Hi, I have difficulty in giving direct answers to this case questions, it is project finance case

1 1. Background of the Deal The Milan Metro Line 5 is one of the infrastructure projects of major public interest included in Law N 443 dated 21 December 2001 (Legge Obiettivo 2001). This particular project involves the creation of a new metro line in the northern part of the City of Milan, between the Porta Garibaldi and Bignami stations, following a route from Viale Zara to Viale Fulvio Testi. A public transportation system linking Viale Zara and Viale Fulvio Testi was an idea which dated back to the 1920s. In the early '90s, however, the city opted to build a tram line rather than an underground line. The proposal to build the Metro Line 5 was advanced only in 1999, subsequent to evaluations of the traffic congestion in this area. The project was part of a general scheme aiming to organize public transportation links between the cities of Milan, Cinisello Balsamo, Sesto San Giovanni, and Monza. On 30 June 2003, a consortium advanced a proposal to build Line 5 utilizing project financing. Consortium members (Promoter Consortium) were: Astaldi S.p.A., Torno Internazionale S.p.A., AnsaldoBreda S.p.A., Ansaldo Trasporti-Sistemi Ferroviari S.p.A., Alstom Ferroviaria S.p.A. and Azienda Trasporti Milanesi S.p.A. (ATM - the Milan public transportation company). After verifying the validity of the project and the public utility of the works, on 15 April 2005 the City of Milan called for tenders on the concession for construction and operation (Concession), which was awarded to the Promoter Consortium on 17 May 2006. The agreement was signed on 16 June 2006 for a term of 31 years and 9 months (including 5 years and 10 months for building the entire line), and stipulated that the Special Purpose Vehicle Metro 5 S.p.A. (Metro 5) would automatically substitute the Promoter Consortium. This new company, whose shareholders were the members of the same Consortium which won the tender, was commissioned to design, build and operate the project according to a DBOT (Design, Build, Operate and Transfer) scheme. After the Concession was signed, a modification was made to the final section of the route (Garibaldi Variant). Specifically, the Garibaldi Station was initially positioned perpendicular to the Garibaldi Station on Line 2 of the Metro and at the same level underground, making possible future extensions of the line impossible. Consequently, the Garibaldi Variant was incorporated into the original Concession through an amendment undersigned on 3 August 2007. This Supplementary Contract relocated the station in question and extended the line by 300 meters in order to create a tunnel for maneuvering railcars, which would serve as the first branch of the future Line 6 running toward San Siro. On 23 November 2007, construction of the new metro line was commissioned to a temporary business association made up of Metro 5 shareholders (TBA or Contractor) through an EPC contract (Construction Contract). In particular, Astaldi S.p.A. and Torno Internazionale S.p.A. would handle civil engineering through a new company, Garbi Linea 5 S.c.r.l.2 This work would primarily involve digging a straight tunnel underneath Milan approximately 17 meters below ground level utilizing a Tunnel Boring Machine (\"TBM\"). 3 The technological aspects of the project would be handled by AnsaldoBreda S.p.A., Ansaldo Trasporti-Sistemi Ferroviari S.p.A. and Alstom Ferroviaria S.p.A; these companies would build automatic controls for running the trains, the signal systems, the engineering system, and the rolling stock . 2 The Operations & Maintenance (O&M) Contract, undersigned on 7 September 2007, commissioned ATM S.p.A (Operator) to handle operations and maintenance of the subway line for the entire term of the Concession. Lastly, the financial closing took place on 12 December 2007, when the financing contract was signed with Dexia Crediop S.p.A., Mediobanca S.p.A., Socit Gnrale S.a. and WestLb Ag (Lenders). Table A1 gives an overview of the timeline of the deal; Figure A1 shows the project sponsors and the key project contracts. Table A1: Timeline of the Deal 3 Figure A1: Structure of the deal 4 2. Description of the works Line 5 will connect the Garibaldi railroad hub to the current terminal of the Bignami tram line, following a route that runs entirely underground for approximately 6.1 km. The new line will offer passenger service to nine stations4 located an average distance of 600 meters apart. Figure A2 shows the stations along the route and its location on a city map of Milan. Line 5 will run through an area which is already serviced by major rail systems (National Railroad and Northern Milan Railroad), and will count 500,000 resident target users. When fully operational, the projected maximum transportation capacity of the subway will be 26,000 passengers per hour per direction, with guaranteed interchanges: - with Suburban Railway Service (Passante Ferroviario) and Metro Line 2 at Garibaldi Station, and - with Metro Line 3 at Zara Station. An additional service link is planned between Line 5 and Line 2. However, this link will be used solely when trains are first rolled out, and to switch vehicles between Line 5 and the Famagosta depot located on Line 2, where long-term overhauls on railcars will be done as well as extraordinary maintenance work when need be. Finally, the new metro line will intersect with the surface tram and bus lines at various ground-level stations, ensuring ample interconnections with existing transportation systems. The transportation system designed for Line 5 is a driverless light urban railway on fully automated track. The line will be staffed only by onboard agents, who will handle passenger assistance, ticket control and surveillance; no permanent personnel will work in the stations. The platforms in every station will be completely isolated from the tracks by a barrier of shatterproof transparent panels, automatic doors and emergency exits for access to railcars, minimizing risks of potential safety hazards. 3. Project Sponsors Listed below are the project sponsors for Milan Metro Line 5, who formed a temporary business association (as illustrated in Figure A1). Astaldi SpA (Astaldi) Astaldi is a large Italian general contractor active in the sectors of infrastructure, and civil and industrial construction. Recently Astaldi participated in the construction of the Naples Underground, Genova's suburban railway, Line C of the Roman Metro and extensions of Milan's metro lines (Line 2 from Romolo Station to Famagosta Station, and Line 3 from Zara Station to Maciachini Station). Astaldi was also involved in building underground rapid transit systems in Copenhagen and Brescia in collaboration with Ansaldo Trasporti-Sistemi Ferroviari S.p.A. and AnsaldoBreda S.p.A. These two projects were identical to Line 5 in terms of the technology utilized and the problems involved. Torno Internazionale SpA (Torno) Torno is a leader in the Italian construction industry, specializing in transportation infrastructure. The company recently contributed to building sections of the metro lines in Milan, Naples, and Genova. Specifically regarding Milan, Torno participated in the construction of: a) sections of the Suburban Railway linking the Northern Railroad to the National Railroad networks; b) the 5 Suburban Railway near the Porta Vittoria Station; c) the Brenta and Corvetto Stations and the extension of Line 3 from Maciachini to Affori; d) the extension of Line 1 from Molino Dorino Station to Rho Fiera Station. AnsaldoBreda SpA (AnsaldoBreda) AnsaldoBreda, 100% controlled by Finmeccanica SpA,5 and is the top Italian producer of vehicles for mass transit. AnsaldoBreda supplied rolling stock for construction of the Copenhagen underground, and participated in building the metro systems in Brescia, Salonicco, and Rome. Ansaldo Trasporti-Sistemi Ferroviari SpA (Ansaldo) Ansaldo is a member company of the Ansaldo STS SpA Group, 6 specialized in the design, construction, installation, operation and maintenance of railway and underground transportation