Energy Sector Project Finance, Management & Analysis

This 5-day course explores the management and analysis of project finance in the energy sector.

  • Course Instructor

    Ed 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.

This project finance course answers the questions: 

  • What is the big deal about project finance and what makes project finance different from other forms of financing?
  • Where does debt and equity money come from?
  • What are the benefits of project finance relative to the high fees received by lawyers and bankers?
  • Where has project finance been used and what have been the largest project financings?
  • What type of risks should be evaluated in project finance to test when projects go bad?

Introduction to Project Finance

The course begins with introductory comments about the skills and general objectives in project finance analysis with an emphasis on the difficulty in measuring and valuing risk. Project finance terminology, the structure of project finance debt, project contracts and other issues are discussed in the context of a case study and a completed project finance model. Subjects discussed in the first module include:

  • Overview of Project Finance Terms/Project Finance versus Corporate Finance
  • Project Finance Definition and Definition of Selected Terms
  • Phases in Project Financing
  • Structure and Contracts in Project Financing
  • Characteristics of Project Finance Debt and Debt Service Coverage
  • Project Finance Analysis Compared to Traditional Corporate Finance
  • Advantages and Disadvantages of Project Finance – Sponsor
  • Advantages and Disadvantages of Project Finance – Government/Off-taker
  • Excel Case Exercise: Simple Project Finance Model
  • Industry Sectors and Different Risks in Project Finance
  • Sectors that are not applicable (high-technology/innovation)
  • Commodity Pricing: Oil and Gas
  • Commodity Pricing: Mining
  • Take or Pay Contracts: Electricity Independent Power and Water
  • Merchant Power Plants: Electricity Independent Power
  • Renewable Energy and Resource Analysis
  • Infrastructure with Traffic Risk
  • Infrastructure, Public Finance and Availability Payments
  • Case Study Risk Identification and General Terms in a Project Finance Transaction
  • Overview of Transaction Structure
  • Reasons for Use of Project Finance
  • Risk Classification – Risks During Different Project Phases, Political, Market
  • Risk Identification – Description of Different Risks
  • Risk Mitigation – Alternative Techniques and Limitations
  • Risk Coverage – Break Even Analysis and Debt Service Coverage
  • Cash Exercise: Measurement of Break Even using DSCR

Issues addressed in the first session include:

What is the big deal about project finance and what makes project finance different from other forms of financing? Where does debt and equity money come from these Modules in project financing? What are the benefits of project finance relative to the high fees received by lawyers and bankers? Where has project finance been used and what have been the largest project financings? What type of risks should be evaluated in project finance to test when projects go bad?

Technical Mechanics of Project Finance

The second part of the course covers technical mechanics of project finance transactions as well as valuation and credit analysis. The valuation section addresses appropriate use of equity and project internal rate of return and net present value. The credit analysis describes use of debt service cover and other ratios to measure the credit risk and debt capacity of a project. Issues addressed in this part of the course include:

  • General Contract Structure in Project Finance Using Case Study
  • Concession Agreements and Build Own Operate
  • Relationship Between Contracts and Back-to-Back Contracts
  • Insurance and Third Party Support
  • Government Guarantees
  • Structuring Special Purpose Vehicles
  • Structure of Financing and Dividends
  • Flip Structures
  • Conflicts of Interest and Limits on Negotiation
  • Case Exercise with Excel: Cash Flow Flip and Risk Transfer
  • Concession Contract/Off-take Contract
  • Applicability to Different Industries
  • Structure and Usage versus Availability Payments
  • Timing and Costs of Delay
  • Termination Issues
  • Case Exercise with Excel: Bidding for Contracts
  • Construction Contract
  • Lump-sum Fixed Price versus Cost Plus
  • Limited Recourse and Responsibility for Cost Over-runs
  • Milestones and Conditions Precedent for Draw Down
  • Relationship with Operation Contract and Off-take Contract
  • Force Majure and Limitations on Responsibility of Contractor
  • Completion Tests
  • Liquidated Damages for Performance
  • Liquidated Damages for Delay
  • Case Exercise with Excel: Computation of Liquidated Damages for Delay
  • Operation and Maintenance Contract and Supply Contracts
  • Relation with Construction Contract
  • Incentives in Operation Contract
  • Responsibilities of Operator
  • Take or Pay Supply Contracts
  • Political Risk Insurance
  • Basic Three
  • Applicability to Debt and Equity
  • Additional Risk Insurance
  • Payment Conditions for Risk Insurance
  • Development Institutions and Leverage
  • Analysis of Debt Sizing, Debt Structuring and Returns in Project Finance
  • Bank Loans versus Bonds
  • Debt Structuring in Tight Transactions versus Loose Transactions
  • Debt Structuring
  • Key Features
  • Timing of Debt and Equity Draws During Construction
  • Treatment of Cost Over-runs
  • Pricing of Debt and Changing Spreads
  • Debt Tenor and Grace Periods
  • Alternative Debt Repayment Methods (Level, Annuity, Sculpted)
  • Debt Service Reserve Account
  • Covenants
  • Cash Flow Sweeps
  • Case Exercise: Excel Exercise with Debt Structuring and Debt Sizing

