Convergence of FSRU and Power Projects The Challenge of LNG to Power 2 nd Annual Japan Ship Finance Forum 7 th December 2017 1
OUTLINE 1. Introduction 2. King & Spalding Overview 3. THE RIGHT TIME FOR LNG-TO-POWER? 4. Regasification Facility Choices 5. LNG Procurement 6. Structuring Considerations (including comparison between FSRU-IPP and FSRP Models) 7. Bankability Issues and Sources of Finance 8. PPA Considerations 9. Conclusions 2
INTRODUCTION 3
Introduction to King & Spalding Leading international law firm with 1,000+ lawyers Founded in 1885 130 years of continuous service 20 offices across Asia, Europe, Russia, Middle East and United States Full capability to support Japanese clients business around the world in the energy and infrastructure space as well as including shipping FPSO, FSRU etc development, financing and M&A: Tier 1 Energy Practice Chambers, Legal 500 20+ years experience working with Japanese clients Extensive knowhow and experience Leading practice in 52 different areas Chambers Global 2016 Recognized as one of the top five global arbitration counsel Global Arbitration Review 2016 Represent 250+ public companies including half of the Fortune Global 100 Leading firm in multiple practice areas, including real estate, finance, M&A, Government investigations, environmental liability, all aspects of dispute resolution and so on. 4
King & Spalding in Tokyo Opened in 2015, the 18th office for the firm and the second in Asia. Core team of partners well-known in the Japanese and Asia Pacific market. Advise Japanese and other clients based in Asia or investing into Asia across a broad range of complex infrastructure, energy and natural resources, finance, private equity, M&A and investment fund matters around the world. Active on matters and projects throughout Asia, North and South America, Africa, the Middle East, and Europe. The office facilitates the group s work for key Japanese and Korean clients on energy transactions, project development, financing and energy-related dispute resolution. - Chambers Asia Pacific 2016. Members of our team have been based in Japan over 20 years 5
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THE RIGHT TIME FOR LNG-TO-POWER? Electricity Consumption Growth Climate Change Policies LNG Supply Growth & Buyer s Market Fuel Oil & Coal Substitution LNG-to-Power Opportunities Improved Reliability Improved Cost Efficiency Technical Innovation and Flexibility 7
REGASIFICATION FACILITY CHOICES 8
REGAS. OPTIONS: FSRU V. ONSHORE Lower upfront capital cost Short lead time (2-3 years) Construction done in reliable developed market with skilled work force. Limits local labour issues at site location Fewer regulatory issues (nb. offshore) Flexible and scalable Unit deployed offshore, close to shore Moveable or even used as LNG carrier Flexible for shorter terms Higher capital cost Long lead time (3-5 years) Significant upfront investment capital needed Complex regulatory approval processes Limited flexibility and scalability Requires large tracts of land Fixed location Intended for long-term use Requires skilled labour at site location, greater exposure to local labour regulations. 9
PROCUREMENT: NEW VS CONVERTED New-build FSRU Converted LNG Carrier Purchase Cost: US$240 270 million Lease Cost: US$120 140k/day Bareboat: US$100 110k/day OPEX: US$18 30k/day (depending on jurisdictional factors, incl. tax) Availability: Limited slots in major shipyards Boil Off : 0.15% per day (at typical operating range) Peak Send Out: Up to 800 Mmscfd/day Higher storage volume compared to most converted carriers Purchase Cost : US$100 120 million (or US$35m engineering costs to convert from LNG carrier) Lease Cost : US$80 100k/day Bareboat: US$60-65k/day OPEX: US$20-35k /day (depending on jurisdictional factors, incl. tax) Availability : Some coming off long term charters Boil Off : 0.5% per day (at typical operating range) Peak Send Out: Typically up to 550 Mmscfd/day 10
