1. AN OVERVIEW OF PROJECT FINANCE IN PRIVATE-PUBLIC PARTNERSHIPS FINANCE 101 T ERRI S MALINSKY Managing Director 312 596 1582 tsmalinsky@ziegler.com B.C. Ziegler and Company | Member of SIPC & FINRA PRESENTED BY: Presented to National Conference for Private-Public Partnerships P3 Connect July 28, 2014

2. Tax supported bonds –Secured by general credit of the municipality –Obligation to pay from all available resources, usually property and other taxes and fees –Obligation to pay even if project is never completed or does not operate Asset based lending -- municipal leases –Used primarily for equipment, such as computers or buses –Secured by a specific asset or receivables –Also secured by general credit of the municipality Enterprise revenue supported bonds –Supported solely by revenue of the enterprise, such as a water system or an airport, but not by the assets of the enterprise –System is owned and operated by the municipality THREE TYPES OF FINANCINGS ARE TYPICALLY USED BY GOVERNMENTAL ENTITIES 2

3. Requires the governmental entity to adopt a partnership and risk sharing approach to development of infrastructure Giving up some control of the design, construction, operation, and financing including a lien on the asset or the right to use the asset In return, enables the governmental entity to share the risks of the project with the private sector Shifts some or all of the risks of design, construction, operation and financing to a private sector partner who is better able to manage those risks in return for a financial return ADOPTING A P3 PROJECT FINANCE APPROACH 3

4. Using a P3 project finance should achieve a lower cost and lower risk to the governmental entity Isolate the financial risks of the project from the other operations and assets of the governmental entity Enables the governmental entity to set quality and performance expectations for the project and let competing private sector entities propose creative alternative means of achieving those objectives BENEFITS OF A P3 PROJECT FINANCE APPROACH 4

5. “Project” in a project financing context is a term with a more specific meaning than in general use A “project” is not just a hard asset A “project” generally consists of: An asset or group of assets that generate identifiable revenues from operations Includes the legal documents assigning rights to those revenues to debt and/or equity providers for an extended period of time Sometimes includes a lien on the asset or assets No financial guarantee or recourse to any person or corporation, even a 100% owner of the “project” The revenue generating asset typically has less asset value than its ability to generate revenues through its intended use in place WHAT IS THE “PROJECT” IN A PROJECT FINANCE? 5

6. The private sector party will typically be a group of separate companies each bringing a different set of skills necessary to accomplish the project’s goals These companies will set up a “special purpose entity” or SPE to be the project owner and enter into a contract with the governmental entity This SPE structure accomplishes two major goals from the private sector owners’ perspective Isolates the financial risks of ownership from the partners in the “project” thereby limiting their financial risk Allocates the risks and benefits of ownership appropriately among partners in the “project” PROJECT OWNERSHIP IN A P3 STRUCTURE 6

7. Governmental entity grants the right to build, own and operate an infrastructure facility to a private sector party A identified asset or group of assets that generate revenues from operations, existing or to be built Legal rights to all of those revenues and obligation to pay expenses May or may not include actual ownership of the asset(s), but always includes the right to use and operate the assets Equally important, the governmental entity sets the performance requirements for the facility, and penalties for non-performance GOVERNMENTAL ENTITY’S ROLE IN A P3 PROJECT FINANCING 7

8. Contract with the public sector entity to construct, finance and operate asset(s) An agreement among the SPE partners controlling governance of the SPE, such as capital contributions, ownership shares and voting rights Construction contract between the SPE and a construction contractor (which may be a partner in the SPE) typically guaranteeing a fixed price and schedule An operating agreement with a company experienced in operating the asset (which may be a partner in the SPE) Loan documents, typically assigning all rights of the SPE to own, construct and operate the asset(s) as collateral, including the ownership interests in the SPE TYPICAL CONTRACTS IN A PROJECT FINANCING 8

9. SPE Governmental Entity Operating Company Agreement Construction Agreements Financing Agreements Offtake Agreements Feedstock Agreements TYPICAL PROJECT FINANCING SPE CONTRACT STRUCTURE 9

10. Lenders will typically want all revenues of the project to be held by trustee The trust indenture (or loan agreement) is the contract to repay the debt, and will establish priority of usage of the revenues as they are received 1.Operations and Maintenance 2.Debt Service 3.Capital Replacement Reserve 4.Debt Service Reserve 5.Distributions to equity SPE FLOW OF FUNDS IN A PROJECT FINANCE 10

11. Trust indenture/loan agreement will also contain covenants that the SPE is obligated to meet –Debt Service Coverage ratio –Annual audits –Insurance requirements –Performance obligations It also specifies events of default, and remedies available to the lender in the event of default –Cure periods for certain defaults –Step-in rights –Sale of assets or the SPE SPE LOAN COVENANTS 11

12. Among the most difficult areas of discussion between public and private sector parties in a P3, because the governmental entity often wants to be the party to reclaim the project in the event of default However, the lender will want right to foreclose and to “step-in” to the rights of the SPE if the SPE defaults on the loan, including all rights to operate and receive revenue from the project asset Typically, lender will want the right to replace the construction company and/or operator May or may not also have the right to foreclose on the asset itself LENDER RIGHTS IN A PROJECT FINANCE 12

13. Will also want the right to sell the ownership of the SPE, including all of the rights of the SPE under the P3 contract, in the event of a default Especially important if the asset is a single purpose asset (i.e. a highway or a hospital) The value of the physical asset would generally not be sufficient for the lender to recoup its losses The value is in the legal agreement giving the SPE the right to build/operate the asset LENDER RIGHTS IN A PROJECT FINANCE 13

14. Equity Senior Debt Subordinated Debt Leases State Grants and/or loans Federal Grants and/or loans Public Sector Contribution Tax Equity Tax Credits (Low Income Housing, New Markets) EB-5 Equity TYPICAL PROJECT FINANCE CAPITAL STRUCTURE COMPONENTS IN P3 PROJECTS 14

15. Risk  Technology  Operations & Management  Financial  Construction SHARING AND MITIGATING PROJECT FINANCE RISKS 15 Mitigation  Warranties on equipment  Design and installation expertise  Renewal and Replacement Reserve for post warranty period  Experienced operators for the specific project type  Requirements for ongoing maintenance  Performance requirements  Offtake and feedstock agreements  Trusteed revenues and cash traps  Insurance covers damage and destruction, theft and business interruption  Experienced contractor  Fixed price construction contract  Performance bond