PROJECT FINANCE

1
PROJECT FINANCE

• Financing Wind Energy in Poland

Rosa Tarragó CoC RE RM Brussels, 03.04.2008
2
Agenda
1.
Commerzbank CoC
1 5
2.
Current status wind energy in Poland
6 15
2.1
Resource potential
2.2
Network availability
2.3
Environment Natura2000
2.4
Remuneration
3.
Project financing
16 19
4.
Conclusions
19
3
Commerzbank - An Overview

• CB hold gt98 of equity in Eurohypo, Europes
  largest real-estate lender
• Acquired 66.2 in November from DBK and DrKW
• CBK also owns controlling stake in BREbank

• 796 domestic branches
• 6.7 million account holders
• Telebanking business with 115,000 customers
• 850,000 deposits with assets of 130bn
• comdirect - Europes fastest growing on-line
  broker

• Corporate Relationship Management
• Capital Markets Advisory
• Debt Capital Markets
• Brokerage
• Derivatives
• Research

Asset Management

• 21 branches outside Germany

• No 5 in German Asset Management

• 780,000 high net worth customers with assets in
  excess of 12bn

• Centralized unit in Hamburg responsible for
  national and international RES projects
• Portfolio of app. 3.5 billion EUR

4
Renewable Energy is one of Commerzbanks growth
sectors
Regional markets
Commerzbank and Renewables

• Track record in renewable financing since 1986
• Project and corporate finance for our clients
  worldwide
• Commerzbank is one of Europes leading banks in
  this sector
• Portfolio of about 3.5 bn debt capital
• The Center of Competence has over 60 employees
  specialised in evaluation of RE projects and
  companies located in Hamburg and in RE desks in
  NY and Asia.
• Commerzbank has a market share of app. 20 of
  wind energy financing in Germany and is number 1
  financer in Turkey.

CoC RE
RE desk NY
RE desk Asia
Markets accounting for 90 of global RE growth .
Future growth markets
5
CB presence in CEE / CIS - strong platform for
further growth
BRE Bank (70.2) Headcount 3,878 Total
assets 11,099m Pre tax profit
135m
CB (Eurasija) SAO (100) Headcount
83 Total assets 1,070m Pre tax profit
34m
Poland
Russia
Promsvyazbank (15.32) Financial investment
Prague branch incl. Bratislava (100) Headcount
148 Total assets 2,101m Pre tax
profit 16m
Czech Republic/ Slovakia
Bank Forum (60) Headcount 2,506 Total
assets 1,102m Pre tax profit 2.5m
CB Budapest Rt (100) Headcount 113 Total
assets 843m Pre tax profit 12m
Ukraine
Hungary
ProCredit Banks Albania / Bosnia-Herzegovina /
Bulgaria / Georgia / Kosovo / Romania / Serbia
Representative offices Belarus / Croatia /
Kazakhstan / Romania / Russia / Serbia-
Montenegro / Ukraine / Uzbekistan
Data as per 12 / 2006
6
Poland strong platform for further growth in
wind business (1/2)

• Key figures
• Binding EU target 20 from RES by 2020 (15 for
  Poland, i.e. 7.900 MW)
• Existing (indicative) national target 7,5 RES
  by 2010
• Wind 2,3 of energy consumption (5,1 RES2007)
• 2.000 MW2010 from base case of ca 276 MW
• Comparison Spains (realistic) target 20.000 MW
  by 2010

Source Total Installed Capacity at the end of
2007. EWEA
Poland will have to comply with this target or
risk penalties
7
Poland strong platform for further growth in
wind business (2/2)
Puck
Lisewonia
Kisielice
Tymién
Jagniatkowo
Kamienrísk
Source PWEA Status 29/01/2008
Currently under Construction (2008)

• Till now, 9 commercial wind farms
• Mainly located on the Nord
• 788 Km of coast with high potential for offshore
  wind farms

Karscino 69 MW Lebcz 8 MW Malbork 18
MW Zajaczkowo i Widzino 90 MW
8
Poland wind resources onshore at 30 m and
offshore at 100 m
Source Institute of Meteorology and Water
Management

• Resources on Baltic Sea coast and North-Eastern
  Poland, some potential on complex terrain on the
  South
• Wind studies for each site are necessary for
  proper evaluation project financing

9
How much wind tolerate the MV HV networks?

• Key facts
• Best wind sites are located in areas with low
  population density
• Current distribution network allows connection of
  approx. 1.500 MW in the next 5 years
• Total applications 26.424 MW (427 wind farms)
• 1.120 Km of new lines defined by PSE
• PSE assumes the following amounts of installed
  power in wind sources