Some of the issues addressed in this session include:

How are project IRRs and the equity IRRs used in making investment decisions? What is the difference between equity cash flow, free cash flow and cash flow for debt service? What debt service coverage ratio is appropriate for various types of projects? Why do bankers use the LLRC and PLCR in measuring the credit risk of a project?

Understanding Project Finance Models and Financial Statements

After the introductory discussion, participants construct a basic project finance model to become familiar with the structure of a project finance model, equity cash flow and free cash flow. The model is then used to demonstrate how interest during construction, multiple equity sources and target debt service cover can be added to a model. Once the fundamental model is built, it is used in the context of simple applications involving debt capacity, contract pricing, debt structuring, break-even analysis and probability of default. Construction of a simple model involves the following:

  • Objectives of Project Finance Models
  • Structuring and Tight DSCR Projects
  • Computation of Contract Prices and Other Contract Terms
  • Risk Analysis and Sizing in Downside Cases
  • Development of Assumptions and Alternative Scenarios
  • Key Parameters in Project Finance Models
  • Analysis of Models and Evaluation of Key Decisions
  • Project Finance Models versus Other Kinds of Models
  • Mechanics of Project Finance Models
  • Setting-up project phases in model
  • Sources and uses of funds statement during the construction period
  • Debt schedule and connection with cash flow statement for Sweeps, Traps, Defaults, and DSRA
  • Income Statement to Compute Income Taxes
  • Cash Flow Statement and Cash Flow Waterfall
  • Computation of Model Outputs – Equity IRR, DSCR, LLCR, and Debt IRR
  • Avoiding Bad Practices in Modelling
  • Best Practice Objectives
  • Inputs and Organization
  • Transparent Calculations
  • Simple Formulas
  • Auditing, Balance Sheet and Model Checks
  • Technical Issues After Construction
  • Computation of Tax Depreciation and Amortisation of Fees
  • Cash Flow Waterfall Mechanics and Issues
  • Debt Service Reserve Account Cost and Benefits
  • Working Capital Facilities
  • Cash Flow Sweeps
  • Cash Flow Trap Covenants
  • Subordinated Debt
  • Maintenance Reserve Accounts
  • Alternative Computation of Debt Service Coverage Ratio
  • Equity Cash Flow and Free Cash Flow
  • Project Finance Valuation with Models
  • Cash Flow as Basis for Valuation
  • Project IRR to Screen Projects
  • Equity IRR to Structure Projects
  • Modified IRR and NPV versus Unadjusted IRR
  • Payback and Other Valuation Metrics
  • Reading and Interpreting Models
  • Re-creating Models
  • Testing Models for Extreme Changes in Key Variables
  • Computation of Equity IRR

Some of the issues addressed in this session include:

What basic components should be included in a project finance model? How should the model be developed to assure flexibility in debt terms? How can a project finance model be used to compute the debt capacity of a project? What techniques should be used in computing the financial ratios for a project? How can a project finance model be used in determining contract prices? How can interest during construction be incorporated in a model?

Risk Analysis in Project Finance

This part of the course involves discussion of modelling mistakes, model layout and best practices spreadsheet conventions as a prelude to hands-on work on a comprehensive model. Lectures address the objectives of project finance models, mistakes that have been made in project finance models, how models should be laid out and best practices in programming a model. The objective is to explain the fundamental structure of a project finance excel model and excel techniques that create efficient, robust and stable project finance models.

