Youngsuk SEO - Levelizing Expectations

ASIA CLEAN ENERGY FORUM 2012
Levelizing Expectations
Youngsuk Seo
Senior Consultant Climate Change & Sustainability KPMG Korea
Table of Contents
Global shift of investors Major risks concerned How to meet investors expectations
03 ]
11 ]
14 ]
2012 Samjong KPMG Advisory Inc., the Korean member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Global shift of investors
Business opportunities with Korean investors
In the midst of the current global financial crisis, Koreas economy has remained robust.
- Korea shows positive GDP growth rate despite the global economic downturn.
Average annual percentage of GDP growth rate during the period of 2008 to 2010
3.5 3 Growth rate (% per annum) 2.5 2 1.5 1 0.5 0 -0.5 -1 -1.5
2.9% 2.5%
-0.2%
-0.1%
-1.2%
Korea
United States
Germany
Japan
Australia
Source: World Bank
4
In the midst of the current global financial crisis, Koreas economy has remained robust.
- Since 2000, Korea has been increasing its FDI which reached USD 25 billion in 2011. - Based on its national vision of Green Growth, the Korean government encourages green investment at home and abroad.
Annual Foreign Direct Investment during period of 2000 to 2010

30,000 25,000 20,000 USD Million 15,000 10,000 5,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: KEXIM Overseas Economic Research Institute
Korean investors have:
- good understanding of Asias business practices (40.8% (10.5 billion) of Koreas total FDI in 2011 was injected into the Asian market) - emerging needs of off-shore carbon credits following the introduction of the national Emission Trading Scheme (2015)
Korean investors pursue long-term partnerships rather than project-based approaches.
- higher possibility for scaling up the business
Obstacles to overcome
- very conservative approach, last minute joiner (Investment withdrawal due to lack of clarity on the FIT policy in the Philippines)
Possible investment from Korean investors
Strategic Investors (SIs) - are power companies and equipment manufacturers - have longstanding experience and expertise in the power industry as well as strong funding power - are new to the renewables industry - have the desire to participate in both funding and EPC/O&M of projects - may have possibly lower investment criteria to build track records - may provide stronger warranties to cover their limited experience
Equity Investment
KOESP(power company) and DSME(manufacturer) jointly developed a 40 MW wind farm in the US, scheduled to commence construction in May, 2012. Financial Investors (FIs) - are private funds, financial institutions and conglomerates - have high interest in renewable projects in Asia and reasonable hurdle rates - have the desire to work jointly with SIs - prefer experienced EPC/O&M contractors In 2010, Korea Carbon Fund and LG International invested in a 60 MW biomass project in China. (currently under construction)
Possible investment from Korean investors
Debt Financing
Korean ECAs (KOREA EXIM BANK, KOREA TRADE INSURANCE) - Are multi-billion dollar financing is possible - Offer services only when Korean parties participate in EPC and/or O&M contracts - prefer a syndicated loan structure with local banks In 2011, KOREA EXIM BANK committed USD 100 million debt financing to a 100 MW wind farm project in the US
Example of investment structure
syndication Korea ECA
Local government
Permits Incentives
Target project
Debt Financing
Local bank
Financial arranger
Interaction
Equity Funding
Korea consortium
Local developer
Tech. Service
technology
Korean FI
Korean SI
EPC provider O&M provider
Deal arranger
Case study 60MW biomass project in China
syndication Korea ECA K-sure Financial arranger Korean bank E-bank
Local government
Permits Incentives
Biomass project
Debt Financing USD 40 Million
Interaction
USD 20 Million Equity Funding Korea consortium
Tech. Service
Local developer C-company
Korean FI A-fund
Korean SI B-company
Tech. provider D-company
Shareholders
10
Major risks concerned
Deal breakers Risks at first sight

Major risks
Country Risks
Government permits and policies - The process of obtaining necessary permits may be delayed or fail. - lack of transparency in the process of obtaining permits - unstable or ineffective incentive policies Local partners - insufficient financial resources (in general, a minimum investment of 30% of the total equity is required) - credit insufficient to provide recourse to lender
Wind source evaluation - inaccurate forecast of long-term trends due to insufficient data - doubt in credibility and expertise of evaluation companies.
Technical Risks
EPC and O&M - Price over-run - insufficient security package of contractors - argument on performance default between EPC and O&M contractors
12
Deal breakers Risks at first sight