systems, acting as a turnkey provider. The company's prior experience includes involvement in building metro systems in Dublin, Birmingham, Copenhagen, Salonicco, Genova, Rome, Naples and Brescia. Alstom Ferroviaria SpA (Alstom) Alstom is the Italian subsidiary of the French multinational group Alstom SA, active in the energy and transportation sectors. Alstom provides turnkey rail transportation systems, primarily dealing in rolling stock and signalling systems. The company has consolidated experience in the sector thanks to its involvement in the construction of the Losanna metro and the driverless system in Singapore. Another project to include in Alstom's list of references is the people mover from the San Raffaele Hospital to the Cascina Gobba Station on Metro Line 2 in Milan, the first turnkey project in the Italian transportation sector. Azienda Trasporti Milanesi SpA (ATM) ATM is the joint stock company owned by the City of Milan which runs public transport in the metropolitan area and in 87 cities in the Province of Milan. Metro Line 5 is not the only recent project realized or designed by ATM, but one of many public works to be undertaken with the aim of achieving an integrated mobility system for the greater metropolitan area of Milan. In addition to Line 5, extensions of Line 2 from Famagosta to Assago and Line 3 from Maciachini to Comasina are currently under construction. Other projects in the design phase include the extension of Line 1 from the Sesto railroad station to Monza Bettola, and the construction of Line 4 from Lorenteggio to the Linate Airport. 6 3. The DBOT Concession Contract and Supplementary Contract (Variante Garibaldi) 3.1 Purpose and Duration On 16 June 2006 the City of Milan (Concession Authority) and Metro 5 (Concession Holder) signed the Construction and Operations Concession. The term of this agreement was 31 years and 9 months, including 56 months for the construction of the Zara-Bignami stretch (Functional Section) and 70 months for building the entire metro line (Entire Line). Operations would begin with the functional section, slated for delivery by 28 February 2011; the Entire Line was scheduled to begin operations by 30 April 2012. At the end of the Concession, the Holder would transfer the project and rolling stock to the Concession Authority. According to the terms of the Concession, the Concession Holder undertook the design, construction, operation and maintenance of the new metro line, and would collect payment from ticket sales on behalf of the Concession Authority. 3.2 Concession Holder's Grants and Fees The project would be financed in part by a state capital grant totalling approximately 233 million euro and a grant provided by the City of Milan of approximately 62 million euro, both disbursed by the Concession Authority while construction was underway. Specifically, the state capital grant would be paid by the Concession Authority on a milestones basis 7 no later than 30 days after these funds were actually credited to the Authority by the State. However, the Concession Authority offered no guarantee as to the actual date this disbursement would take place. If delays in state grant disbursement resulted in delays of over 120 days in the payment of a milestone certification, the Concession Holder would have the right to call for a revision of the Business Plan (BP). Instead, the grant provided by the City of Milan would be paid out by the Concession Authority within 60 days of presentation of milestone certification. When each certification was issued, the Concession Holder was to post a letter of credit equal to the corresponding portion of the municipal grant. Once the value of the guarantee equalled 1/5 of the entire grant, the guarantee was discharged and then reconstituted for the next milestone certification. The guarantee would be definitively discharged when the subway line was tested. As in the case of the state grant, delays in the disbursement of the municipal grant would give the Concession Holder the right to request a Business Plan revision. The Concession also provided for an Availability Fee (AF) consisting of semi-annual contributions made by the Concession Authority to operating expenses incurred by the Concession Holder during the operations phase. The AF would be paid in full if the actual number of passengers equalled or exceeded 32% of the benchmark number (risk threshold). Specifically, this 6-month benchmark was estimated in the Concession as follows: - 7,711,200 for the operating period of the Functional Section; - 9,520,000 for the first year of operations of the Entire Line; - 10,080,000 for the following year; 7 - 11,200,000 after that. If traffic fell below the risk threshold, the amount due would be reduced proportionally to the difference between the risk threshold and the actual number of passengers. Specifically, the AF is calculated as follows: - If the actual number of passengers (Pa) is lower than the risk threshold (Pr), for every 6-month period we would have: (AF = Tb*(Pt+Pa-Pr) where Pt represents the target number of passengers and Tb stands for the benchmark tariff indexed to the inflation rate. - If the actual number of passengers is higher than the risk threshold, for every 6-month period we would have: AF=Tb*Pt. The benchmark tariff at 2003 prices was: a) 1.522 euro for Year 1 and Year 2 of operations; b) 1.422 euro for subsequent years of operations until loans were repaid; c) 0.650 euro beginning on the date that loans were repaid. The Tb, to be applied in the first two years of operations, would be revised on the basis of actual inflation levels recorded from 1 January 2004 to the COD-Commercial Operating date (the start date of commercial operations). Subsequently, the Tb would be updated every two years based on the average of actual inflation rates (consumer prices according to the ISTAT-Italian Central Statistics Institute index) and the rates projected for the previous two-year period. 3.3 Revision of the Concession Revising the Business Plan (BP) would serve as a way to rebalance the concession if any inequality emerges; however, this option would only be allowed under the following circumstances: - an act of the Concession Authority, defined by Article 1 of the Concession as: \"(i) an act for which the Concession Authority or its bodies may be deemed responsible; (ii) a violation by the Authority of obligations stipulated in this Convention, or (iii) an act for which a competent supranational, national, regional, provincial, or municipal authority may be deemed responsible, which causes a delay with respect to the time limits prescribed by law for the issuance of a permit or a provision resulting directly in the impossibility of the Concession Holder to fulfil its obligations, in accordance with the time limits and in the manner prescribed in the Convention and/or in every contract or document stipulated in the same Convention; (iv) an act for which the owners and/or operators of underground utilities and surface utilities may be deemed responsible.\" - new laws or regulations which set new tariff schemes or new operating conditions - force majeure - possible future extensions of the line - land reclamation - archeological or war finds - any other case covered by the Convention Specifically, in the case of force majeure, land reclamation or possible findings of archeological or war artifacts, the BP would be revised only if the higher costs incurred by the Concession Holder exceeded the single cumulative sum of 2 million euro. Moreover, certain force majeure events (for example, earthquakes, floods, or terrorist acts) were covered by specific insurance policies. Even if the BP were not revised, in the case of land reclamation or the discovery of archeological/war artifacts an automatic extension 8 would be triggered on the deadline for completion of the works and start date of operations if, despite every effort by the Concession Holder, total delays ran more than 30 days behind schedule. 