FSRU PROCUREMENT CONSIDERATIONS VESSEL Newbuild or converted LNG carrier? Existing charter? OWNERSHIP RIGHTS Lease from owner, or Purchase from yard? FSRU STRUCTURES Does FSRU owner provide full suite of services? Connecting infrastructure / jetty? Floating Storage Unit (FSU) with Onshore Regasification Unit (ORU), or one entity with FSU and the other ORU? OTHER COMMERCIAL POINTS Will FSRU owner consider sale v. long-term charter? Sponsor technical ability to operate FSRU? FSRU owner equity in project? Dedicated or multi-user FSRU? 11
LNG PROCUREMENT 12
LNG PROCUREMENT CONSIDERATIONS Fuel Supply Coordination & Management: one of the most complex areas for LNG-to-Power. Key Considerations include: LNG baseload volumes; inventory management, storage and back-up supply LNG facilities vaporisation & gas send-out rates Power plant dispatch rates & seasonal variability Maintenance & dry-dock scheduling Testing & commissioning Power plant outages Force Majeure 13
LNG PROCUREMENT - OPTIONS LONG- TO MEDIUM- TERM SPA SHORT-TERM SPA TAKE-OR-PAY CARGO-BY- CARGO FIRM CALL OPTION SPOT SUPPLY BACK-UP SUPPLY Supply security Limited options if market changes More flexibility Supply dependent Premium pricing Buyer to take or pay over contract year with right to make-up LNG Buyer to compensate seller but seller reimburses buyer for net proceeds from resale of cargo Quantum of reservation fee Can reservation fee be passed through under PPA? Multiple partners Important Must comply w/ PPA & local law (eg emissions) 14
STRUCTURING CONSIDERATIONS INCLUDING COMPARISONS WITH FSRP(W) AND FSRU/IPP MODEL 15
STRUCTURING CONSIDERATIONS EQUITY STRUCTURE FINANCING STRUCTURE REGAS TYPE REGAS BUSINESS MODEL IPP BUSINESS MODEL INTEGRATED COMBINED FLOATING DEDICATED TO IPP BASELOAD PARTIALLY INTEGRATED NON- INTEGRATED SEPARATE ONSHORE MULTIUSER PEAKER 16
STRUCTURING CONSIDERATIONS LNG PROCURER LNG SUPPLY MODELS EPC PROCUREMENT MODEL SPA / PPA CONTRACT INTERFACE REGULATORY FSRU CO/FSRP IPP- CO/FSRP POWER PURCHASER/ GAS AGGREGATOR SINGLE SUPPLIER PORTFOLIO SUPPLY DMO SUPPLY SPOT PURCHASES SEPARATE EPC ONSHORE / OFFSHORE EPC TURNKEY EPC WRAP FUEL PRICING COMPLETION CREDIT RISK FM OPERATIONAL PERFORMANCE LOCAL SHAREHOLDING LOCAL CONTENT TAX STABILIZATION / BIT PROTECTION SHIPPING REGULATIONS 17
STRUCTURING CONSIDERATIONS Commercial Issues: Alignment of equity across FSRU and IPP? (FSRP has advantage since it is all in one) Different Sponsors / Risk Profiles of IPP v. FSRU Sponsors (FSRP has advantage since it is all in one) FSRU provider selling v. chartering vessel to IPP (FSRP has advantage since it is all in one) IPP experience at owning / operating FSRU / LNG procurement experience (issue still relevant in FSRP for operation & maintenance) Dedicated vs. Multi-User Terminal (Multi-user gas supply is not viable without a gas pipeline for offshore location may be viable for jetty side location) Tolling structure for FSRU (can be applied via an energy conversion agreement for the FSRP where Power Offtaker is procuring the LNG) Procurement of LNG and supply of gas via gas aggregator? (application to FSRP separation of the gas production and power generation, but no ability to offtake excess gas if offshore location may be viable for jetty side location allowing offtake of excess gas) Lender Issues: project-on-project risk, completion risk, operating risk, inter-creditor issues, counterparty credit risk, fuel procurement risk etc. (FSRP has many advantages from being all in one, one issue is how to manage the LNG procurement with variable power unit dispatch and no gas pipeline to offtake excess gas if in offshore location. May be overcome for jetty side location with access to gas storage) 18
