A 5–day intermediate training course featuring:
- Economic analysis of renewables
- Development phase analysis of wind and solar projects
- Modelling exploration and development options
- Break even development probability
- Resource assessment of wind, solar, geothermal and hydro
Featuring:
Case study: Throughout the five day course, we will use a case study on a solar, on-shore and off-shore wind farm project. General information on the case will be provided to course participants ahead of the course.
Course objectives
The overall objective of the course is to provide participants with a general background on how project finance works in the context of renewable energy investments. After completing the course, participants will understand project finance terminology; the economic and financial theory that underlies different transaction structures; the motives of different parties in a transaction; and, the importance of various financial and contract provisions.
The teaching approach is hands-on using excel exercises along with lectures, and case studies using solar, geothermal and wind farm transactions. The course will be structured assuming that participants have little or no hands on experience in project finance scoring.
The course will be of value to professionals in the following areas:
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Corporate Finance / Corporate Treasury
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Capital Markets
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Audit / Product Control / Risk Management / ALM
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Research & Analysis
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Sales & Trading
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Investment Management
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Origination
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Securitisation / Syndication
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Structured Finance
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Money Markets / Repo
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Systems Programming
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Funding
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Government / Agency Funding & Investment
- Regulation / Compliance / Documentation
Day 1
Overview
- Project finance terms and transaction structure
- Project finance definition
- Phases in project financing
- Structure and contracts in project financing
- Overview of project finance debt
- Economic and financial theory of project finance
- Importance of cost of capital for capital intensive renewable investments
- Traditional financial analysis of investment
- Problems in measuring risk of investments and lessons from financial crisis
- Use of debt capacity in project finance to measure risk
- Costs and benefits of project finance
- Financial theory and project finance
- Examples of successful project finance transactions
- Examples of unsuccessful project finance
Case study introduction
Throughout the five day course, we will use a case study on a solar, on-shore and off-shore wind farm project. General information on the case will be provided to course participants ahead of the course.
The introduction to the case will discuss comparison of transaction with other renewable and non-renewable
electricity transactions; why project finance was used rather than other financing alternatives; how to interpret the sources and uses of funds statement, the cash flow waterfall and general structure of the project finance debt.
Economic analysis of renewable investments
- Drivers of value in renewable energy projects
- Resource assessment
- Electricity pricing
- Capital costs
- Taxes and financing
- Operating costs
- Risk analysis and value measurement
- Development of simple financial model
- Computation of irr and dscr
- Risk analysis using break-even analysis
- Risk analysis using scenario analysis
- Risk analysis using spider and tornado diagrams
- Discussion of nuanced economic issues
- Value and costs of development and research stage
- Mean reversion of resource evaluation
- Value of different tax and financing incentives
Day 2
Development phase analysis
- Overview of development costs in renewable projects
- Development time frame and costs in wind and solar projects
- Exploration costs and time frame in geothermal projects
- Development fees and compensation for development
- Probabilities of proceeding beyond development
- Modelling exploration and development options – geothermal case
- Inputs – exploration and development cost, probability time frame
- Segregating development phases
- Discount rates for different stages
- Computation of expected value
- Interpretation of development value
- Relative effect of development cash costs and construction costs
- Break-even development probability
- Length of development period
Day 3
Resource assessment
- Overview of resource assessment in renewable projects
- Resource assessment of wind
- Resource assessment of solar
- Resource assessment of geothermal and hydro
- Probability distributions of resources
- Exercise on modelling resource distributions of wind
- Power curve for wind turbines
- Distribution of wind resources and wind studies
- Simulation of power distribution
- Computation of P95, P90, P75 and P50 statistics
- Interpretation of resource assessment
- Mean reversion of resources
- Aspects of probability distribution other than resources
- Use of probabilities in financial analysis
- Contrast among different risks
Day 4
Valuation and credit analysis in project finance
- Financial statement analysis in project finance
- Source and use of funds statement
- Income statement and use of EBITDA
- Interpretation of cash flow statement
- Evaluation of operating and debt service reserve accounts
- Computation of equity cash flow and free cash flow
- Analytical Exercise: Computation of equity cash flow, free cash flow and cash flow for debt service from financial statements
- Project finance valuation
- Project IRR to screen projects
- Equity IRR to structure projects and minimum required equity IRR for different Renewable projects
- Equity IRR complexities from re-financing and development fees
- Credit analysis in renewable project finance
- Background on probability of default and loss given default
- Definition and calculation of DSCR
- Use of DSCR in base (P50 cases) and downside (P90, P95 cases) in determining debt capacity
- Application of LLCR and PLCR
- Average life and other ratios
- Analytical exercise: computation of equity IRR, project IRR, DSCR and LLCR using cash flow definitions
Case study continuation – financial analysis
Participants will interpret financial statements from the case and from other electric generation transactions. The financial data will be used to evaluate the historic performance of the project from the perspective of both sponsors and lenders. Issues addressed will include the expected future trends in financial statements; discussion of interest capitalised during construction and accounting treatment of financing fees.