3.4 Penalties The Concession Holder was responsible for any delays, with the exception of force majeure events or actions of the Concession Authority. If the deadlines for the start up of the Functional Section and/or the Entire Line were not met, the Concession Holder would be charged a set penalty of 30,000 euro per day of delay, up to a maximum of 6,750,000 euro. The Concession Holder would be subject to additional penalties if performance parameters were not respected. In fact, beyond the obligation to respect the project timeline, the Concession Holder agreed to realize and manage the project ensuring that certain performance parameters would be respected. For each of these parameters, specific target values and minimum values were established. Failure to meet targets would subject the Concession Holder to penalties; failure to achieve minimums, instead, would potentially result in the maximum penalties. Performance parameters were calculated as follows: - system availability: a measure of the relationship between the amount of time the system actually runs, and the nominal theoretical operations time. Therefore, availability = (minutes of actual service/minutes of scheduled service)*100, where minutes of actual service were counted in relation to the number of stations served, so as to take into account periods in which service was not complete; - regularity of service: a measure of the relationship between the number of runs made and the number of runs planned: regularity= (actual runs /scheduled runs)*100; - punctuality of service: determined as the difference between 100% and the ratio of the number of late runs out of the total number of runs which reached the terminal: punctuality=[1-(late runs/total complete runs)]*100, where \"late\" is defined as reaching the terminal more than 3 minutes past schedule. An initial performance assessment of the system would be carried out after the first 6 months of operations for the Entire Line, when performance parameters would be calculated for the first time. If one or more parameter did not meet the relative target value, a supplemental 6-month period would be granted to allow the Concession Holder to implement any necessary corrective measures. At the end of this time, the system would be monitored for 6 more months, after which a definitive measure of performance parameters would be established. If these parameters were again lower than target values, the Concession Holder would apply the penalties listed in Table A2, up to a maximum of 15 million euro. Payment of penalties or achievement of performance parameters would mark the end of this initial system performance verification period, referred to as the Observation Period. After the Observation Period, performance parameters would be calculated every six months. If one or more did not meet relative target values, the Concession Holder would be charged operating penalties as listed in Table A3, not to exceed a maximum of 3.28 million euro per year. 9 Table A2 Penalties for underperformance during the Observation Period 10 Table A3: Penalties for underperformance after the Observation Period 11 As regards penalties for both delays and for substandard performance, the Construction Contract and the Operations & Maintenance Contract stipulated by the Concession Holder with the Contractor and the Operator respectively reiterated exactly the provisions in the Concession pertaining to penalties paid by Metro 5 to the Concession Authority. 3.5 Contract Termination The main reasons that would prevent the continuation of the contract relationship would be termination due to nonfulfillment of obligations (grave inadempimento) by one of the counterparties or cancellation for reasons of public interest. In either case, Metro 5 would have the right to an indemnity to be used to repay bank loans. This amount would equal the value of the works already executed, net of amortization and any possible damages incurred by the Concession Authority. In addition, compensation would be made for loss of future income totalling 10% of the value of the works yet to be completed and/or the portion of the transportation service yet to operate on the basis of the BP. If Concession Holder were in default, the Lenders could name a new concession holder in order to prevent contract cancellation and in doing so to safeguard their position (step-in right). 4. Construction Contract and Operations & Maintenance Contract 12 4.1 Construction Contract The Construction Contract established joint liability of TBA members and a 2-year warrantee period. Moreover, the Contractor was obliged to provide turnkey construction. The Construction Contract specifically addressed designing and building the line and supplying rolling stock, reflecting the provisions of the Concession. The TBA was also responsible for handling expropriations. The amount due for construction activity, totalling 452.64 million euro, was a fixed lump-sum figure. Relative payments would be made on the basis of performance milestone certificates (PMC)8; 2.5% would be withheld on each payment to serve as guarantee of the proper fulfilment of contractual obligations. The amount withheld would be released on the commercial operating date for the Entire Line. Additional compensation and supplementary indemnities set down in the Contract would be contingent on the Concession Authority paying the same sums to the Concession Holder subsequent to a Business Plan revision. The Contract also stipulated that possible cost overruns incurred by the Construction Contractor due to force majeure events, land reclamation, or archeological or war finds would be reimbursed by the Concession Holder, up to a maximum total of 2 million euro. The right of the Contractor to request indemnities above this amount was conditional to a BP revision. The Construction Contract addressed delays in delivery of the Functional Section and/or the Entire Line with penalties identical those set down in the Concession. These penalties would be applied only if the Concession Authority would request as much from the Concession Holder. In addition, the Construction Contractor would be required to pay a supplemental penalty of 36,000 euro per day of delay to offset further costs and damages incurred by the Concession Holder. Overall, the penalties described here were not to exceed 14,850,000 euro. This cap was sized to cover delays corresponding to the maximum amount that could be levied against Metro 5 as agreed in the Concession, that is 6,750,000 euro. The Construction Contractor committed to executing the works in such a way as to meet performance parameters set down in the Concession. If one or more parameter did not meet the relative target value at the end of the Observation Period, the Contractor would be required to pay penalties9 specified in the Concession regarding respect of performance parameters, as long as the sum of these penalties did not exceed 15 million euro. In this case, too, penalties would only be due if the same were applied to Metro 5 by the Concession Authority. As a guarantee of proper and timely fulfilment of the obligations deriving from the Construction Contract, the TBA provided the Concession Holder with a performance bond equalling 8% of the amount due, in addition to a system performance guarantee of 10 million euro, issued on the assurance that the metro line would meet performance parameters. The rule regulating contract cancellation due to nonfulfillment by the TBA reiterated the provisions of the Concession regarding the same by the Concession Holder. Instead, breaches by the Concession Holder resulting in contract cancellation were far more restricted. In fact, the TBA could terminate the contract only if the Concession Holder failed to make a payment within 60 days of the established due date. In addition, the indemnity due was limited to the amount paid by the Authority to the Concession Holder, less the sums to be used to pay back lenders. 