Project Finance Advanced Modeling: Syllabus

New York Apr 14-15, 2010

Part 1 - Project Finance vs. Corporate Finance

• Corporate finance is a balance sheet exercise
• Project finance is a cash flow exercise
• "Cash is King"
• The Time Value of Money ("TVM")
• "A Dollar Day Is Worth More Than A Dollar Tomorrow"

Part 2 - The Role of the Model & Common Rules

• Reflection of the Project & Financing Documents
• An easily manipulated model to reflect changes in the deal
• A tool to support negotiations
• "Always negotiate off the model and never model off the negotiations"
• Run different cases and scenarios
• Essential model layouts and rules

Part 3 - The Risk Matrix

• What is Risk?
• A statistical perspective
• A level view of risk
• Risk is not pejorative
• What is Reward?
• Does the reward adequately compensate the risk?
• "Beauty is in the Eye of the Beholder"
• How do we approach risk from a modeling standpoint?
• Matching risk mitigation with documents and cash flow

Part 4 - Introduction of a Project for Modeling

• The project structure and the model
• Project Documents are financed, not models
• Appropriately representing document structures in the financial model
• Nominal versus real models
• Real models underestimate real cash taxes

Part 5 - The Project Documents

• Overview of the major Project Documents used for the modeling exercise
• Which documents can be modeled and which cannot?
• How to translate these Documents to the model

Part 6 - The Assumption Page

• Off-take Contract
• Capacity payments vs. variable-based payments
• Concept of time-based versus unit-based contracts
• The cornerstone contract to high-leverage project finance structuring
• Operational Contract
• Construction Contract
• Fully wrapped contracts versus cost-plus contracts
• Supply/Raw Materials Contract
• Reserve contracts versus supply contracts
• Financial Term Sheets
• Including quantitative elements of security packages
• Project Taxes
• Development and construction taxes
• Operational taxes
• Impact of depreciation on operational taxes
• General Macroeconomic Indicators & Currencies
• Inflation and escalation impact
• Purchasing power parity ("PPP")
• Capital Costs & Project Timing

Part 7 - Operations

• Correctly matching units
• Crossing out appropriate units and tariffs to arrive at cash
• Fixed and variable costs
• Matching cost drivers to revenue drivers
• Escalation factors
• "How many angels are on a pinhead?"
• Operational taxes
• Accurately assigning appropriate taxes

Part 8 - Construction

• Various draw profile & timing
• Equity first
• Pro-rata
• Philosophy on timing returns and risk vis-à-vis construction draws
• Interest During Construction ("IDC") & Commitment Fees
• Contract splitting for on- & off-shore costs

Part 9 - Insurance

• Construction
• Operation
• The role in the Security Package

Part 10 - Taxes

• Identifying and negotiating tax holidays
• Matching appropriate domestic and foreign taxes in the model

Part 11 - Depreciation

• Different modeling techniques
• The "Trapped Cash" dilemma
• Thin-Capitalization issues

Part 12 - Financing(s)

• Circularity
• Debt profiles
• Mortgage, or annuity, style
• Level-Principal style
• Sculpted debt
• Currencies
• Matching currencies to revenue drivers
• The FX dilemma, forecasting future spot rates
• Repayment terms (including grace periods)
• Escrow accounts/funding and/or Letter of Credit
• Model switches and masks
• Coverage ratios

Part 13 - The Income Statement

• Flow of information from worksheet tabs to the Income Statement

Part 14 - The Balance Sheet

• Balance checks
• Addressing Working Capital in the Current Accounts
• Flow of information from worksheet tabs to the Balance Sheet

Part 15 - The Statement of Cash Flows

• Flow of information from worksheet tabs to the Statement of Cash Flows
• Waterfall of payments
• Trapped Cash
• Cash accounts and distributions
• Issues related to retained earnings

Part 16 - Equity Returns

• IRR calculations
• Addressing NPV and Weighted Average Cost of Capital ("WACC")
• Theory versus reality
• "Don't give away the farm"

Part 17 - Loan Values

• Calculating present value of the loan
• Calculating average loan life

Part 18 - "Pricing the Deal" and Scenario Analysis

• Review potential risks in the equity model and project documents
• The equity's view
• Lenders' view
• The other participants' views
• Refining role of a risk matrix and reflection in the model

Part 19 - Monte Carlo Simulations

Part 20 - Documenting Changes to the Model

• Downside, Base and Upside Cases
• How to use the model to price and negotiate
• (a) Tables
• (b) Goal seeking
• (c) Logic functions
• Analysis of Liquidated Damages ("LD")
  • Delay in Start-up
  • Shortfalls in Performance
  • Calculate and analyze if they are sufficient in terms of the risk
• Summary, questions and discussions