Commercial Issues: Limitation on subsea transmission cable capacity (100 or 200 MW) consideration of technical limits. Consideration of cost of subsea transmission line compared to FSRU and gas pipeline to onshore power station Limitation on the storage of gas or supply of gas to multiple users of gas without a subsea gas pipeline STRUCTURING CONSIDERATIONS FSRP IN AN OFFSHORE LOCATION (COMPARED TO JETTY SIDE LOCATION) 19
FUEL CHAIN IPP AS LNG BUYER FSRU/IPP LNG SPA Fully / Partially Integrated Affiliates LNG Supplier(s) FSRU-CO tolling agreement / charter IPP PPA Electricity Offtaker FSRU / Other Gas Assets Power Assets IPP procures LNG directly, reducing risk of misalignment between FSRU-CO and IPP FSRU-CO processes LNG received from IPP Issue is how to manage the LNG procurement to match IPP dispatch. Check for PPA pass through 20
FUEL CHAIN POWER PURCHASER AS LNG BUYER FSRU/IPP Shareholders Local Partner Sponsors LNG SPA Equity & loans Dividends & loan repayments LNG Supplier Project Co ECA / Tolling Agreement Electricity Offtaker LNG procurement Power offtaker procures LNG & manages procurement and IPP dispatch risks. Energy Conversion Agreement with IPP FSRU / Other Gas Assets Power Assets 21
FUEL CHAIN GAS AGGREGATOR AS LNG BUYER FSRU/IPP Shareholders Gas Aggregator Local Partner Sponsors LNG SPA Equity & Tolling loans Agreement & Gas Sales Agreement Dividends & loan repayments LNG Supplier Project Co PPA Electricity Offtaker Gas aggregator procures LNG and enters into tolling agreement with FSRU owner to convert LNG to gas and sells gas to IPP. FSRU / Other Gas Assets Power Assets 22
EXAMPLE CASE PENCO LIRQUEN LNG TERMINAL AND ASSOCIATED GAS-FIRED POWER PLANT THE OCTOPUS LNG PROJECT LNG SPA Sponsor group owning Terminal company and IPP Co (integrated model) LNG Supplier(s) FSRU-CO Terminal Company SPV IPP Co SPV PPAs Electricity Offtaker charter LNG tolling agreements Lenders based on charter hire payments FSRU / Other Gas Assets Lenders Single financing with joint and several financings and intercompany loan structure Power Assets The Octopus LNG Project is an integrated model, which is preferred by lenders as it minimizes conflicts of interest within the structure 23
FUEL CHAIN POWER PURCHASER AS LNG BUYER FSRP Shareholders Local Partner Sponsors LNG SPA Equity & loans Dividends & loan repayments LNG Supplier Project Co ECA/Tolling Electricity Offtaker LNG procurement Power offtaker procures LNG & manages procurement and IPP dispatch risks ECA energy conversion agreement FSRP 24
FUEL CHAIN IPP AS LNG BUYER FSRP LNG Supplier(s) LNG SPA Project Co PPA Electricity Offtaker Project Co procures LNG directly Project Co processes LNG to produce gas for the gas fired generator Issue is how to manage the LNG procurement to match IPP dispatch. Check for: PPA pass through, minimum dispatch Offtake of excess gas FSRP 25
BANKABILITY AND SOURCES AND TYPES OF FINANCE 26
SOURCES OF FINANCE Sources of Finance A. Sponsor Equity and Shareholder Loans Timing Upfront pro-rata back-ended Cost overruns and completion support Debt service obligations Back financing for local partners Letters of credit for contingent and staged equity B. Bank Debt Commercial Lenders ECA (JBIC, NEXI) Criteria (nationality of sponsors, EPC procurement, O&M participation, lock-in) Hot button issues (environmental and social guidelines, bribery corruption, lock-in period, prepayment fees) Political Risk Cover Multilateral Lenders (Asian Development Bank) 27
SOURCES OF FINANCE Sources of Finance C. Bond market (unlikely to be suitable) Currency Flexibility Availability 28
TYPES OF FINANCE Types of Finance A. On-Balance Sheet with corporate guarantee Construction period Operation Period B. Off-Balance Sheet finance Construction period Operation Period C. Combination of On-Balance Sheet and Off-balance sheet financing Construction period on-balance sheet Operation period off-balance sheet 29