• .. 473 MW
• .. 901 MW
• ..1.543 MW
• ..2.297 MW
• ..2.332 MW
• ..2.376 MW
• ..2.422 MW
• ..2.471 MW

Source PSE Operator S.A.
Current network barriers funding spatial plans
10
Network capacity balancing system

• Key regulatory changes
• Network capacity for wind farms
  limited to a reserve capacity (2 years)
• Settlement of a capacity guarantee to apply for
  grid connection
• Energy balance
• Reduction of the electricity production
  schedule from 48 to 2 and now to 1 hour
• In case of unbalancing
• Balance energy sale 37.52 /MWh
• Balance energy purchase 20.37 /MWh
• Difference 17.15 /MWh
• New regulation should allow grouping of wind
  sources

Source PSE Operator S.A.
Balancing costs have to be deducted from
electricity remuneration.
11
Natura2000 environmental issues that need to be
addressed

• Key figures
• In 2007 72 areas of special birds protection
  (9.7 of the countrys area)
• In 2008 124 areas (15.62)
• In 2007 240 special habitats protection (5,4
  of the country's area)
• In 2008 264 areas (8.95)

Source ETC Biological / Diversity (European
Environment Agency)
Source Polish Ministry of Environment

• Increase in the amount of land considered as
  legitimate for being qualified as NATURA2000
• Lack of training of local institutions in charge
  of NATURA 2000 of transparency regarding
  sources on presence of priority species on
  particular areas

Source EBREC, Krzysztof Gierulski
12
Attractive remuneration system, though volatile
(1/3)
Remuneration
Black electricity prices
Black electricity prices
Certificates of Origin (CoO)
Source New Energy Finance, 10/2007
13
Attractive remuneration system, though volatile
(2/3)
Remuneration
Certificates of Origin
Black electricity prices
Certificates of Origin (CoO)
Source BRE Bank
14
Attractive remuneration system, though volatile
(3/3)
Remuneration
Challenges from a bankers view
Modelling electricity prices on power stock
exchange, power commodities
Black electricity prices
PPAs off takers creditworthiness term of the
PPAs
CoO max price substitution fee (248,46
PLN/MWh2008) annual inflation. None low limit!
Certificates of Origin (CoO)
CoO until 2012. And afterwards?
15
Poland project finance structure
Sponsors
Utility
Lenders
Subordinated Debt
Equity Subscription
Shareholders Agreement
Credit/Facility Agreement
Subordinated Loan Agreement
Power Purchase Agreement
Project Company
Insurance policies
Security
Swap/ Option Agreements
EPC Contract
Insurers
Hedge Providers
Supply Erection Warranty
Operating and Maintenance Contract
Turbine Manufacturer
Construction Contractor
OM Contractor
Which parties are involved? Which are the
relations of these parties among each
other?
Extensive contract review for diversification of
risks
Legal, Financial Technical DD
16
Evaluation parameters in wind project financing
Exemplary
Parameter
Requirements

• Is there a wind energy certificates purchase
  obligation? With priority access? Are the
  balancing market costs fix?
• Grid extension operation public or private?
  TPA?
• Credit-worthiness of the off-taker?
• Remuneration system (Feed-in, PTCs,
  Certificates)?
• How often does the remuneration law change?

Electricity market
Electricity output
Off-taker
Price
Construction phase risk

• Construction plan mitigation of commissioning
  delays, delays in receipt of permissions? Test
  period defects?
• Turbine supply alternatives purchase contract
  details, performance guarantee, completion
  guarantees?
• EPC-Contractor or Multi-Contracting?
  Subcontractors clauses? Qualified local
  workforce?

Contracting
Construction
Operational risks
Proven Technology

• Product quality? Dependence on suppliers
  know-how?
• TCMA contracts, alternative vs. reliable
  providers?
• Volatility of OM costs? Loss of licences?
• Envt monitoring plan? Business interruption?
• Operational efficiency problems?
• Exchangeability of currency? Appreciation vs
  depreciation? Interest rate changes? Cash-sweep?

