Bidding and concession process

The government launched an international competitive bidding process in November 1996. There were four bidders AES, Cinergy, Enron and Tractebel. Cinergy won primarily by proposing the lowest electricity tariff. Because of conflicts among the Ivorian regulatory agencies concerned, the concession agreement was not signed until September 1998 and the financing was not structured until early 1999. Among the issues that caused the delay were the lack of a formal legal structure for...

Offtake risk

The PPA with Emcali provides fixed-capacity payments designed to cover all fixed operating costs, including debt service, and energy payments that pass through virtually all actual fuel supply, transportation and other variable costs. Emcali, rated 'BBB-' at the time of the project financing by Standard & Poor's, is contractually obligated to provide additional support in the form of a letter of credit and a fiducia, described below, to cover short-term payment disruptions. The project was...

Description of financing

a US 900 million facility from Jexim a US 540 million facility from the Export-Import Bank of the United States (US Exim) a US 200 million facility from the Overseas Private Investment Corporation (OPIC) US 180 million as a funding loan, refinanced in 1996 with Rule 144A private placement of US 180 million 9.34 per cent senior notes due 2014 US 374 million subordinated debt from the sponsors and PT PAITON ENERGY (PAITON 1), INDONESIA

Subsequent developments

Since the project financing in 1999 AES and its Drax power plant investment have been affected primarily by two important developments with far-reaching ripple effects. First, the combination of NETA and an oversupply of generating capacity reduced wholesale electricity prices in the United Kingdom by far more than expected, and consequently reduced the earnings and value of power plants such as Drax. Second, the Enron bankruptcy caused investors and lenders to take a more conservative stance...

Power plant financing

Prior to the 1990s the majority of power plants in China were domestically owned and operated, using local technology and equipment. Direct foreign investment was rare and mostly through joint venture agreements, with projects awarded on a negotiated rather than a competitive-bidding basis the sale of foreign technology to Chinese power plants was more com-mon.4 Between 1979 and 1996 about 10 per cent of investment in the local power sector came from foreign sources such as foreign direct...

Market risk high leverage high purchase price

Among others, Ofgem, the UK power industry regulator, warned that electricity prices would decline when the New Electricity Trading Arrangements (NETA) were implemented. Despite these warnings international power companies such as AES continued to pay high prices for assets such as Drax. The effects of NETA on the Drax power plant in the United Kingdom were underestimated. After a fixed-price contract for 60 per cent of its output was cancelled Drax faced the prospect of operating on a merchant...

Bank financing

The lead arrangers for the original bank financing were Chase Manhattan, acting as book manager, ratings adviser and financial modelling bank Deutsche Bank, as loan documentation bank, technical bank and facility agent and the Industrial Bank of Japan, the project documentation and insurance bank. The lead arrangers faced three main challenges the size of the financing was unprecedented the plant was partially subject to merchant power risk and the project had high leverage. Co-arrangers,...

Independent Engineers Report

Among the opinions expressed by the Independent Engineer were the following. The Drax power station, as National Power's flagship representing 20 per cent of its generating capacity, had been operated and maintained to the highest standards. An availability factor of 89.75 per cent, one of the assumptions in the Power Market Consultant's model, was reasonable and achievable, reflecting the plant's high standards of design, construction, operation and maintenance. Historically, the plant had...

Project credit ratings

In July 1997, when the financing closed, the senior secured bonds were rated 'Ba1' by Moody's. In its rating analysis Moody's cited contracts providing for strong cash flow in support of debt-service coverage ratios, a fuel-cost passthrough, and minimum firm capacity payments to cover operations and maintenance. Other strengths that the agency cited were the turnkey construction contract with Bechtel Power Corporation and the 25 per cent equity contribution from the sponsors. Moody's also noted...

Bajio

InterGen's 600 MW Bajio project in San Luis de la Paz, 160 miles northwest of Mexico City, shows some new directions for IPPs in Mexico. The project sponsors are InterGen and AEP Resources, a subsidiary of American Electric Power. The project will use 495 MW of its capacity for sale of electricity to CFE under a 25-year PPA and the remaining 105 MW for sales to third-party industrial customers. A Mexican IPP with a 'self-supply permit' is allowed to sell electricity to industrial customers that...

Construction risk

The Transgas (see Volume II - Resources and Infrastructure) and TermoEmcali (see Chapter 3) projects in Colombia showed that infrastructure projects, such as power plants and pipelines, that generate local revenues in a developing countries can be financed 'out of the box' (prior to construction) under the right circumstances. However, these circumstances have changed considerably since the project financing of these projects was done in 1997, particularly in Colombia, where the economic and...