  • Evaluation of Project Finance Statements
  • Accounting Issues in Project Finance – Depreciation, Interest During Construction, Income Taxes, Dividends
  • Equity Cash Flow, Project Free Cash Flow and Cash Flow Available for Debt Service
  • Importance of Cash Flow in Project Finance Relative to Income
  • Cash Flow Waterfall
  • Balance Sheet Changes over Time
  • Analysis from Sponsor Perspective
  • Cash Flow as Basis for Valuation
  • Project IRR and Pre-tax IRR versus Equity IRR
  • Feasibility Study and Project IRR versus Interest Rate to Screen Projects
  • Development Costs and Show Stoppers
  • Value for Money Analysis in PPP Projects
  • Equity IRR requirements and Equity IRR Adjustments
  • Modified IRR and NPV versus Unadjusted IRR
  • Payback and Other Valuation Metrics
  • IRR and Risk Sharing in PPP Projects
  • Equity Returns and Valuation in Case Study
  • Risk and Credit Analysis in Project Finance
  • Risk Classification, Risk Mitigation and Risk Allocation Matrix
  • Understanding Alternative Fundamental Business Risks in Project Finance
  • Risks from Statistical Analysis in Renewable Resource
  • Risks of Commodity Prices, Volatility and Long-term Prices
  • Risks of Traffic Studies and Track Record of Forecasts
  • Risks of Unconventional Technology
  • Off-taker Risks
  • Why DSCR is the Central Measure of Risk for Lenders in Project Finance
  • Construction of Realistic Downside Case Assumptions
  • Sizing of Debt Using DSCR in Base Case versus Downside Case
  • Case Study of Risk and Return
  • Risk Allocation in the PPA
  • Construction Risk
  • Operation Risk
  • Risk Mitigation

Some of the issues addressed in this session include:

What have been analytical mistakes in project finance failures? What are examples of risks that have cause major projects to fail such as Eurotunnel, Euro Disney, U.S. merchant electric plants and Enron’s Dabhol LNG plant? How should risks be classified and mitigated in project finance? What are some of the excel rules that guide accurate and efficient development of models? How can project finance models be audited to check errors that we will make? What should we do to incorporate alternative debt structures and interest during construction into the model?

Re-Financing, Covenants and Risk Mitigation in Project Finance

This part of the course involves performing analysis with the case study. The course module addresses effectiveness of covenants, cash flow traps, and alternative levels of senior and subordinated debt issues. In addition, the model includes cash flow waterfalls, covenants, defaults and cash traps. The analysis deals with how risk and return can be gauged through equity IRR and debt service cover. Issues covered in analysis of the case study include:

  • Re-financing in Project Finance
  • Theory of re-financing
  • Benefits from Re-financing
  • Effects of Re-financing for Different Types of Projects
  • Mechanics of Re-financing and Dividends
  • Re-financing and Measurement of Equity IRR
  • Measurement of Risk and Return
  • Risk analysis using break-even points on debt
  • IRR and risk with different senior and junior debt
  • IRR and risk with different cash flow trap structures
  • Debt Service Reserve Accounting and Modelling
  • Accounting for debt service and other reserves
  • Illustration of impacts in project model
  • Circularity problems
  • Interest income
  • Covenants in Project Finance
  • Positive and negative covenants
  • Project finance covenants versus corporate covenants
  • Covenants and risk analysis of projects
  • Examples of covenants

Some of the issues addressed in this session include:

What types of covenants are included in project finance transactions? Is it more important to trap cash during good times or develop covenants that prevent cash from leaving the project when times are bad? How much safer is senior debt than junior debt? Should cross defaults be included in the transaction? What is the appropriate level for various covenants and what financial ratios should be used in the covenants? How can we model inflows and outflows from a debt service reserve? What complications arise from modelling senior and subordinated debt tranches? Can we really quantify the cost and benefits of covenants and cash flow traps? What should we do to the model when a debt payment default occurs?

Electricity Independent Power Projects

This part of the course begins with addressing industry specific project finance subjects. The first industry is the independent power business. Issues addressed include pricing of a PPA contract, risk allocation theory in determining contract provisions and evaluating the economics of electric power.

  • Introduction to Independent Power
  • Terminology for IPP Projects
  • Recent Development of Large Power Projects
  • History of Independent Power
  • General Concepts of Risk Allocation for IPP Projects
  • Allocation of Risks between Off-taker and SPV
  • Calculation of Carrying Charges and Levelized Cost of Electricity
  • Risk Allocation in PPA Contracts
  • Demand Risk and Capacity Addition Risk for Merchant Power Plants
  • Fuel Cost Risk and Fuel Cost Volatility
  • Construction Phase Risks
  • Operation and Maintenance Risk
  • Availability Risk and Costs of Reduced Power
  • Heat Rate Risk and Use of Target Heat Rates
  • Currency Risk and Inflation Risk
  • Case Study of IPP Projects and PPA’s in the Philippines
  • Other Risks in PPA Plants
  • Exchange Rate Risk and Indexing of Capacity Charges
  • Interest Rate Risk and Interest Rate Swaps
  • Political Risk
  • Off-taker Default Risk
  • Off-taker Analysis
  • Review of IPP Defaults and Problem Loans
  • Potential Problems with Off-taker from Cost Increases
  • Exchange Rate Risk for Off-taker and Purchasing Power Parity
  • Case Study on Off-taker Risk
  • Modelling Issues for Plant with PPA Contract
  • Review of Power Project Models
  • Modelling PPA Contract and Target Heat Rate
  • Modelling Actual Costs and Actual Heat Rate
  • Evaluating Exchange Rate Risk
  • Modelling Interest Rate Risk
  • Computing Bid Prices with Different Financing
  • DSCR and IRR Criteria for Different Projects
  • Computing Debt Size from DSCR and Leverage Constraints
  • Computing Capacity Charges from Equity IRR
  • Determining Bid Prices and Debt Size from Financial Constraints

Merchant Power and Contract Power

This section of the course continues the discussion of electricity issues in project finance and addresses the economics of electricity pricing along with merchant electricity projects.

