S e c u r i n g a n d S t r u c t u r i n g

S e c u r i n g a n d S t r u c t u r i n g F i n a n c i n g f o r t h e C z e c h E n e r g y S e c t

Dr. Ernst GieseMgr.Slavomír M. Čauder

18 June, 2004

CEE Power 2004, Warsaw

Contents1. Firms Profile2. Structuring M&A Transaction and its Financing3. Structuring Project Financing Transaction in the Czech

Republic4. Parties to Project Financing5. Securing Investment and Loans6. Regulatory / Competition Legal Aspects and Implications7. Risks and Challenges of Investment / Project Financing in

the Czech Republic

1. Giese & Partner, v.o.s.• Found in 1997 • Partner office of Coudert Brothers / Schürmann & Partner• 18 lawyers:

• German, US, Czech & Slovak• Specialty:

• M&A, Financing, Construction & Energy Law• 90% cross-border business legal advisory• Languages:

• English, German, Czech, Slovak, French, Swedish & Norwegian

2. Structuring M&A + Financing in CZ Energy Sector

A. Forms of Transaction– Share Deal– Asset Deal

B. Measures– Documents– Steps

A. Forms of Transactions1. Share Deal

• Transfer of Liabilities• Transfer of Labour• Large Amount of Representations and Warranties• Importance of Due Diligence• Registration of Acquisition of Shares with Security Centre• Exclusion of Transfer Tax for Real Estate• State or Seller´s Guarantee for Liabilities (tax, unrevealed

debts,…)

• No Transfer of Delivery Contracts and Other Key Agreements• No Transfer of Licenses• Specification of Assets• Transfer of Liabilities (if the whole enterprise is acquired)• Hiring of Key Personnel (holder of licenses, executives, etc.)• Loss of Tax Benefits and Other Incentives

2. Asset Deal

A. Forms of Transactions

B. Measures1. Documents

• Confidentiality Agreement• Letter of Intent• Preparation of Transfer Documents• Framework Agreement and Share Transfer Agreement (Share

Deal)• Movables, Goodwill, Licenses and Immovables Transfer (Asset

Deal)• Financing Documentation

B. Measures2. Steps

• Tender• Due Diligence• Appraisal• Signing of Agreement• Closing• Registration of Transfer (Company Register / Security

Centre)• Anti-Trust Proceeding (Competition Authority)

1. Equity2. Loan3. Grants

C. Financing

• Investors Cash Injection• Technology, Know-how• Contributions-in-Kind (e.g. Machinery)• Financial Investors

– Strategic– Institutional

• Bond Issues• Going Public (IPO)

C. Financing1. Equity

2. Loans

C. Financing

• EBRD, KfW, EIB• Commercial Loans (Banks)

3. Structuring a Project Financing Transaction

• Letter of Intent / Memorandum of Understanding / Letter of Information– Info on PC – the Project, Ownership Structure– Financial Projections

• Licence (Concession) Contract • Loan Agreements

– Standard: Amount, Interest rates, Term of Repayment, Representations & Warranties, Covenants and Events of Default

– Special: Completion• Securities / Guarantees

A. Legal Documentation

A. Legal Documentation• Power Purchase Agreement (PPA)• Production Sharing Agreement (PSA)• Engineering, Procurement & Construction Agreement

(EPC)• Operation & Maintenance Agreement (O&M)• Fuel Supply Agreement

• Assessment• Calculation• Outcome

B. Financial Assessment Process

• Project Financing – new or retrofit electricity generation– Limited recourse financing– Corporate financing

• Project Financing - energy efficiency projects– Corporate financing– Add-on facilities

C. Financing Models

• Project Company• Sponsors• Constructor• Operator• Supplier• Purchaser• Lender

• Private Equity & Venture Capital Funds

• Multilateral Financing Organisation

• Export Credit Agency (ECA)• Insurer• Experts• Host Government

4. Parties to Project Financing

5. Securing Investment and Loans A. Securities

• Pledge of Shares of the Project Company (PC)• Pledge of all Real Estate of the PC• Pledge of Movables of the PC• Pledge of Intangibles of the PC• Pledge of Governmental Licence / Concession Contract• Assignment of Receivables• Subordination Agreements• Hedging Agreements (interest & currency exchange)

5. Securing Investment and Loans

B. Guarantees

• Governmental• Letter of Comfort• Third-party Guarantee

• Primary Sources – Integration Agreements• Secondary Sources:

– Directive 2003/54/EC – E-Directive– Directive 2003/55/EC – G-Directive– Regulation 1228/2003– Directive 2001/7/EC– Directive 2004/8/EC

6. Regulatory / Competition Legal Aspects

A. EU - Legislation

• Regulated Sectors: Electricity, Natural Gas, Heating• Legislation:

– Primary Legislation:• Energy Act No. 458/2000 Coll., • Energy Management Act No. 406/2000 Coll.

– Secondary Legislation:• Issued by Ministry of Industry & Trade• Issued by Regulatory Body (ERU)

B. Czech Legislation

• Scope of Competence:– Licencing– Price Regulation– Issuance of Legislative Regulations / Decrees– Disputes Resolution– Publishing of Energy Regulation Bulletin

C. Energy Regulatory Office

7. Risks and Challenges

• Pre-completion Risks:– Time Overrun– Capital Cost Overrun

• Post-completion Risks:– Technology– Market– Political & Legal– Operation– Fuel– Financial

A. Risks

7. Risks and Challenges

• Adverse, unforeseen events– Cross-border Jurisdictional Issues– Delays in Development, Construction or

Operating Phase– Failure of a Transaction´s Financing– Collapse of Particular Sector of Economy

A. Risks

• For the Foreign Investor:– Access to new markets– Well developed infrastructure– Favourable geographical position of Czech Republic– Lower wages and ancillary wage costs– High degree of education of Czech labour

• For the Czech Partner:– Transfer of technology– New investment– Improvement of capital resources– Better utilization of production capacity– Strengthening of domestic market position– Access to foreign markets

7. Risks and ChallengesB. Incentives & Challenges

Project

Shareholders Agreement

Ordinary Shares and Shareholder Loans

IntermediateIntermediate

IntermediateShareholderEntity 1

Sponsor 2 Sponsor 3

Sponsor 4 Sponsor 5

Sponsor 1

Government orUtility

Concession Agreement, PPA, etc.

SPV Shareholder Structure

Project

Intermediate

IntermediateIntermediateMultilateral and

BilateralLenders

CommercialB Lenders

Multilateral andBilateral A & B Loans

Security Agent/Trustee

ECA and ECA-guaranteed

Intercreditor andSecurity Sharing

Agreement

Intermediate

Sponsor 2

Sponsor 3 Sponsor 4

Sponsor 5

Sponsor 1

Typical Project Financing Structure

Project

Pledge of Shares of Project

Company

IntermediateIntermediate

IntermediateMultilateral andBilateralLenders

CommercialB Lenders

ECAsSecurity Agent/

Trustee

Security Interest

in SPV’s Assets

Intercreditor and

Security Sharing

Agreement

Intermediate

Sponsor 2

Sponsor 3 Sponsor 4

Sponsor 5

Sponsor 1

SPV Security Documents

Typical Project Financing Security Structure

Your contact at Giese & Partner, v.o.s.

Dr. Ernst GieseManaging Partner

Mgr. Slavomír M. ČauderUtilities Counsel

Palác MyslbekOvocný trh 8117 19 Praha 1Czech Republic

Telephone: 00420 221 411 511Fax: 00420 222 244 469E-mail: giese@giese.cz, cauder@giese.cz

Thank youfor

your attention!

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