Emcali support package

In addition to the security package, Emcali's obligations under the PPA are supported by a letter of credit and a fiducia. The fiducia is a trust that grants TermoEmcali a priority interest in a portion of Emcali's operating cash collections in case Emcali defaults on its payment obligations under the PPA. Emcali installed the fiducia after closing. Until the fiducia was in place, the letter of credit was oversized. In the US 424 million Termobarranquilla power project, closed in November 1995,...

Events since 1998

In April 1999, shortly before commercial operation was scheduled to begin, Duff & Phelps downgraded the rating of the US 165 million TermoEmcali Funding Corporation senior secured notes from 'BBB' to 'BB+', reflecting a similar rating downgrade of Emcali. The agency explained that the offtake risk of the TermoEmcali PPA was that of Emcali and therefore that TermoEmcali's credit rating was constrained by that of Emcali. Recent poor economic performance in Colombia, and particularly in Cali,...

Critical success factors and lessons learned

In his article in the Journal of Project Finance (Fall 2000), mentioned above, John S. Strong concluded that the Azito project was a model for future infrastructure projects in the region. Some of the reasons Strong cited for the project's success are listed below. C te d'Ivoire's economic policies and growth after its 1994 devaluation and its debt restructuring initiatives gave project sponsors and lenders confidence in the success of a private project in the power sector. Power needs...

Fundamental problems unresolved

At this point there were still two principal problems unresolved. First, the price of power supplied by DPC under the PPA was more than the MSEB could afford and more than the price charged by other power plants in Maharastra. Second, Maharastra had more power than it needed. In the early 1990s, when the original PPA was negotiated, it had been projected that Maharastra would need all the power that the Dabhol project could produce and more. However, even though the Indian economy grew at more...

Arrangement of financing

In August 2000 CBK Power took the most important step toward finalising the contract by reaching agreement on a US 383 million loan with four major international financial institutions Soci t G n rale SG , Banque Nationale de Paris subsequently BNP Paribas , Dai-Ichi Kangyo Bank and the Industrial Bank of Japan IBJ . Impsa and Edison Mission Energy planned to provide US 120 million equity for the project. By that time the NPC had made progress on the outstanding right-of-way issues for the...

Electrical transmission capability

The Union Power project is connected to Entergy Corporation's 500 kV El Dorado transmission substation located adjacent to the plant site, thereby gaining direct transmission access to the Entergy subregion of the SERC, which is connected to the Southwest Power Pool, part of the NERC, and to the TVA and Southern Company subregional markets. In addition, the sponsors have invested in several additional upgrades recommended by Entergy to enhance the power plant's transmission capability. The Gila...

Financing structure

Project Financing Structure

The project financing structure is shown in Exhibit 3.4. TermoEmcali Funding Corporation, wholly owned by Leaseco, is established for the sole purpose of issuing the notes. It is a special-purpose corporation operating under the laws of the State of Delaware in the United States. TermoEmcali Funding lent a portion of the proceeds from issuance of the notes to Leaseco, which used those proceeds to acquire equipment for lease to the project company. This arrangement allows the project company to...

La Rosita I and II

In December 2001 InterGen closed a US 625 million commercial bank financing for La Rosita I and II formerly called Rosarito but renamed because of confusion with other projects , in Baja California, about six miles south of the US border. Of the total amount, US 420 million is covered by political risk insurance from the Export Development Corporation of Canada. The covered portion has a tenor of 15 years and the uncovered portion 11 years. Guillermo Espiga, Director - Finance, Latin America,...

Teg I

Termoelectrico del Golfo I TEG I is an 'inside the fence' project costing about US 370 million. The plant is located in Tamuin in the central Mexican state of San Luis Potosi. The project is sponsored by Sithe Energies, Inc., ABB Alstom Power and Cemex. The sponsors have put in place wheeling arrangements with the CFE so that the project can transmit power to 12 Cemex cement plants. Wheeling is the movement of electricity from one system to another over the transmission facilities of...

Strategic

The Enron bankruptcy has resulted in more intensive investor and lender scrutiny of power companies with trading operations, international networks and difficult-to-understand financial statements. Calpine and AES, owner of the Drax power plant in the UK, have scaled down their capital expenditure programmes, sold assets and reduced their leverage see Chapter 14 . After TXU, a diversified energy company based in Dallas, Texas, decided to withdraw support for its European operations, which are...

High leverage

Unexpectedly high purchase prices financed with high leverage accentuated problems with the Drax power plant in the United Kingdom see Chapter 12 and the BCP cellular telephone project in Brazil see Volume II - Resources and Infrastructure . For the FLAG under-sea cable project, aggressive network expansion financed with high leverage may have been a viable strategy while internet use, telecommunications traffic and related capital spending were growing rapidly, but FLAG did not have sufficient...