4.2 Operations & Maintenance Contract The Operations & Maintenance Contract, signed on 7 September 2007, reflected the provisions in the Concession. In fact, ATM would be responsible for operating the transportation service and handling ordinary and extraordinary maintenance on the line for the entire term of the Concession. The ATM was to be paid an annual lump-sum fee of 8.2 million euro for the operations period of the Functional Section, and subsequently 9.43 million euro. In addition to the remuneration for operations and ordinary maintenance, a lump-sum 13 compensation of 4.08 million euro was set for extraordinary maintenance. The remuneration and compensation due for operations were subject to the same inflation indexing mechanism detailed in the Concession for the contribution to operating expenses. As in the Construction Contract, ATM had the option to request supplementary payments or indemnities if the Concession Holder received these sums from the Concession Authority. As for the start of commercial operations of the Functional Section and/or the Entire Line, if the deadlines set in the agreement were not respected, the Operator would pay the Concession Holder penalties for delays equaling the amounts stipulated in the Concession, plus an extra daily penalty of 36,000 euro to offset additional charges or damages incurred by the Concession Holder. Once again, these penalties were cumulative up to a total of 14,850,000 euro. Furthermore, the Operator was subject to penalties if performance parameters were not met after the Observation Period ended. In this case, too, penalties were identical to those set down in the Concession (see Table A3), and were not to exceed an annual total of 1.2 million euro. This amount was far less than the 3.28 million euro limit set in the Concession as the maximum penalty against the Concession Holder. However, Metro 5 could potentially face penalties of up to 3.28 million euro annually, with the option of recovering only 1.2 million euro from ATM. This being the case, the SPV set up a reserve fund to cover penalties that could not be transferred to the Operator (Penalty Reserve). In addition, Metro 5 would forfeit the right to a performance bond from the Operator as long as the following conditions applied: - the Operator was a company wholly controlled by the City of Milan; - the Operator was responsible for operating the entire local public transportation service of Milan's metro lines. Serious breach of contract by one of the counterparties was addressed once again as in the provisions of the Concession. 5. Financial Structure The cost of the project, totalling approximately 550 million euro, was funded through a mix of equity, public grants, and bank loans. Table A4 gives the statement of sources and uses of funds for the construction phase of the works. Equity contributions by project sponsors would be made on the basis of a leverage ratio of approximately 80/20. The Financing Contract, signed at the end of 2007, stipulated the following: - a base facility totalling 183 million euro, earmarked for financing the project costs not covered by contributions from shareholders or public grants; - a revolving grant facility of 70 million euro, which could be utilized to cover financial charges due to possible delays in the disbursement of public grants; - a VAT facility of 22.6 million euro, earmarked for financing VAT on construction costs for the portion which would not be covered by collected VAT; it was expected that only 20 million euro of this facility would be used during the construction period; - a revolving working capital facility totalling 10 million euro to cover the need for working capital that may arise during the operations period; - a stand-by facility of 20 million euro to cover unexpected cost overruns during the construction phase. 14 Repayment on the base, stand-by, and working capital facilities was due by 31 December 2030, while the grant and VAT facilities had to be repaid by 31 December 2013 and 31 December 2015 respectively. Lastly, Metro 5 set up an interest rate swap with its lenders to fix the interest rate against a margin of around 100 basis points over Euribor. Table A4 Prospectus of Funding Sources/Allocation11 (The operating cash flow figure refers to cash flows generated once the Service Section becomes operational.) A CASE STUDY: \"MILAN METRO LINE 5\" QUESTIONS: 1. Design the architecture of the PF deal, showing actors, roles, flows of funds, contracts and responsibilities. 15 2. Analyze the risk management side of the deal. Does it work the \"pass-through\" mechanism? 3. What is the rationale for the \"availability fee\"? What are the potential scenarios? Question 4: Answer: in millions Summary P&L Volume (in million liters) Selling price per liter Net sales COGS as % of sales Cost of goods Actuals Estimated Dec. -02 Dec. -03 Dec. -04 Dec. -05 Dec. -06 1,836.5 0.53 978.6 0.37 363.1 1,815.2 0.55 1,004.4 0.35 347.4 1,692.8 0.56 956.2 0.40 379.1 1,695.8 0.56 953.3 0.39 372.3 1814.51 0.56 1020.03 0.39 375.9 Gross contribution before marketin Marketing % of net sales 615.50 101.7 10.4% 657.00 110.8 11.0% 577.10 106.4 11.1% 581.00 109.5 11.5% 644.13 122.40 0.12 Gross contribution after marketing 513.80 546.20 470.70 471.50 521.73 Adjusted EBITDAa Adjusted EBITDA as % of net sales 184.1 0.19 197.5 0.20 190.5 0.20 184.1 0.19 204.01 0.20 (33.0) (25.0) (12.0) 114.10 27.3 (5.8) (47.6) 171.40 (12.6) (35.2) (40.3) 102.40 (25.2) (31.6) (21.3) 106.00 -25.45 -1.00 -21.51 156.04 103.30 67.15 119.67 52.52 (25.2) (31.6) (21.3) -25.58 82.90 53.89 132.60 78.72 -25.45 -1.00 -21.51 30.75 -25.58 1.00 -25.58 30.75 0.94 28.79 Change in working capital Restructuring payments Net Capex Pretax Operating Cash flow Additional debt Interest Interest * (1- Tax rate) EBITDA *(1- Tax rate) EBIT * (1- Tax rate) Change in working capital Restructuring payments Net Capex FCF Terminal cash flow Terminal value Net cash flow PV factor PV cash flow Value of Orangina Forec 1669.329 Assumptions: YOY growth rate is assumed to be at 7% in the volume and assumed that there will be no increase in the sales pric COGS % of sales will continue to remain constant at 2005 Estimated level Marketing as a % of net sales expected to remain at 12%. Adjusted EBITDA as % of net sales will increase to 20% and will remain constant over the period. Changes is working capital expected to grow at 1% every year Restructuring payments will remain constant at 1million euros. Net capex will grow at 1% year on year. Tax rate is assumed to be at 35% Debt is assumed to be 7.3x the EBITDA for 2005. Interest payment is as per the given exhibit. There will be addit WACC 6.818% Question 5: Answer For WACC, the US treasury bond rates for 30 years has been taken which is th Levered beta of Orangina is determined using the D/E ratio from Exhibit 9a th and Pepsi. It is always appropriate to make use of comparables information to company. Weight of debt is determined using the D/E ratio for the company as it is appro Tax rate is assumed to be at 35%. All these assumptions and calculation are appropriate as there was not direct in information were taken into consideration for performing the calculation. Ther Dec. -07 Forecast Dec. -08 Dec. -09 Dec. -10 Dec. -11 Dec. -12 Dec. -13 1941.52 0.56 998.4 0.39 389.91 2077.43 0.56 1,035.9 0.39 404.56 2222.85 0.56 1,075.3 0.39 419.95 2378.45 0.56 1,114.5 0.39 435.25 2544.94 0.56 1,075.4 0.39 419.98 2723.08 0.56 1,114.6 0.39 435.29 2913.70 0.56 1,075.5 0.39 420.02 608.49 119.81 0.12 631.34 124.31 0.12 655.35 129.04 0.12 679.25 133.74 0.12 655.42 129.05 0.12 679.31 133.75 0.12 655.48 129.06 0.12 488.68 507.03 526.32 545.51 526.37 545.55 526.42 199.68 0.20 207.18 0.20 215.06 0.20 222.90 0.20 215.08 0.20 222.92 0.20 215.10 0.20 -25.71 -1.00 -21.73 151.25 50.00 84.36 54.83 129.79 74.96 -25.71 -1.00 -21.73 26.52 -25.96 -1.00 -21.95 158.27 100.00 85.22 55.39 134.67 79.28 -25.96 -1.00 -21.95 30.37 -26.22 -1.00 -22.16 165.67 150.00 83.97 54.58 139.79 85.21 -26.22 -1.00 -22.16 35.82 -26.49 -1.00 -22.39 173.03 200.00 81.03 52.67 144.89 92.22 -26.49 -1.00 -22.39 42.34 -26.75 -1.00 -22.61 164.72 250.00 77.19 50.17 139.80 89.63 -26.75 -1.00 -22.61 39.27 -27.02 -1.00 -22.84 172.07 300.00 72.15 46.89 144.90 98.00 -27.02 -1.00 -22.84 47.15 -27.29 -1.00 -23.06 163.75 350.00 64.90 42.19 139.82 97.63 -27.29 -1.00 -23.06 46.28 26.52 0.88 23.25 30.37 0.82 24.92 35.82 0.77 27.51 42.34 