O M
Macroeconomic framework
Due Diligence

• Resource assessment from independent consultants
• Secured legal title to the land? (rental, lease,
  usufruct)
• Collaterals concept based on wind experienced
  international legal advisors
• Comprehensive DDs (Legal DD, Tax DD, Technical
  and Insurance DD)

Resource Assessment
Securing of Assets
17
Cisowo Windfarm (18 MW - V.80)

• Owner Energia Eco Sp. zo.o
• Developer EPA
• Location Cisowo (Koszalin region) ca 1,5
  km from Baltic shore
• Generation 55.000 MWh/pa
• Commissioning 1st stage (3 WT) in IVQ 2001 2nd
  stage (6WT) in IQ 2002
• Turbine type Vestas V80-2,0MW
• Investment costs PLN 94 mm
  (EUR 26.1 mm at rates 02/2002)
• Financing Equity 20
  Grant 27,3 EcoFundusz,
  NFOSiGW 47,5 (National Fund for Environmental
  Protection and Water Management) (preferential
  loans for 10 years period)
• BRE Bank short term loan of 5,2 for VAT
  financing - fully repaid upon completion of the
  project
• other facilities provided by BRE Bank for the 2nd
  stage of the project
• (a) L/C (70 of the total amount of contract
  with Vestas 2nd stage of the project)
• (b) payment guarantee securing 75 of
  preferential loan provided for the 2nd stage of
  the project for 2,5 years.

18
Financing Wind farms past present
Wind farm Investment
40
Windfarm Investment
Sponsors
Windfarms
10
20
Sponsors
Hedge Providers
Subsidies
WP
Subordinated Debt
Equity Subscription
EcoFund
National Fund
WP
90
40
Debt
Debt

World Bank
Lenders
Commercial Banks
EBRD

• In the past, none international commercial banks
  provided debt finance
• The role of local commercial banks was limited
  to provide short term VAT-financing, L/C,
  payment guarantees
• Financial close only possible with large grant
  amounts international donors providing debt
  finance
• Today equity provided by renowned international
  players commercial banks
• Portion Equity / Debt changed

19
Conclusions
Joining forces to support wind energy in Poland
Resource Potential
Network conditions
Environment Natura 2000
Remuneration
30 of country area estimated to be
econo- mically suitable for wind Large offshore
potential
Favourable unbalancing settlement
model Priority access for wind Spatial
development plans Building code requirements
Natura2000 areas almost completely
defined Guidelines on EIA are current priority
of Polish wind industry
Price uncertainty of electricity CoO on
wholesale market Electricity prices are
expected to rise (capacity expansion, carbon
certificate costs, UCTE)
Market maturity large scale financing starting
mid 2009-2010
Availability
Current importance
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For further information Torsten
Hinsche Andreas Liese Rosa M. Tarragó Head of
CoC RE Vice President Relationship Manager P
49 40 3683 2232 P 49 40 3683 2659 P 49
40 3683 4927 M torsten.hinsche_at_ M
andreas.liese_at_ M rosamaria.tarrago_at_ Commerzbank.
com commerzbank.com commerzbank.com
www.commerzbank.com
21
Attractive remuneration system, though volatile

• Electricity price
• 117,49 PLN/MWh (ca. 3 c/kWh)
• Green certificates
• max. 240 PLN/MWh (ca. 6 c/kWh) inflation
• Emission Reduction Unit (CO2 certificates)
• ca. 5 /ERU

Prices for Green Certificate 2006

• Annual revenues 30 MW Kamiénsk Hill Windfarm
• 1) Electricity 74.800 MWh 2.244.000
• 2) Certificates 74.800 MWh 4.488.000
• 3) ERU 75.099 CO2t
  375.495
• Total annual cash-flow 7.107.495

OZEX index that measures the market-traded value
of CoO
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Quantification of emission reductions
Baseline emissions without JI project
(business as usual)
CO2 emissions (within project boundaries)
Emissions with JI project
reduced CO2 emissions
real CO2 emissions
crediting period
years
Project Implementation
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Project financing with BRE Bank

• BRE Bank (formerly known as Bank for Export
  Development) was founded in 1986
• In 1992 BRE Bank was privatized, since 1994
  Commerzbank strategic investor
• Nowadays, Commerzbank AG owns ca 70.2 of BRE
  Banks shares
• Key figures of BRE Bank in Poland
• 3,320 employees based in 23 commercial banking
  branches
• 1.63 million customers and a total of 1.9 million
  accounts in mbank (internet banking) and
  Multibank (retail network)
• BRE Bank has business relations with nearly every
  second company in Polands to 500 list
• whole spectrum of financial services, incl.
  leasing, mortgage bank, factoring, insurance and
  brokerage services
• one of the leading banks in Poland in project
  finance (including renewable energy), LBO/MBO
  financing