Wind Farm Project Finance

Financing and Technical Requirements

Gabriele Ferrante
PPP Task Force, Presidency of the Council of Ministers, Italy

Models and Strategies for Public-Private Partnerships (PPP):

experiences from Italy and Bulgaria
Bourgas, 18th July 2007

Bulgaria - Italy Bilateral Cooperation

AGENDA

Project Finance: definitions and main characteristics

Due Diligence and Risk Analysis in a Wind Farm Project
Financial instruments for evaluation of a Wind Farm Project

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Project Finance: Definitions and Main Characteristics

Project Finance is a multi-discipline approach to the funding of specific investments
characterised by wide levels of structural complexity as well as the possibility to resort to
large financing from the banking sector.

The main guarantee of debt payment are Project cash flows required to prove certain
and effective management of the initiative-related risks which allows limiting the
possibility of failure of envisaged cash flows.

The evaluation of economic/financial sustainability of single initiatives is exclusively

based on the quality (to be intended as the capacity to generate cash flows versus a given
risk level) of single projects, rather than on the credit merit of single shareholders.

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Project Finance: Definitions and Main Characteristics

The operational phase (likewise construction) is of primary importance, as only

effective and high-quality management allows generating the necessary cash flows
to satisfy banks and shareholders.

The editing of the operation is characterised by an important process of

negotiations amongst the various subjects involved (i.e. shareholders, banks,
commercial counterparts), with variable duration and aiming to distribute initiativerelated risks amongst the various actors involved.

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Project Finance: Definitions and Main Characteristics

Project Finance Step-by-Step
Agreements
and
Negotiations

Monitoring

Business Idea
Description
EVENTS

Debt Service period

Studies and
Analyses

Proposal

Debt Settlement

Funding

ORIGINATION

CONSTRUCTION

OPERATION

Data Collection and Analysis

Execution

Management

PHASES

DOCUMENTS
Financial
Model

Term Sheet SPV Deed of

Partnership
and Statute
Feasibility
Study

Monitoring Report

Commercial and
Funding Contracts

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Project Finance: Definitions and Main Characteristics

DESIGN BUILD FINANCE OPERATE

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Due Diligence and Risk Analysis

Loan Banks, supported by external consultants professional, independent, and wellreputed on the financial market resort to Due Diligence for:

Correct assessment of risks linked to the Projects nature and structure so as to identify
the possibility to mitigate such risks

Establish funding terms and conditions

Create a robust Project structure also via a financial model capable of supporting
sensitivity analysis

Evaluate Project actual financiability

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Due Diligence and Risk Analysis

Risk Trend
ORIGINATION
PHASE

CONSTRUCTION
PHASE

OPERATION
PHASE

CONSTRUCTION
RISK

RISK FOR
DEVELOPERS

PRODUCTIVE
RISKS
MARKET RISKS

START-UP (Debt
Service starts)

REGULATORY
RISKS

RISK TREND

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Due Diligence and Risk Analysis

Risk Analysis and Risk Allocation of a Wind Farm Project
Price Risks/Market Risks
Identification

Energy price trend

Mitigation

Long-term projection of energy prices through adequate market surveys carried out by
independent external consultants

Annual revision mechanisms for prices envisaged in the funding contract

Mechanisms of anticipated debt payment in the hypothesis of cash sweep
Power Purchase Agreement : fixed-term and fixed-price energy sale contracts

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Due Diligence and Risk Analysis

Risk Analysis and Risk Allocation of a Wind Farm Project
Productive Risks
Identification
Analysis of site windiness
Turbine and system availabity factor
Turbine technology
Mitigation
Evaluation of wind energy production
Guarantee mechanisms of turbine supplier and manager through appropriate EPC and
O&M contracts
Turbine selection

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Due Diligence and Risk Analysis

Risk Analysis and Risk Allocation of a Wind Farm Project
Construction Risks/Completion Risks
Identification
Construction price variations
Construction delays
Turbine performance risk
Mitigation
Multi-site construction programme
Constructor evaluation
Turn Key construction contract with guaranteed prices and deadlines
Penalty mechanisms for constructor
Reserve mechanisms for possible increase in Project costs (guarantee both on
availability and productive capacity)

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Due Diligence and Risk Analysis

Risk Analysis and Risk Allocation of a Wind Farm Project
Regulatory Risks
Identification

Obtain necessary authorisations and permits

Environmental Impact Assessment (E.I.A.)
Mitigation

Revision of Project authorisations and permits

Analysis of land contracts

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Financial Instruments
Financial Strategy and Economic and Financial balance
Investments

Operational
Costs

Other Costs

Revenue

Profitability Indices
Contractual Structure
Operational
Cash Flows

Risk Analysis

Bankability
Indices

Financial
Risk Allocation
and
Quantification

Debt Service
Capacity

Structure
Debt service
requirements

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Capacity
Requirements?

Financial Instruments
Economic and Financial Balance
Economic and Financial
Balance

PROFITABILITY

IRR

BANKABILITY

NPV

DSCR

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LLCR

Financial Instruments
Profitability

PROFITABILITY
Project capacity of: (a) creating value; (b) generating
adequate level of profitability of the invested capital
versus private investors expectations, and possibility to
activate project financing.

IRR

NPV

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Financial Instruments
Bankability

BANKABILITY

Project capacity to generate sufficient cash flows to

guarantee debt payment, compatibly with adequate return
for private investors involved in the realisation and
management of the initiative.

LLCR

DSCR
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Financial Instruments
Financial Structure

DEBT

Subordinated Debt

EQUITY

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Financial Instruments
Creating a Wind Farm: Percentage Cost

ELECTRIC
WORKS 15%
PUBLIC WORKS
10%

VARIOUS
5%
TURBINES
70%

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CONTACTS
UNITA tecnica FINANZA di PROGETTO
Head Office - Via Boncompagni, 30 00187 Rome, Italy
Tel. +39 06 4761 1850 1846, Fax. +39 06 4761 1857 www.utfp.it
Gabriele FERRANTE Financial Advisor
Tel. +39 06 4761 1935
Email: g.ferrante@governo.it

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