Evolution of IPPs in Mexico

In the early 1990s, before the creation of the North American Free Trade Area, there was growing interest among Mexican authorities and US developers in creating an independent power industry in Mexico. To meet expected power needs, the Comision Federal de Electricidad CFE planned for an increase in installed power-plant capacity from 33,000 MW, projected for 1995, to 45,000 MW in 2005. About half of the new capacity and one quarter of total capacity was expected to come from IPPs. The...

Lessons learned

The MSEB's failure to honour its contract obligations indicates that contract parties may fail to honour their contractual commitments when it is beyond their ability or not in their eco nomic interest to do so. By not honouring their guarantee and counter-guarantee obligations, the Government of Maharastra and the Government of India undermined the foundations of the project. Such political decisions could be considered forms of 'creeping' expropriation. The unwillingness of the two...

Mexican power projects following Samalayuca II and Merida III

After AES was awarded the mandate for Merida III in March 1997 see Chapter 8 , three power project concession awards followed the build-lease-transfer BLT model of Samalayuca II see Chapter 7 the 450 MW Rosarito III project, the 100 MW Cerro Preto project and the 435 MW Encino project. Subsequently, budget cuts made the Comision Federal de Electricidad CFE more receptive to the private sector and several more independent power producer IPP ventures were approved. The structure for the Merida...

Project contract letter of credit facility

The fuel performance letter of credit supports certain payment obligations under the gas supply agreement and the fuel transportation performance letter of credit supports certain payment obligations under the gas transportation agreement. Both are in an amount of US 5.5 million, issued on the financial closing date and expiring in five years. Ecopetrol required that the fuel performance and fuel supply letters of credit be issued by a Colombian bank. A back-to-back letter of credit was created...

History since 1952

Starting in 1952, nergie lectrique de C te d'Ivoire EECI , a government corporation overseen by a unit of the Ministry of Economic Infrastructure, was responsible for generation, transmission, and distribution of electricity. In the 1980s, however, EECI ran into financial difficulty as a result of overexpansion, droughts, financial mismanagement, the deterioration in the country's economy and problems with collecting bills from other government agencies. The company accumulated significant debt...

Principal project contracts

The principal project contracts are the PPA, the construction contract, the operation and maintenance O amp M agreement, the fuel supply agreement, the coal purchase agreement, the mining and barging contract, the coal terminal services agreement, the contract of affreightment, and the Kelanis Facility agreement. The PPA defines the rights and obligations of Paiton Energy and PLN relating to development, financing, construction, testing and commissioning of the project, and operation and...

Award of the project

The Mexican government issued tender documents to the bidders for the Samalayuca II project in May 1991. Bids were submitted in March 1992 by three groups, one led by General Electric GE , another by ABB and the third by Westinghouse. GE was joined in the winning consortium by Bechtel, El Paso Natural Gas, Grupo ICA and Coastal Corporation, a pipeline company. Later, Bechtel established its InterGen subsidiary and participated through it, while El Paso Natural Gas participated through El Paso...

Negotiations with Enron

International power developers did not respond immediately to the new opportunities in the electricity sector in the early 1990s because India had suffered recent balance-of-payments problems and banks had cut back their credit facilities. As a result, the government had to seek out developers. Delegates from the Ministry of Power visited various IPPs to solicit their interest. When they reached Houston, Texas, they found Enron to be particularly committed and focused. Their discussions would...

Gas supply agreement

The project executed a 16-year firm gas supply agreement with Ecopetrol, commencing 1 January 1999, for up to 42,000 million Btu per day. Ecopetrol is Colombia's state-owned oil and gas company. The project initially paid on an annual take-or-pay basis for 10,000 million Btu per day, which is equal to 25 per cent of the firm quantity available to the project. The project has an option to convert all or a portion of the remaining 31,000 million Btu per day to a take-or-pay basis if, and to the...

Land use rights transfer agreements

In the early stages of negotiation with the Power Bureau the project sponsors thought that they had done everything that was required to acquire the plant site. However, in 1997, just after the sponsors and local land bureau had signed the Land Use Rights Transfer Agreements, the central government issued a moratorium on the grant of arable land. The land bureau delayed issuing the land use rights certificates that were required to mortgage the land use rights to the project site until it had...

