determined after the project has been developed, and you know what the cash flow for debt service is. This allows you to determine what the amount of the debt is, naturally determined by the term. You can make us some assumptions, if you're putting this in the model that will be certain refinancings at times. Project financiers want to see security, nearly every project is secured not only by assets of the project, but also by the shares in the project company, and sometimes the holding company. There needs to be covenants, the operating covenants. They're nearly all cash flow covenants, just occasionally you see other sorts of covenants. But the reality is that project financing is cash flow lending, and the covenants are generally cash flow. And of course, interest rates are driven by how much risk there is in the project. So just to give two quick examples here, and they are available here on an Excel form. So this allows you, as a format, whatever project you're involved in, to start filling in the boxes, to make sure that all the boxes are filled in, and you've understood how the projects work. And this format will go through these two projects right now, but this format can be used for any sort of project. Right in the middle, we have the project company, so here we have a cheese company. Now, you say that's very strange for a project financing to do a cheese company. But a cheese factory today, it costs about a quarter of a billion dollars to build a world class cheese plant. And this industry doesn't have a lot of large players in it that want to put this amount of capital into a cheese plant. So here is a structure that allows a cheese factory to be built, and it's very attractive for all the parties. But the benefits of project financing were used to provide capital to an industry that didn't have the availability for capital, on a long-term basis, on a standalone basis. And doesn't necessarily fall back to any one of these sponsor's balance sheets. So here we have our project company, this is a cheese plant. We have various sponsors at the top. They're dairy and cheese wholesalers, maybe multiple dairy and cheese dairy farms, or dairy cooperatives and cheese wholesalers. Their interest is getting the cheese plant built. The dairy companies want to be able to sell milk, the cheese companies, the wholesalers want the cheese, but they don't want to run the cheese factory. So on the left hand side here, we have the dairies, they are suppliers, they sign supply contracts with the cheese project company. And then the cheese wholesalers, on the other side, sign offtake contracts. The dairy suppliers and the cheese offtake contracts have got the same basis for pricing cheese and milk. So that there is really an arrangement here that the cheese is always priced a certain level above the milk price. So that there's enough cash flow in the cheese project company to be able to meet its obligations. The cheese factory has to be built, so there's EPC contractors that build it. And there's an O&M agreement because neither the dairy farmers, or the cheese wholesalers want to operate the plant. So there's a cheese manufacturer that provides an O&M agreement to operate the cheese plant. Governments, the cheese industry, and the milk industry, there are dairy regulations there. So while there's no direct agreement between the government, and the government regulatory authorities and the cheese plant, they provide the dairy industry regulation. They provide the pricing metrics, they provide the volume metrics, and they provide the government support metrics. There's a technology supplier, amazingly, there's technology in a cheese plant, and typically a cheese plant has a technical support agreement with the technology suppliers that go into this. So here we have a fantastic example of being able to to construct a cheese plant, which is a quarter of a billion dollar, big, industrial plant. And to allow sponsors that really didn't, or couldn't, afford to build or operate this. Project financing allows all of these parties to cooperate, to take the risks that they're able to manage, and to pass the risks off to others that they can't manage, and for this to be a very financeable and viable operation. And the last one today is what is a very big segment at the moment. This is a wind farm, we have a project company, standalone, right in the middle here, wind farm company. We have power developers as sponsors at the top, they're looking for a financial return. Sometimes, these power developers are generators themselves, but quite often they're financial sponsors. But the wind farms have very, very long assets, and most of these companies could not borrow capital, and don't want to borrow and have capital committed for such a long period of time. So, here on a wind farm, we clearly don't have any inputs, although I did put here, they do need some ground leases from landowners to be able to build the wind farm. The offtake contractors are generally the grids or the electricity suppliers. They're quite willing to sign a long term agreements, they want wind farm, they often have renewable requirements, so they will sign long term offtake agreements. Clearly, in the top left-hand corner, the turbine manufacturers, often the contractors, are there and they'll build the wind farm. There are many, many contract operators for for wind farms, so they provide the O&M agreements for a long period of time. And even if those weren't to run, there would always be a replacement for them. Here's the interesting part about the renewable energy industry. It relies tremendously on government tax rates and subsidies. So the government regulatory arrangements here are a critical part of wind farm financing here, because it's often the tax allowances and the benefits from renewable energy credits that really drive the cash flows. And it's the predictability of those, and the government willingness to, under a regulatory regime, to essentially guarantee those payments. The guarantees, the cash flow to the wind farm company. Turbine manufacturers provide technical support agreement, and that is, there's compensation there for failure for the turbines to work in certain circumstances. So consequently, the project finance debt here is very willing to provide very long-term financing to these wind farm projects. Because the government regulations are such that there's a great assurance that there will be cash flow there to be able to pay the debt on an ongoing basis. So these two examples, and they're available as I said Excel, if you're doing your own project you can just the redo the boxes for the project that you're working on here. But the ability to analyze the risks of a project, be able to understand which contracts go where, which risks get allocated to who, will ensure that you end up with a good project. So again, there are four tenants for project financing. It's cash flow lending, risks are going to those parties best are able to control and manage them. Project financiers will take term risk, but avoid principal risk. And finally, the project drives the financing, and not the other way round. Design the project, and financing will fall out of that. Do not try and beat a project into submission by producing financing that has to go into a project. It is a great, fun industry, it's quite a simple in concept. It's difficult to put into place, but project financing, successful project financing is a way of putting a project together that might not be possible otherwise, and ensure that you have a long term viable enterprise. Thank you very much.