EXAMPLE FINANCING STRUCTURE A Lenders loans Sponsor(s) equity concession Host Gov t LNG Supplier(s) LNG SPA B IPP - FSRP PPA/ECA [+ Tolling] Electricity Offtaker Tolling Agreement EPC O&M FSRU/FSRP EPC O&M Co Limited recourse, long-tenor debt financing Back-to-back pass-through of costs/risks Lenders direct agreements with key counterparties A is the case where Electricity Offtaker is LNG Buyer and B is the case were IPP Co/FSRP is LNG Buyer. Note also gas aggregator model with gas sales agreement to IPP. 30
EXAMPLE FINANCING STRUCTURE Octopus LNG Loan Finally Closes Jan 05, 2017 The three sponsors behind an offshore LNG regasification terminal and a linked gas-fired combined-cycle project in Chile, collectively known as Octopus LNG, have closed an $850 million debt financing for the projects, more than three years after initially hiring financial advisers. The deal entered general syndication late last year and closed on Dec. 29. BNP Paribas advised the sponsors Cheniere Energy, EDF and Andes Mining & Energy on the eight-year mini-perm, and was also one of the six bookrunners. The other bookrunners were Crédit Agricole, DNB, MUFG, SMBC and Société Générale. Scotia, Korea Development Bank, Siemens Financial Services and Banco BCI also participated as lenders, say deal watchers. Pricing on the loan was said last year to be 250 basis points over Libor with multiple step-ups. The final pricing could not immediately be established. Officials representing the sponsors and the bookrunners either declined to comment or could not be reached by press time. Located in Concepción Bay, the Penco Lirquén floating LNG terminal and regasification plant is expected to come online in 2019 with a capacity of 423 million cubic feet a day. The natural gas from the terminal will supply the 1,140 MW El Campesino gas-fired project in Bulnes, Bíobío, the first 640 MW phase of which is being financed alongside the terminal with the proceeds of the $850 million loan. * Source: Power project Risk and Finance 31
MYANMAR POSSIBLE ALTERNATIVE STRUCTURE? Gas supply LNG (procured by MOGE) FSRU Owner TUA MOGE (gas aggregator) Other uses of gas Objectives Reduce credit exposure to EPGE Pass USD energy charge to MOGE GSA Gas supply EPGE ECA (Capacity Charge with EPGE having the Gas supply obligation) IPP Co 32
MYANMAR SOLVING THE CURRENCY RISK? LNG is procured by MOGE (acting as a gas aggregator) FSRU owner and MOGE enter into a Terminal Use Agreement (TUA) to convert LNG into Gas for MOGE in return for a fee The TUA fee is payable in USD offshore Myanmar to FSRU Owner s nominated account MOGE enters into a gas sales agreement (GSA) with EPGE to supply gas to EPGE for EPGE to supply gas to IPP Co under the terms of the PPA. MOGE takes the credit risk on EPGE. IPP Co is not responsible for gas supply. EPGE pays IPP Co: A. a Capacity Charge monthly in USD to an offshore account nominated by IPP Co; or B. a Capacity Charge in MKT which is invoiced in USD monthly and payable in MKT at a rate guaranteed to give the USD invoiced amount by a nominated bank in Myanmar, such conversion from MKT to USD and remittance of USD outside of Myanmar to be guaranteed 100% by Myanmar Ministry of Finance (similar scheme to that applied in Vietnam IPPs). EPGE s payment obligations (Capacity Payment and Termination Fee) are guaranteed by the Myanmar Ministry of Finance. Termination Fee under PPA/ECA to be payable in USD to an offshore account of IPP Co or using a mechanism as in B above. Consider also JBIC/NEXI cover for sub-sovereign credit under new policy if no central Government guarantee. Important to have official confirmation by Myanmar Government of the National Energy Policy and for the project to be recognized by the Myanmar Government as being within that policy and important for the country. 33