Day 5
Project finance models
- Objectives and structure of project finance models
- General objectives of financial models and financial forecasts
- Objectives of project finance models
- General flow and design of project finance models
- Examples of the structure of actual project finance models
- Mechanical issues in creating and interpreting project finance models
- Sources and uses analysis in models
- Importance of debt module
- Fixed asset analysis
- Profit and loss statement and tax analysis
- Cash flow waterfall
- Tax flip structures
- Analytical exercise: computation of simple financial model
Case study continuation – working with financial model
Participants will use and interpret a completed financial model of the case study transaction. The financial model will initially be reviewed and then participants will adjust various inputs in the model including use of alternative financing terms and operating assumptions. Participants will use the model to interpret equity IRR, project IRR and DSCR’s using different assumptions.
Structural enhancements in project finance
- Objectives of structural enhancements
- Definition of structural enhancements
- Timing of equity cash flow distribution and equity IRR
- Management of distributions
- Trade-offs between risk and return with structural enhancements
- Cash flow lock-up covenants
- Examples of lock-up covenants
- Cost of lock-up covenants in terms of equity IRR
- Benefits of lock-up to lenders
- Lock-up tradeoffs in alternative transactions
- Debt service and maintenance reserve accounts
- Accounting for debt service reserve accounts
- Rational for operating reserve accounts
- Example of reserve accounts in electricity generation
- Cost of lock-up reserve accounts
- Risk reduction from reserve accounts
- Cash flow sweeps
- Examples of cash sweeps in electricity generation
- Cost of cash sweeps
- Risk reduction to lenders from cash sweeps
Recap the course
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Ed Bodmer
Edward Bodmer has created innovative forward pricing, productivity measurement and investment valuation software for consulting clients throughout the United States. He has taught energy economics and finance throughout the world, and formulated significant government policy and corporate strategy in the U.S.
Mr. Bodmer's consulting clients include investment banks, commercial banks, research institutions and government agencies on a wide variety of complex valuation and advisory matters. He has constructed a unique framework for electricity price forecasting and valuation using production cost modelling techniques combined with option price theory and Monte Carlo simulation.
Mr. Bodmer is also an adjunct professor at leading University where he teaches courses in microeconomics. Along with his practical experience that covers a multitude of major advisory projects, he has taught specialised courses in financial modelling, electricity pricing, option valuation, mergers and acquisitions and contracting to investment banks, commercial banks, industrial corporations and electric utility companies.
Mr. Bodmer was formerly Vice President at the First National Bank of Chicago where he directed analysis of energy loans and also created financial modelling techniques used in advisory projects. He has used the models in providing expert testimony on subjects ranging from capital structure to investments in multi-billion dollar nuclear plants to complex valuation of new investments.
Mr. Bodmer received an MBA degree specialising in econometrics (with honours) from the University of Chicago and a BS degree in finance from the University of Illinois (with highest university honours). He has written many articles and is in the process of completing a textbook on valuation of electricity assets.
Courses run by this instructor
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