0.72 30.45 39.27 0.67 26.44 47.15 0.63 29.72 2502.59 2548.86 0.59 1503.84 ill be no increase in the sales price. t over the period. iven exhibit. There will be additional debt of 50 million every year from 2007 at the cost of debt of 6.72% years has been taken which is the risk-free rate and it will be appropriate for the Rf under CAPM. the D/E ratio from Exhibit 9a that provides the proportion of debt and the average asset beta of Coca-Cola e of comparables information to determine the information when there is no information about the concern tio for the company as it is appropriate. ropriate as there was not direct information being provided. IN this case, the appropriate and relevant performing the calculation. Therefore, it makes strategic sense. Dec. -14 Year ending Dec. 31, in dollars millions Revenue Coca-Cola Dec 05 (est). Dec 04 Dec 03 Dec 02 23,104.0 21,962.0 21,044.0 19,564.0 Dec 02-03 7.56% Year ending Dec. 31, in dollars millions Revenue PepsiCo Dec 05 (est). Dec 04 Dec 03 Dec 02 32,562.0 29,261.0 26,971.0 25,112.0 Dec 02-03 7.40% in millio Dec. -02 Dec. -03 Dec. -04 Dec. -05 Net sales 978.6 1,004.4 956.2 953.3 WORKING NOTES 2673.21 2005 EBITDA Mu Market CaEBITDA MktCap/EBITDA Coca-Cola 95494.00 6085.00 15.69 PepsiCo 97837.00 7230.00 13.53 Orangina 2690.20 184.10 14.61 Average Sales MultMarket CaSales MktCap/Sales Coca-Cola 95494.00 23104.00 4.13 PepsiCo 97837.00 32562.00 3.00 Orangina 3402.26 953.30 3.57 Average Tc 35% levered betD/E asset beta Coca-Cola 0.4 0.012 0.40 PepsiCo 0.5 0.024 0.49 Orangina 0.6 0.498 0.44 Risk-free r30-year go Market ri Assumed 4.72% 5% Dec 04-05 -0.30% Beta Cost of equity The risk premium ove Cost of pre-tax debt After tax cost of debt 0.6 7.72% 3% 7.72% 5.01% WACC calculation Weight Cost WACC Debt 0.332324 5.01% 1.667% Equity 0.667676 7.72% 5.151% WACC 6.818% Dec 03-04 Dec 04-05 Average 4.36% 5.20% 5.71% Dec 03-04 Dec 04-05 Average 8.49% 11.28% 9.06% Dec 03-04 -4.80% Dec 02-03 Average 2.64% -0.82% Question 4: Answer: in millions Summary P&L Volume (in million liters) Selling price per liter Net sales COGS as % of sales Cost of goods Actuals Estimated Dec. -02 Dec. -03 Dec. -04 Dec. -05 Dec. -06 1,836.5 0.53 978.6 0.37 363.1 1,815.2 0.55 1,004.4 0.35 347.4 1,692.8 0.56 956.2 0.40 379.1 1,695.8 0.56 953.3 0.39 372.3 1814.51 0.56 1020.03 0.39 375.9 Gross contribution before marketin Marketing % of net sales 615.50 101.7 10.4% 657.00 110.8 11.0% 577.10 106.4 11.1% 581.00 109.5 11.5% 644.13 122.40 0.12 Gross contribution after marketing 513.80 546.20 470.70 471.50 521.73 Adjusted EBITDAa Adjusted EBITDA as % of net sales 184.1 0.19 197.5 0.20 190.5 0.20 184.1 0.19 204.01 0.20 (33.0) (25.0) (12.0) 114.10 27.3 (5.8) (47.6) 171.40 (12.6) (35.2) (40.3) 102.40 (25.2) (31.6) (21.3) 106.00 -25.45 -1.00 -21.51 156.04 103.30 67.15 119.67 52.52 (25.2) (31.6) (21.3) -25.58 82.90 53.89 132.60 78.72 -25.45 -1.00 -21.51 30.75 -25.58 1.00 -25.58 30.75 0.94 28.79 Change in working capital Restructuring payments Net Capex Pretax Operating Cash flow Additional debt Interest Interest * (1- Tax rate) EBITDA *(1- Tax rate) EBIT * (1- Tax rate) Change in working capital Restructuring payments Net Capex FCF Terminal cash flow Terminal value Net cash flow PV factor PV cash flow Value of Orangina Forec 1669.329 Assumptions: YOY growth rate is assumed to be at 7% in the volume and assumed that there will be no increase in the sales pric COGS % of sales will continue to remain constant at 2005 Estimated level Marketing as a % of net sales expected to remain at 12%. Adjusted EBITDA as % of net sales will increase to 20% and will remain constant over the period. Changes is working capital expected to grow at 1% every year Restructuring payments will remain constant at 1million euros. Net capex will grow at 1% year on year. Tax rate is assumed to be at 35% Debt is assumed to be 7.3x the EBITDA for 2005. Interest payment is as per the given exhibit. There will be addit WACC 6.818% Question 5: Answer For WACC, the US treasury bond rates for 30 years has been taken which is th Levered beta of Orangina is determined using the D/E ratio from Exhibit 9a th and Pepsi. It is always appropriate to make use of comparables information to company. Weight of debt is determined using the D/E ratio for the company as it is appro Tax rate is assumed to be at 35%. All these assumptions and calculation are appropriate as there was not direct in information were taken into consideration for performing the calculation. Ther Dec. -07 Forecast Dec. -08 Dec. -09 Dec. -10 Dec. -11 Dec. -12 Dec. -13 1941.52 0.56 998.4 0.39 389.91 2077.43 0.56 1,035.9 0.39 404.56 2222.85 0.56 1,075.3 0.39 419.95 2378.45 0.56 1,114.5 0.39 435.25 2544.94 0.56 1,075.4 0.39 419.98 2723.08 0.56 1,114.6 0.39 435.29 2913.70 0.56 1,075.5 0.39 420.02 608.49 119.81 0.12 631.34 124.31 0.12 655.35 129.04 0.12 679.25 133.74 0.12 655.42 129.05 0.12 679.31 133.75 0.12 655.48 129.06 0.12 488.68 507.03 526.32 545.51 526.37 545.55 526.42 199.68 0.20 207.18 0.20 215.06 0.20 222.90 0.20 215.08 0.20 222.92 0.20 215.10 0.20 -25.71 -1.00 -21.73 151.25 50.00 84.36 54.83 129.79 74.96 -25.71 -1.00 -21.73 26.52 -25.96 -1.00 -21.95 158.27 100.00 85.22 55.39 134.67 79.28 -25.96 -1.00 -21.95 30.37 -26.22 -1.00 -22.16 165.67 150.00 83.97 54.58 139.79 85.21 -26.22 -1.00 -22.16 35.82 -26.49 -1.00 -22.39 173.03 200.00 81.03 52.67 144.89 92.22 -26.49 -1.00 -22.39 42.34 -26.75 -1.00 -22.61 164.72 250.00 77.19 50.17 139.80 89.63 -26.75 -1.00 -22.61 39.27 -27.02 -1.00 -22.84 172.07 300.00 72.15 46.89 144.90 98.00 -27.02 -1.00 -22.84 47.15 -27.29 -1.00 -23.06 163.75 350.00 64.90 42.19 139.82 97.63 -27.29 -1.00 -23.06 46.28 26.52 0.88 23.25 30.37 0.82 24.92 35.82 0.77 27.51 42.34 0.72 30.45 39.27 0.67 26.44 47.15 0.63 29.72 2502.59 2548.86 0.59 1503.84 ill be no increase in the sales price. t over the period. iven exhibit. There will be additional debt of 50 million every year from 2007 at the cost of debt of 6.72% years has been taken which is the risk-free rate and it will be appropriate for the Rf under CAPM. the D/E ratio from Exhibit 9a that provides the proportion of debt and the average asset beta of Coca-Cola e of comparables information to determine the information when there is no information about the concern tio for the company as it is appropriate. ropriate as there was not direct information being provided. IN this case, the appropriate and relevant performing the calculation. Therefore, it makes strategic sense. Dec. -14 Year ending Dec. 31, in dollars millions Revenue Coca-Cola Dec 05 (est). Dec 04 Dec 03 Dec 02 23,104.0 21,962.0 21,044.0 19,564.0 Dec 02-03 7.56% Year ending Dec. 31, in dollars millions Revenue PepsiCo Dec 05 (est). Dec 04 Dec 03 Dec 02 32,562.0 29,261.0 26,971.0 25,112.0 Dec 02-03 7.40% in millio Dec. -02 Dec. -03 Dec. -04 Dec. -05 Net sales 978.6 1,004.4 956.2 953.3 WORKING NOTES 2673.21 2005 EBITDA Mu Market CaEBITDA MktCap/EBITDA Coca-Cola 95494.00 6085.00 15.69 PepsiCo 97837.00 7230.00 13.53 Orangina 2690.20 184.10 14.61 Average Sales MultMarket CaSales MktCap/Sales Coca-Cola 95494.00 23104.00 4.13 PepsiCo 97837.00 32562.00 3.00 Orangina 3402.26 953.30 3.57 Average Tc 35% levered betD/E asset beta Coca-Cola 0.4 0.012 0.40 PepsiCo 0.5 0.024 0.49 Orangina 0.6 0.498 0.44 Risk-free r30-year go Market ri Assumed 4.72% 5% Dec 04-05 -0.30% Beta Cost of equity The risk premium ove Cost of pre-tax debt After tax cost of debt 0.6 7.72% 3% 7.72% 5.01% WACC calculation Weight Cost WACC Debt 0.332324 5.01% 1.667% Equity 0.667676 7.72% 5.151% WACC 6.818% Dec 03-04 Dec 04-05 Average 4.36% 5.20% 5.71% Dec 03-04 Dec 04-05 Average 8.49% 11.28% 9.06% Dec 03-04 -4.80% Dec 02-03 Average 2.64% -0.82% 1. Background of the Deal The Milan Metro Line 5 is one of the infrastructure projects of major public interest included in Law N 443 dated 21 December 2001 (Legge Obiettivo 2001). This particular project involves the creation of a new metro line in the northern part of the City of Milan, between the Porta Garibaldi and Bignami stations, following a route from Viale Zara to Viale Fulvio Testi. A public transportation system linking Viale Zara and Viale Fulvio Testi was an idea