„Project financing from a bank's perspective“

1. „Project financing from a bank's perspective“ PEP Capacity Development Workshop, 30.10.2012 Dipl.-Ing. H. Eimannsberger X:\541\Berichtswesen und Öffentlichkeitsarbeit\Vorträge\Hans Eimannsberger\

2. Agenda • Investitionsbank Schleswig-Holstein and energy agency • How do banks look at loan applications? • Due diligence and what does it include? • The role of quality aspects for the assessment of project proposals • Summary

3. Schleswig-Holstein within Europe and Germany

4. Investitionsbank Schleswig-Holstein • Main development bank of the land Schleswig-Holstein • Balance sheet total 18,1 Mrd. € • New business volume 2,1 Mrd. € • 494 employees • Energy Agency • Participation in financing of : 480 wind turbines (102 wind farms) with a total installed capacity of approx. 585 mw; Investment volume: 692 million € 76 PV-Systems with a total installed capacity of approx. 95 mw; Investment volume: 248 million € 107 Biogas-Systems with a total installed capacity of 66 mw; Investment volume: 250 million € 4

5. The Energy Agency: History • 1991 Founding of the Energy Agency as part of the Investitionsbank Schleswig-Holstein • Aims • Implementation of the energy concept of the Federal State • Improvement of Climate Protection • Rational and economical use of energy • Increasing the usage of renewable energy sources • Employees • Engineers with diverse specialisation, Agronoms, Geographers etc. NotationIn Germany there are 28 energy agencies. Their main tasks are promotions of the use of RE, energy saving or energy efficiency projects. They are funded by the state, by projects or by banks.

6. The Energy Agency: Scope of consulting • Neutral Advice and Project management in the following areas: • Energy management / Energy controlling • Refurbishment of buildings (concept, selection of planner, realisation) • Contracting / Financing • Economic Energy production (Object-BHKW) • Usage of renewable Energy (Wind, Biomass, Geothermia, Solar) • Tendering for energy supply • Energy efficiency for industry and SME • Preparation of expertises for lenders, Project financers and real estate owners

7. In what do banks and financiers need to pay attention ? • Stable and secure conditions • essential for investors, industry and financiers • feed-in tariff law, promotion based on certificates, tax incentives, tenders • National/ regional licensing procedure • calculable /non-calculable; • quick and transparent or bureaucratic • Local “technical” assumptions • amongst others: wind speed, sunshine duration, sustainable acces to biomass etc. • Technology • practically proven or new technology, • service- and maintenance costs p MW/h • Credit worthiness/ political stability of a country • criterion also again in Europe

8. Risks in the construction phase • Main risks in the construction phase • Licence risk: Payment condition is the presentation of the planning permission; contradiction periods notice... • Completion risk („on time, on budget“): Banks favour general contractors • Principle: with more interfaces, there must be a higher risk integration of the sponsor • Performance (purchase) risk: • low risk by established manufacturers with proven layouts • higher risk with new manufacturers or with new layout types • careful technical audit ("Due Diligence") necessarily

9. Risks in the operating phase • Main risks in the operating phase • Wind risk: • wind measurements are important • close to the hub height • Rule: • two certificates of famous addresses are necessary • Wind farms must also be able to gain a long-term electricity yield with security discounts of 15-20% on • Servicing / maintenance costs: • Full service contracts with the manufacturer (rule) or if necessary with a famous service company (exception). • In the second decade of operation expenses could be twice as high as in the first decade If „homework are well done“, wind projects are above average investments!

10. What is Due Diligence and what does it include (1) • Due diligence is used to investigate and evaluate a business opportunity. • The term Due Diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business . • Due diligence sounds impressive but ultimately it translates into basic commonsense success factors such as "thinking things through" and "doing your homework ".

11. What is Due Diligence and what does it include (1) • Financial Due Diligence • Analysis of the financial risks and chances • Evaluation of sustainable revenues and cash flow • Evaluation of balance sheets and financial statements • Market conditions and operational aspects • Operational Due Diligence • Market / Commercial Due Diligence • Environmental Due Diligence • Currency and interest risks • Tax Due Diligence • Companies receive a respectable basis of decision-making, including assessment model, calculations of probability and sensitivity analysis.