  • Policy Analysis and Electricity Project Finance
  • Alternative Electricity Policy Options in Electric Power
  • State Ownership Advantages and Disadvantages
  • Regulated Power Pros and Cons
  • De-regulated Market Benefits and Costs
  • Single Buyer IPP Model Issues
  • Cost Analysis of IPP from Off-taker Perspective with Lease Treatment
  • Electricity Technologies and Case Study
  • Capital and Operating Cost Data
  • Carrying Charge Analysis
  • Levelized Cost Analysis of Different Technologies
  • Comparison of Costs with Different Cost of Capital
  • Merchant Power and Risk Allocation in PPA Contracts
  • Review of Electricity Prices
  • Bid Price Simulation
  • Analysis of Supply and Demand and Electricity Prices
  • Simulation of Prices with PPA Contracts and Merchant Plants
  • Use of Electricity Price and Electricity Cost in PPA Analysis of Availability
  • Case Study of Mixed PPA/Merchant Electricity Plant
  • Factors that Drive Electricity Price Movements
  • Changes in Market Structure and Electricity Price Movement
  • Debt Capacity of Merchant Power Plants
  • Use of Scenario Analysis in Evaluating Power Plants
  • Construction of Scenario Analysis in Electricity Plant Model

Oil and Gas Project Finance

  • Introduction to Energy Projects
  • Historic Commodity Prices
  • Volatility and Mean Reversion of Commodity Prices
  • Analysis of Refining Margins
  • Supply Curve of Mining and Refining Projects
  • Correlation among Commodity Prices
  • Marginal Cost of Commodity Prices
  • Modelling of Energy and Mining Projects
  • Evaluation of Volumes and Availability
  • Separation of Fixed and Variable Costs
  • Use of Cash Flow Sweeps
  • Modelling of Deferred Payments
  • DSCR Requirements for Refining Projects
  • Break-even Analysis on Costs and Margins
  • Use of Monte Carlo Simulation to Measure Probability of Default and Credit Spread
  • Case Study of Refining Project
  • Project Structure
  • Structure of EPC Contracts and Guarantees
  • Consultant Studies of Margins and Competitive Position
  • Downside Risk Analysis
  • Re-financing and Upside in Energy and Mining Projects
  • Re-financing and Credit Spreads
  • Re-financing after Repayments
  • Potential for Re-payment of Initial Debt
  • Increased Debt and Dividends from Re-financing
  • Modelling Optimal Re-financing of Projects

Renewable Energy Project Finance

  • Introduction to Renewable Power
  • Comparison of Alternative Technologies
  • Feed-in Tariffs versus PPA Contracts
  • Importance of Cost of Capital in Renewable Projects
  • Changes in Capital Cost of Renewable Projects
  • Policy Issues for Renewable Power
  • Different Financial Issues for Different Types of Projects
  • Resource Assessment
  • Resource Assessment for Alternative Project Types
  • Variability in Wind Resources versus Solar Projects
  • Quantity Risks from Resource versus Technical and Statistical Factors
  • Interpretation and Use of P90, P75 and P50
  • Statistical Analysis of Power Production
  • Power Curves and Solar Efficiency
  • Degradation of Power in Solar and Wind
  • Risk Analysis and Contracts in Renewable Electricity
  • Construction Phase and Technological Risks
  • Contracts State with Suppliers for Plant Efficiency
  • Scenario Analysis for Capacity Factor Risk
  • Off-taker and Counter-party Analysis
  • Modelling and Analysis of Renewable Projects
  • Computing Resource Assessment and Capacity Factor
  • Effect of Financial Structure and Sculpting on Equity IRR
  • Effect of DSRA and Cash Sweep on Returns
  • Ed 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. 

    His 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.

    He 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.

    He 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.

    He 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

    New York Hotel (energy), New York, United States

    All Euromoney Energy Training courses are held at four or five star hotels. We strive to provide you with a training environment of the highest quality, to ensure that the whole learning experience exceeds your expectations.

    Your training venue will be confirmed by one of our course administrators approximately 3-4 weeks before the course start date.