which dated back to the 1920s. In the early '90s, however, the city opted to build a tram line rather than an underground line. The proposal to build the Metro Line 5 was advanced only in 1999, subsequent to evaluations of the traffic congestion in this area. The project was part of a general scheme aiming to organize public transportation links between the cities of Milan, Cinisello Balsamo, Sesto San Giovanni, and Monza. On 30 June 2003, a consortium advanced a proposal to build Line 5 utilizing project financing. Consortium members (Promoter Consortium) were: Astaldi S.p.A., Torno Internazionale S.p.A., AnsaldoBreda S.p.A., Ansaldo Trasporti-Sistemi Ferroviari S.p.A., Alstom Ferroviaria S.p.A. and Azienda Trasporti Milanesi S.p.A. (ATM - the Milan public transportation company). After verifying the validity of the project and the public utility of the works, on 15 April 2005 the City of Milan called for tenders on the concession for construction and operation (Concession), which was awarded to the Promoter Consortium on 17 May 2006. The agreement was signed on 16 June 2006 for a term of 31 years and 9 months (including 5 years and 10 months for building the entire line), and stipulated that the Special Purpose Vehicle Metro 5 S.p.A. (Metro 5) would automatically substitute the Promoter Consortium. This new company, whose shareholders were the members of the same Consortium which won the tender, was commissioned to design, build and operate the project according to a DBOT (Design, Build, Operate and Transfer) scheme. After the Concession was signed, a modification was made to the final section of the route (Garibaldi Variant). Specifically, the Garibaldi Station was initially positioned perpendicular to the Garibaldi Station on Line 2 of the Metro and at the same level underground, making possible future extensions of the line impossible. Consequently, the Garibaldi Variant was incorporated into the original Concession through an amendment undersigned on 3 August 2007. This Supplementary Contract relocated the station in question and extended the line by 300 meters in order to create a tunnel for maneuvering railcars, which would serve as the first branch of the future Line 6 running toward San Siro. On 23 November 2007, construction of the new metro line was commissioned to a temporary business association made up of Metro 5 shareholders (TBA or Contractor) through an EPC contract (Construction Contract). In particular, Astaldi S.p.A. and Torno Internazionale S.p.A. would handle civil engineering through a new company, Garbi Linea 5 S.c.r.l.2 This work would primarily involve digging a straight tunnel underneath Milan approximately 17 meters below ground level utilizing a Tunnel Boring Machine (\"TBM\"). 3 The 1 2 technological aspects of the project would be handled by AnsaldoBreda S.p.A., Ansaldo Trasporti-Sistemi Ferroviari S.p.A. and Alstom Ferroviaria S.p.A; these companies would build automatic controls for running the trains, the signal systems, the engineering system, and the rolling stock . The Operations & Maintenance (O&M) Contract, undersigned on 7 September 2007, commissioned ATM S.p.A (Operator) to handle operations and maintenance of the subway line for the entire term of the Concession. Lastly, the financial closing took place on 12 December 2007, when the financing contract was signed with Dexia Crediop S.p.A., Mediobanca S.p.A., Socit Gnrale S.a. and WestLb Ag (Lenders). Table A1 gives an overview of the timeline of the deal; Figure A1 shows the project sponsors and the key project contracts. Table A1: Timeline of the Deal 3 Figure A1: Structure of the deal 4 2. Description of the works Line 5 will connect the Garibaldi railroad hub to the current terminal of the Bignami tram line, following a route that runs entirely underground for approximately 6.1 km. The new line will offer passenger service to nine stations4 located an average distance of 600 meters apart. Figure A2 shows the stations along the route and its location on a city map of Milan. Line 5 will run through an area which is already serviced by major rail systems (National Railroad and Northern Milan Railroad), and will count 500,000 resident target users. When fully operational, the projected maximum transportation capacity of the subway will be 26,000 passengers per hour per direction, with guaranteed interchanges: - with Suburban Railway Service (Passante Ferroviario) and Metro Line 2 at Garibaldi Station, and - with Metro Line 3 at Zara Station. An additional service link is planned between Line 5 and Line 2. However, this link will be used solely when trains are first rolled out, and to switch vehicles between Line 5 and the Famagosta depot located on Line 2, where long-term overhauls on railcars will be done as well as extraordinary maintenance work when need be. Finally, the new metro line will intersect with the surface tram and bus lines at various ground-level stations, ensuring ample interconnections with existing transportation systems. The transportation system designed for Line 5 is a driverless light urban railway on fully automated track. The line will be staffed only by onboard agents, who will handle passenger assistance, ticket control and surveillance; no permanent personnel will work in the stations. The platforms in every station will be completely isolated from the tracks by a barrier of shatterproof transparent panels, automatic doors and emergency exits for access to railcars, minimizing risks of potential safety hazards. 3. Project Sponsors Listed below are the project sponsors for Milan Metro Line 5, who formed a temporary business association (as illustrated in Figure A1). Astaldi SpA (Astaldi) Astaldi is a large Italian general contractor active in the sectors of infrastructure, and civil and industrial construction. Recently Astaldi participated in the construction of the Naples Underground, Genova's suburban railway, Line C of the Roman Metro and extensions of Milan's metro lines (Line 2 from Romolo Station to Famagosta Station, and Line 3 from Zara Station to Maciachini Station). Astaldi was also involved in building underground rapid transit systems in Copenhagen and Brescia in collaboration with Ansaldo Trasporti-Sistemi Ferroviari S.p.A. and AnsaldoBreda S.p.A. These two projects were identical to Line 5 in terms of the technology utilized and the problems involved. Torno Internazionale SpA (Torno) Torno is a leader in the Italian construction industry, specializing in transportation infrastructure. The company recently contributed to building sections of the metro lines in Milan, Naples, and Genova. Specifically regarding Milan, Torno participated in the construction of: a) sections of the 5 Suburban Railway linking the Northern Railroad to the National Railroad networks; b) the Suburban Railway near the Porta Vittoria Station; c) the Brenta and Corvetto Stations and the extension of Line 3 from Maciachini to Affori; d) the extension of Line 1 from Molino Dorino Station to Rho Fiera Station. AnsaldoBreda SpA (AnsaldoBreda) AnsaldoBreda, 100% controlled by Finmeccanica SpA,5 and is the top Italian producer of vehicles for mass transit. AnsaldoBreda supplied rolling stock for construction of the Copenhagen underground, and participated in building the metro systems in Brescia, Salonicco, and Rome. Ansaldo Trasporti-Sistemi Ferroviari SpA (Ansaldo) Ansaldo is a member company of the Ansaldo STS SpA Group, 6 specialized in the design, construction, installation, operation and maintenance of railway and underground transportation systems, acting as a turnkey provider. The company's prior experience includes involvement in building metro systems in Dublin, Birmingham, Copenhagen, Salonicco, Genova, Rome, Naples and Brescia. Alstom Ferroviaria SpA (Alstom) Alstom is the Italian subsidiary of the French multinational group Alstom SA, active in the energy and transportation sectors. Alstom provides turnkey rail transportation systems, primarily dealing in rolling stock and signalling systems. The company has consolidated experience in the sector thanks to its involvement in the construction of the Losanna metro and the driverless system in Singapore. Another project to include in Alstom's list of references is the people mover from the San Raffaele Hospital to the Cascina Gobba Station on Metro Line 2 in Milan, the first turnkey project in the Italian transportation sector. Azienda Trasporti Milanesi SpA (ATM) ATM is the joint stock company owned by the City of Milan which runs public transport in the metropolitan area and in 87 cities in the Province of Milan. Metro Line 5 is not the only recent project realized or designed by ATM, but one of many public works to be undertaken with the aim of achieving an integrated mobility system for the greater metropolitan area of Milan. In addition to Line 5, extensions of Line 2 from Famagosta to Assago and Line 3 from Maciachini to Comasina are currently under construction. Other projects in the design phase include the extension of Line 1 from the Sesto railroad station to Monza Bettola, and the construction of Line 4 from Lorenteggio to the Linate Airport. 