KEY BANKABILITY CONSIDERATIONS (1) Check for road blocks to the financing Conduct Thorough Due diligence Project document review Local law issues, including taxes Environmental Permits, consents Sponsor and counterparty assessment Offtaker credit assessment Currency, hedging, insurance considerations Minimize Project-on-Project Risk Synchronization of commissioning and completion regimes across LNG/FSRU and IPP; assess the risk of completion delay, LD s and cover off risk to the extent possible with other project counterparties/insurers. Single Lender group s ability to exercise control across the whole project chain (from FSRU to power generation and sale) through a combined financing, security package & direct agreements helps to minimize project on project risk and assist with Lender concerns on step-in. Risk allocation and mitigation regime across LNG SPA, FSRU TCP, PPA; termination rights check on bankability. FSRP being all in one and using an integrated model helps to mitigate the risks noted above 34
KEY BANKABILITY CONSIDERATIONS (2) Pricing & Cost Pass-Through Risk Clean cash flow through LNG to power chain (e.g. tariff, currency exchange (USD v. local), fuel cost pass-through whether IPP is dispatched or not. Consider the availability of minimum dispatch provisions in the PPA where IPP Co / FSRP is the procurer of LNG) Offtaker Credit Risk FSRU charterer (IPP Co) is likely a SPV Guarantee from creditworthy entity Gas supply risk (in case offtaker procures LNG)? Availability of Government Guarantee for PPA obligations / BOT obligations. Note current difficulty of obtaining Government Guarantee in some emerging countries such as Vietnam (30% guarantee on local currency conversion to USD) and Myanmar (EPGE wants to pay in MKT) Early Termination Risk Termination payments / buyout provisions in PPA need to take into account termination amounts arising under LNG SPA, FSRU charter, as applicable, and power plant. Quantum needs to ensure at minimum all moneys due to the Lenders will be paid out Timing / Risk Profile Mismatch timing of converting balance sheet debt to limited recourse debt on Project will depend upon when the Project reaches COD under the PPA (including the Power Plant, pipeline, jetty, mooring etc). Sponsor support arrangements will need defined criteria for release (mechanical completion, financial completion tests) 35
PROJECT ASSETS SECURITY PACKAGE IMPORT TERMINAL FSRU, mooring, buoyant subsea riser facilities subsea portion of pipeline, jetty, breakwater facilities OTHER REGAS. ASSETS LNG unloading, receiving, storage, vaporisation & send-out facilities GAS ASSETS Gas treatment facilities Onshore pipeline POWER ASSETS Power plant, site and interconnection facilities PROJECT RIGHTS Project documentation, insurances, bank accounts, permits, step-in rights 36
PPA CONSIDERATIONS 37
KEY PPA CONSIDERATIONS IPP/FSRU INTEGRATION Holistic approach to IPP & FSRU. FSRP has advantage as one unit FSRU/LNG COSTS Full coverage of FSRU / LNG-related costs. FSRP has advantage as one unit. LNG procurement to be considered EARLY TERMINATION Parallel protection for IPP & FSRU (including LNG SPA termination costs if applicable) if early termination. FSRP has advantage in that the power unit and the regas unit can be relocated in case of PPA termination FSRU FLEXIBILITY Dedicated supply to IPP or multi-user regasification. The gas aggregator model can help deal with these issues. FSRP needs to be jetty side to be able to offload gas. 38