Major risks
Financial Risks
Revenue plan - absence of long term off-take agreement - lack of predictability of policies, in particular pending status of incentive (e.g. FIT, REC) policies Sunk cost - expenses for initial coordination, data gathering & analysis, preliminary due diligence and etc. - Investors are reluctant to spend any expenses before a firm decision is made.
Identifying solutions for all these concerns and developing projects that meet investors expectations are key to attracting successful investment.
13
How to meet investors expectations
Levelizing expectations
Gap between sellers and buyers
- Many projects are released into the market despite their immaturity in development. - Further development is needed to meet investors expectations: the aforementioned concerns should be addressed.
When am I ready?
- When initial milestones such as clearance of all permits and execution of major contracts before disclosing projects for sale have been achieved. - Or, at least, should have solid plans for the milestones backed by clear timelines and sufficient information.
How do I become ready?
- By preparing a comprehensive solution package from investors perspective. - And, in addition, utilizing outside expertise can be an efficient way.
15
Case study managing and minimizing the risks
Government permits and policies - The process of obtaining necessary permits may be delayed or fail. - lack of transparency in the process of obtaining permits - unstable or ineffective incentive policies Important permits such as Environmental Impact Assessment should be completed or in progress before presenting the project to investors. Developers relationship building with government officials should come first.
Country Risks
Local partners - insufficient financial resources (in general, a minimum investment of 30% of the total equity is required) - credit insufficient to provide recourse to lender Diverse financial instruments should be considered to comply with local regulations as well as to meet stakeholders needs. [case study - biomass project in the Philippines] The developer contributed 60% of common stocks with corresponding security in the form of parent company guarantee and invited preferred stock investors. (ratio of the common to the preferred 3:7)
16
Wind source evaluation - inaccurate forecast of a long-term trend due to insufficient data - doubt in credibility and expertise of evaluationcompanies Quality of data should be enhanced through diverse methods such as third party verification, standardized methodology application and named companys participation. [case study Wind farm project in Australia] +4 years of on-site wind measurement from 3 wind monitoring masts was undertaken by Garrad Hassan. Nearby long-term (+15 years) reference station exists.
Technical Risks
EPC and O&M - Price over-run - insufficient security package of contractors - argument on performance default between EPC and O&M contractors
Technical risks should be managed through safety harbour clauses in contracts. [case study Wind farm project in Australia] A fixed price/time turn-key EPC contract and a 10 year O&M contract covering both scheduled and unscheduled maintenance (to a cap) were executed with one contractor backed by a resource utilisation guarantee.
17
Revenue plan - absence of long term off-take agreement - lack of predictability of policies, in particular pending status of incentive (e.g. FIT, REC) policies
Financial Risks
Legal instruments to secure solid revenue stream such as off-take contracts or local policies should be present. [case study - Wind farm project in Australia] A 15 year fixed price off-take agreement was executed with a government (AAA- rated) owned utility company.
Sunk cost - expenses for initial coordination, data gathering & analysis, preliminary due diligence and etc. - Investors are reluctant to spend any expenses before a firm decision is made. Developers need to treat such expenses as marketing costs or investment. [case study Biomass project in China] The local developer made a solid information memorandum in consultation with a project advisor. The developer was compensated with high premium (paid 10% of total equity but acquired 40% of shareholding).
18
Questions or Inquiries, End of Document

Youngsuk Seo Samjong KPMG (KPMG Korea) Senior Consultant of Climate Change & Sustainability Office fax email +82 (2) 2112 3200 +82 (2) 2112 7670 youngsukseo@kr.kpmg.com
19

Youngsuk SEO - Levelizing Expectations

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Youngsuk SEO - Levelizing Expectations

Uploaded by

Copyright:

Available Formats

ASIA CLEAN ENERGY FORUM 2012

ASIA CLEAN ENERGY FORUM 2012

Global shift of investors

Global shift of investors

Business opportunities with Korean investors

ASIA CLEAN ENERGY FORUM 2012

Global shift of investors

Business opportunities with Korean investors

ASIA CLEAN ENERGY FORUM 2012

Annual Foreign Direct Investment during period of 2000 to 2010

Global shift of investors

Business opportunities with Korean investors

ASIA CLEAN ENERGY FORUM 2012

Korean investors have:

- higher possibility for scaling up the business

Global shift of investors

Possible investment from Korean investors

ASIA CLEAN ENERGY FORUM 2012

Global shift of investors

Possible investment from Korean investors

ASIA CLEAN ENERGY FORUM 2012

Global shift of investors

Example of investment structure

ASIA CLEAN ENERGY FORUM 2012

syndication Korea ECA

EPC provider O&M provider

Global shift of investors

Case study 60MW biomass project in China

ASIA CLEAN ENERGY FORUM 2012

syndication Korea ECA K-sure Financial arranger Korean bank E-bank

Debt Financing USD 40 Million

USD 20 Million Equity Funding Korea consortium

Local developer C-company

Tech. provider D-company

Major risks concerned

Major risks concerned

Deal breakers Risks at first sight

ASIA CLEAN ENERGY FORUM 2012

Major risks concerned

Deal breakers Risks at first sight

ASIA CLEAN ENERGY FORUM 2012

How to meet investors expectations

How to meet investors expectations

ASIA CLEAN ENERGY FORUM 2012

Gap between sellers and buyers

How do I become ready?

How to meet investors expectations

Case study managing and minimizing the risks

ASIA CLEAN ENERGY FORUM 2012

How to meet investors expectations

Case study managing and minimizing the risks

ASIA CLEAN ENERGY FORUM 2012

How to meet investors expectations

Case study managing and minimizing the risks

ASIA CLEAN ENERGY FORUM 2012

Questions or Inquiries, End of Document

You might also like