12. What is due diligence and what does it include (2) • Why is Due Diligence conducted? • There are many reasons for conducting due diligence, including the following: • Confirmation that the business is what it appears to be; • Identify potential "deal killer" defects in the target and avoid a bad business transaction; • Gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions; and • Verification that the transaction complies with investment or acquisition criteria.

13. What is due diligence and what does it include (3) • How is Due Diligence conducted? • The parties conducting due diligence generally create a checklist of needed information. • Management of the target company prepares some of the information. Financial statements, business plans and other documents are reviewed. • In addition, interviews and site visits are conducted. • Finally, thorough research is conducted with external sources -- including customers, suppliers, industry experts, trade organizations, market research firms, and others.

14. What is due diligence and what does it include (4) • Does Due Diligence ensure that a business transaction will be successful? • A well-run due diligence program cannot guarantee that a business transaction will be successful. It can only improve the odds. Risk cannot be totally eliminated through due diligence and success can never be guaranteed. • Can using a Due Diligence Consultant ensure that I will not be sued? • No. However, conducting proper due diligence may serve as a strong legal defense to third-party claims after a transaction closes. Due diligence may also reduce legal issues by alerting a purchaser or investor to potential liabilities that can be mitigated in various ways prior to closing the transaction.

15. Checklist Due Diligence (1) • A. Basic dates company / association A 1 Current excerpts from the trade register including the associated companies A 2 Current economic reports (Creditreform etc.) including the subsidiary companies and the shareholders or partners A 3 Current social contracts including protocols of all company general meetings A 4 Historical summary of all notarial documents • formation of the company • assignment of equity shares as well as any capital increases since the formation • specifications about an advisory board / board of directors A 5 Last annual audit by the fiscal authorities and report of social insurance; list of all audits A 6 Arrangements with associated companies A 7 Presentation of all contracts with partners, shareholders, managers and their close members as well as associated companies

16. Checklist Due Diligence (2) • Other check lists which are needed: • Finances • Balances, investment planning, list of the credits etc. • Marketing / Sales • Turn overs, competitors, marketing strategy etc. • Organisation • Information- and Controllingsystems, contracts etc. • Facility sites • Company properties, plants, vehicles etc. • Human resource management • Employee, notices of cancellation, judicial procedures etc. 16

17. Which role do quality aspects play ? • The quality of applications plays a considerable role, because • it makes clear that the beneficiary has experience, • it shows that the applicant for the credit has dealt with all questions (used technology, grid connection, maintenance costs, risks etc.), • it enables to save expenses for additional certificates, • it helps to evaluate risks and chances correctly, • it facilitates the processing of applications, • it might lead to the fact that the beneficiary gets his money faster with which he can achieve his project quickly .

18. Best Practise : Windpark Essaouria (Marokko) • The challenges • Exchange risks • Young market for wind energy projects • Hardly qualified specialised personnel • Non-specific ownership structures of land and property • Feed-in • Logistics and service • The solution • Strong support of the sponsor • Integration of means from the KfW-environmental programme (abroad) • Integration of Hermes guarantees

19. Summary • A bank must be able to judge the risk of a wind park project exactly, • to accompany properly disturbances in the course of the project, • to make a cost-covering credit decision • An essential assumption for the assessment of projects and business partners is the Due Diligence with its different check lists • Due Diligence and the cash flow model should be drawn up by an experienced planning office • banks who entry into the business of financing wind energy plants should search an experienced bank partner for themselves Nevertheless are wind projects above-average sure investments.

20. Thank you very much for your attention! Hans Eimannsberger Head of Energy Agency Tel. (04 31) 99 05 - 36 60 hans.eimannsberger@ib-sh.de Investitionsbank Schleswig-Holstein, Fleethörn 29 - 31, 24103 Kiel Fax: (04 31) 9905 - 36 52, www.ib-sh.de