6 3. The DBOT Concession Contract and Supplementary Contract (Variante Garibaldi) 3.1 Purpose and Duration On 16 June 2006 the City of Milan (Concession Authority) and Metro 5 (Concession Holder) signed the Construction and Operations Concession. The term of this agreement was 31 years and 9 months, including 56 months for the construction of the Zara-Bignami stretch (Functional Section) and 70 months for building the entire metro line (Entire Line). Operations would begin with the functional section, slated for delivery by 28 February 2011; the Entire Line was scheduled to begin operations by 30 April 2012. At the end of the Concession, the Holder would transfer the project and rolling stock to the Concession Authority. According to the terms of the Concession, the Concession Holder undertook the design, construction, operation and maintenance of the new metro line, and would collect payment from ticket sales on behalf of the Concession Authority. 3.2 Concession Holder's Grants and Fees The project would be financed in part by a state capital grant totalling approximately 233 million euro and a grant provided by the City of Milan of approximately 62 million euro, both disbursed by the Concession Authority while construction was underway. Specifically, the state capital grant would be paid by the Concession Authority on a milestones basis 7 no later than 30 days after these funds were actually credited to the Authority by the State. However, the Concession Authority offered no guarantee as to the actual date this disbursement would take place. If delays in state grant disbursement resulted in delays of over 120 days in the payment of a milestone certification, the Concession Holder would have the right to call for a revision of the Business Plan (BP). Instead, the grant provided by the City of Milan would be paid out by the Concession Authority within 60 days of presentation of milestone certification. When each certification was issued, the Concession Holder was to post a letter of credit equal to the corresponding portion of the municipal grant. Once the value of the guarantee equalled 1/5 of the entire grant, the guarantee was discharged and then reconstituted for the next milestone certification. The guarantee would be definitively discharged when the subway line was tested. As in the case of the state grant, delays in the disbursement of the municipal grant would give the Concession Holder the right to request a Business Plan revision. The Concession also provided for an Availability Fee (AF) consisting of semi-annual contributions made by the Concession Authority to operating expenses incurred by the Concession Holder during the operations phase. The AF would be paid in full if the actual number of passengers equalled or exceeded 32% of the benchmark number (risk threshold). Specifically, this 6-month benchmark was estimated in the Concession as follows: 7 - 7,711,200 for the operating period of the Functional Section; - 9,520,000 for the first year of operations of the Entire Line; - 10,080,000 for the following year; - 11,200,000 after that. If traffic fell below the risk threshold, the amount due would be reduced proportionally to the difference between the risk threshold and the actual number of passengers. Specifically, the AF is calculated as follows: - If the actual number of passengers (Pa) is lower than the risk threshold (Pr), for every 6-month period we would have: (AF = Tb*(Pt+Pa-Pr) where Pt represents the target number of passengers and Tb stands for the benchmark tariff indexed to the inflation rate. - If the actual number of passengers is higher than the risk threshold, for every 6-month period we would have: AF=Tb*Pt. The benchmark tariff at 2003 prices was: a) 1.522 euro for Year 1 and Year 2 of operations; b) 1.422 euro for subsequent years of operations until loans were repaid; c) 0.650 euro beginning on the date that loans were repaid. The Tb, to be applied in the first two years of operations, would be revised on the basis of actual inflation levels recorded from 1 January 2004 to the COD-Commercial Operating date (the start date of commercial operations). Subsequently, the Tb would be updated every two years based on the average of actual inflation rates (consumer prices according to the ISTATItalian Central Statistics Institute index) and the rates projected for the previous two-year period. 3.3 Revision of the Concession Revising the Business Plan (BP) would serve as a way to rebalance the concession if any inequality emerges; however, this option would only be allowed under the following circumstances: - an act of the Concession Authority, defined by Article 1 of the Concession as: \"(i) an act for which the Concession Authority or its bodies may be deemed responsible; (ii) a violation by the Authority of obligations stipulated in this Convention, or (iii) an act for which a competent supranational, national, regional, provincial, or municipal authority may be deemed responsible, which causes a delay with respect to the time limits prescribed by law for the issuance of a permit or a provision resulting directly in the impossibility of the Concession Holder to fulfil its obligations, in accordance with the time limits and in the manner prescribed in the Convention and/or in every contract or document stipulated in the same Convention; (iv) an act for which the owners and/or operators of underground utilities and surface utilities may be deemed responsible.\" - new laws or regulations which set new tariff schemes or new operating conditions - force majeure - possible future extensions of the line - land reclamation - archeological or war finds 8 - any other case covered by the Convention Specifically, in the case of force majeure, land reclamation or possible findings of archeological or war artifacts, the BP would be revised only if the higher costs incurred by the Concession Holder exceeded the single cumulative sum of 2 million euro. Moreover, certain force majeure events (for example, earthquakes, floods, or terrorist acts) were covered by specific insurance policies. Even if the BP were not revised, in the case of land reclamation or the discovery of archeological/war artifacts an automatic extension would be triggered on the deadline for completion of the works and start date of operations if, despite every effort by the Concession Holder, total delays ran more than 30 days behind schedule. 