PROJECT CONTRACT ALIGNMENT ISSUE Project Description Milestones Liquidated Damages - Delay Deemed Commissioning Take-or-Pay (TOP) POSSIBLE APPROACH Ensure FSRU and other gas/regas. assets properly contemplated by PPA. FSRP has advantage Ensure reasonable PPA milestones for plant that take into account FSRU / regas. Development as well as LNG procurement. FSRP has advantage. FSRU providers & LNG suppliers typically cap LDs based on rates of hire & cargo value Cap PPA LDs & procure delay in start-up insurance where needed. Seek to pass LNG procurement risk to power offtaker or gas supply aggregator Ensure any FSRU-related delays caused by local government or electricity offtaker are captured under deemed commissioning for IPP and FSRU charter. FSRP has advantage. Ensure Take or Pay obligations under LNG SPA consistent, fixed charter payments with Take or Pay obligations under PPA. 39 39
PROJECT CONTRACT ALIGNMENT (CONT.) ISSUE Indemnification LNG Supply Force Majeure Prolonged Force Majeure Termination Rights Consequences of Termination POSSIBLE APPROACH Ensure indemnities in respect of loss/damage to property & death/injury to persons include LNG suppliers & FSRU operator / owner and operator of FSRP Ensure events of Force Majeure consistent upstream through downstream (i.e. FM events under LNG SPA / affecting FSRU/FSRP addressed under PPA) Ensure time periods for prolonged FM triggering termination aligned across agreements Ensure events of default consistent and cross-default provisions included to take into account interdependency of agreements. FSRP has advantage since the power and regas facilities can be relocated in case of termination of PPA Termination payments sufficient to cover various costs, including FSRU and pipeline costs, any termination payments due under LNG SPA and/or FSRU charter, amounts payable for nondefaulting part of project, and pay-out of senior-secured lenders and hedging parties. FSRP has advantage since it can be relocated in case of termination. 40 40
PROJECT CONTRACT ALIGNMENT (CONT.) ISSUE Tariff Regime Payment Operational Alignment Governing Law / Dispute Resolution POSSIBLE APPROACH All upstream costs (e.g. costs arising under FSRU service agreement, LNG SPA (including take-or-pay obligations), increased costs from change in law, FSRP regas services (if a tolling model is used for regas)) recoverable on passthrough basis LNG SPA likely denominated in USD, while PPA may be in local currency (usually with US indexed portion, but not in all jurisdictions, such as Myanmar) Consider strategies to mitigate potential forex risk Ensure alignment of payment timings and alignment of indexation using pass through of costs. Ensure careful alignment between operational elements, e.g. LNG delivery / gas send-out timings / quantities & maintenance / outages / dry-docking scheduling Identical governing law, arbitration rules and seat. Allow for joinder of disputes 41 41
PROJECT CONTRACT ALIGNMENT (CONT.) ISSUE Change in Law POSSIBLE APPROACH Ensure that the PPA or concession agreement extends change in law protections to the combined power, pipeline and LNG facilities, FSRP, including in relation to any exemptions for importation of LNG and supply of gas. Ensure that adequate compensation is payable to put affected party in the same economic position as if the change in law had not occurred. 42 42
CONCLUSIONS Structure of the deal is key to the financing. Sponsors need to minimize project on project risks - identify and consider risks and potential mitigation strategies in early on not after the PPA or concession is awarded or signed. PPA is the key driver. Consider risk reward balance for assumption of risks. Due diligence is essential, especially in emerging markets. Jurisdiction may not have laws that fully deal with the convergence of LNG/Regas/Power generation services. Access to (and use of) experienced commercial, technical, legal & financial advisors, with specialised knowledge of these types of projects, will be of vital importance to success. 43
QUESTIONS? John McClenahan Managing Partner, Tokyo Tel: +81-3-4510-5601 Email: jmcclenahan@kslaw.com Rupert Lewi Partner, Tokyo Tel: +813 4510 5602 Email: rlewi@kslaw.com 44