3.4 Penalties The Concession Holder was responsible for any delays, with the exception of force majeure events or actions of the Concession Authority. If the deadlines for the start up of the Functional Section and/or the Entire Line were not met, the Concession Holder would be charged a set penalty of 30,000 euro per day of delay, up to a maximum of 6,750,000 euro. The Concession Holder would be subject to additional penalties if performance parameters were not respected. In fact, beyond the obligation to respect the project timeline, the Concession Holder agreed to realize and manage the project ensuring that certain performance parameters would be respected. For each of these parameters, specific target values and minimum values were established. Failure to meet targets would subject the Concession Holder to penalties; failure to achieve minimums, instead, would potentially result in the maximum penalties. Performance parameters were calculated as follows: - system availability: a measure of the relationship between the amount of time the system actually runs, and the nominal theoretical operations time. Therefore, availability = (minutes of actual service/minutes of scheduled service)*100, where minutes of actual service were counted in relation to the number of stations served, so as to take into account periods in which service was not complete; - regularity of service: a measure of the relationship between the number of runs made and the number of runs planned: regularity= (actual runs /scheduled runs)*100; - punctuality of service: determined as the difference between 100% and the ratio of the number of late runs out of the total number of runs which reached the terminal: punctuality=[1-(late runs/total complete runs)]*100, where \"late\" is defined as reaching the terminal more than 3 minutes past schedule. An initial performance assessment of the system would be carried out after the first 6 months of operations for the Entire Line, when performance parameters would be calculated for the first time. If one or more parameter did not meet the relative target value, a supplemental 6-month period would be granted to allow the Concession Holder to implement any necessary corrective measures. At the end of this time, the system would be monitored for 6 more months, after which a definitive measure of performance parameters would be established. If these parameters were again lower than target values, the Concession Holder would apply the penalties listed in Table A2, up to a maximum of 15 million euro. Payment of penalties or achievement of performance parameters would mark the end of this initial system performance verification period, referred to as the Observation Period. After the Observation Period, performance parameters would be calculated every six months. If one or more did not meet relative target values, the Concession Holder would be charged operating penalties as listed in Table A3, not to exceed a maximum of 3.28 million euro per year. 9 Table A2 Penalties for underperformance during the Observation Period 10 Table A3: Penalties for underperformance after the Observation Period As regards penalties for both delays and for substandard performance, the Construction Contract and the Operations & Maintenance Contract stipulated by the Concession Holder with the Contractor and the Operator respectively reiterated exactly the provisions in the Concession pertaining to penalties paid by Metro 5 to the Concession Authority. 3.5 Contract Termination The main reasons that would prevent the continuation of the contract relationship would be termination due to nonfulfillment of obligations (grave inadempimento) by one of the counterparties or cancellation for reasons of public interest. In either case, Metro 5 would have the right to an indemnity to be used to repay bank loans. This amount would equal the value of the works already executed, net of amortization and any possible damages incurred by the Concession Authority. In addition, compensation would be made for loss of future income totalling 10% of the value of the works yet to be completed and/or the portion of the transportation service yet to operate on the basis 11 of the BP. If Concession Holder were in default, the Lenders could name a new concession holder in order to prevent contract cancellation and in doing so to safeguard their position (step-in right). 4. Construction Contract and Operations & Maintenance Contract 4.1 Construction Contract The Construction Contract established joint liability of TBA members and a 2-year warrantee period. Moreover, the Contractor was obliged to provide turnkey construction. The Construction Contract specifically addressed designing and building the line and supplying rolling stock, reflecting the provisions of the Concession. The TBA was also responsible for handling expropriations. The amount due for construction activity, totalling 452.64 million euro, was a fixed lump-sum figure. Relative payments would be made on the basis of performance milestone certificates (PMC)8; 2.5% would be withheld on each payment to serve as guarantee of the proper fulfilment of contractual obligations. The amount withheld would be released on the commercial operating date for the Entire Line. Additional compensation and supplementary indemnities set down in the Contract would be contingent on the Concession Authority paying the same sums to the Concession Holder subsequent to a Business Plan revision. The Contract also stipulated that possible cost overruns incurred by the Construction Contractor due to force majeure events, land reclamation, or archeological or war finds would be reimbursed by the Concession Holder, up to a maximum total of 2 million euro. The right of the Contractor to request indemnities above this amount was conditional to a BP revision. The Construction Contract addressed delays in delivery of the Functional Section and/or the Entire Line with penalties identical those set down in the Concession. These penalties would be applied only if the Concession Authority would request as much from the Concession Holder. In addition, the Construction Contractor would be required to pay a supplemental penalty of 36,000 euro per day of delay to offset further costs and damages incurred by the Concession Holder. Overall, the penalties described here were not to exceed 14,850,000 euro. This cap was sized to cover delays corresponding to the maximum amount that could be levied against Metro 5 as agreed in the Concession, that is 6,750,000 euro. The Construction Contractor committed to executing the works in such a way as to meet performance parameters set down in the Concession. If one or more parameter did not meet the relative target value at the end of the Observation Period, the Contractor would be required to pay penalties9 specified in the Concession regarding respect of performance parameters, as long as the sum of these penalties did not exceed 15 million euro. In this case, too, penalties would only be due if the same were applied to Metro 5 by the Concession Authority. As a guarantee of proper and timely fulfilment of the obligations deriving from the Construction Contract, the TBA provided the Concession Holder with a performance bond equalling 8% of the amount due, in addition to a system performance guarantee of 10 million euro, issued on the assurance that the metro line would meet performance parameters. The rule regulating contract cancellation due to nonfulfillment by the TBA reiterated the provisions of the Concession regarding the same by the Concession Holder. Instead, breaches by the Concession Holder resulting in contract cancellation were far more restricted. In fact, the TBA could terminate the contract only if the Concession Holder failed to make a payment within 60 days of the established 12 due date. In addition, the indemnity due was limited to the amount paid by the Authority to the Concession Holder, less the sums to be used to pay back lenders. 4.2 Operations & Maintenance Contract The Operations & Maintenance Contract, signed on 7 September 2007, reflected the provisions in the Concession. In fact, ATM would be responsible for operating the transportation service and handling ordinary and extraordinary maintenance on the line for the entire term of the Concession. The ATM was to be paid an annual lump-sum fee of 8.2 million euro for the operations period of the Functional Section, and subsequently 9.43 million euro. In addition to the remuneration for operations and ordinary maintenance, a lump-sum compensation of 4.08 million euro was set for extraordinary maintenance. The remuneration and compensation due for operations were subject to the same inflation indexing mechanism detailed in the Concession for the contribution to operating expenses. As in the Construction Contract, ATM had the option to r