Fuel Supply and Transportation Agreement

Under the FSTA the Guangxi provincial government agreed to supply fuel to the project through its subsidiary, the Guangxi Construction and Fuel Corporation GCFC . The project sponsors have the right to reject coal that does not conform with specifications in the agreement. The base price is fixed every year, but adjustments are made to the price of each delivery based on the quality of the coal, which must be within a defined range. The FSTA specifies the mines that will supply the coal and is...

Debt service reserve letter of credit fac

In previous Colombian power projects, such as takings were necessary. The bank letter of credit facility provided a credit enhancement partly to replace the government guarantee or power-purchase commitment common in previous power project financings. The US 13.2 million debt service letter of credit facility, equal to six months principal and interest payments, supports temporary shortfalls in debt service payments to the 144A note holders. Drawings are available at whichever is the earlier...

Power Purchase Agreement

Emcali purchases power from the facility under a 20-year dispatchable PPA, with fixed capacity payments and variable energy payments. The capacity payments are designed to cover all fixed operating costs, including debt service and return on investment. The energy payments pass through actual fuel-supply and transport costs and other variable operating expenses. TermoEmcali's tariffs are US dollar-indexed. Under the PPA, tariffs are protected from a change in law. Emcali sells power into the...

Laibin B China

Distinctive features First project in China open to international bidding. First Chinese infrastructure project financed entirely with foreign capital. First Chinese infrastructure project to be developed by a wholly foreign-owned project company under a BOT framework. First BOT project to be formally approved at the state level by the State Planning Commission SPC .1 Documentation serves as a model for future BOT power projects in China. French ECA Coface took...

Sources of capital

Historically, commercial banks have provided construction financing for projects, while insurance companies have provided take-out financing with terms of 20 years or more. Banks have been relatively more comfortable with construction risks and short-term loans, while insurance companies have been more comfortable bearing the long-term operating risks after construction has been completed and the project has demonstrated its capability to run smoothly. In the early 1990s, however, the investor...

How the financing was arranged

Bear Stearns was engaged by InterGen before the banks were. InterGen wanted to do a bond financing 'out of the box', but recognised that this was an ambitious undertaking and therefore developed a backup plan in case the bond markets turned unfavourable. This requirement led to the idea of an alternate standby facility to serve as an insurance policy. InterGen tendered the standby letter of credit facility and the debt service working capital reserve facility to the banks for bids. Dresdner...

Sources of free cash flow

Chew, Managing Director of Corporate amp Government Ratings at Standard amp Poor's, recalls that immediately after Enron filed for bankruptcy protection some questioned whether project and structured finance would survive in their current form. Indeed, some corporations with large amounts of off-balance-sheet financing and inadequate disclosure were subjected to increased scrutiny, and sustained sharply reduced valuations for both their equity and debt. In response such companies...

Country risk2

No political risk coverage was provided for this project financing. At the time Colombia had the following long-term investment-grade credit ratings Duff amp Phelps now Fitch , 'BBB' Moody's, 'Baa3' and Standard amp Poor's, 'BBB'. Colombia is Latin America's fifth largest country by area and third largest by population. It claims to be the region's oldest democracy. Between 1945 and 1995 its economy grew at an average annual rate of almost 5 per cent. For the past two decades Colombia has been...

Meizhou Wan China

724 MW net pulverised-coal-fired power plant with two 362 MW units. Country People's Republic of China PRC . Distinctive features First wholly foreign-owned power project successfully financed outside China's state-sponsored build-own-transfer BOT programme. Second entirely foreign-owned project in China. Lack of implied central government support. Multilateral agency both provides cover and holds equity stake. Two export credit agencies ECAs involved. Financed during depth of Asian currency...

Termo Emcali Colombia

Build-own-transfer, combined-cycle, gas-fired power plant. Infrastructure project generating local-currency revenues financed 'out of the box' with bonds. First power project in Colombia financed through Rule 144A private placement. Longest-term bond issued to date for Colombian borrower. Bond issue backed by commercial loan commitment. No state guarantees or state-owned offtakers. Obligations of private offtakers guaranteed by pledge of receivables. Debt-service reserve and working capital...

Declining importance of trading

In an article published in October 2002, Robert Sheppard, a consultant and attorney based in North Carolina, predicted that the role of trading in the electric power industry would diminish in the coming years. He pointed out that supply demand imbalances and price uncertainty in the 1990s were caused largely by an uncertain and changing regulatory environment, and that the electricity market does not have many of the characteristics of other commodity markets in which users need to hedge, such...

Increasing and then decreasing risk tolerance

Until 1997, there were trends of lengthening maturities, thinning prices which was reflected in spreads over benchmark funding indices , loosening covenants, extending project finance to new industries and geographical regions, and a willingness on the part of lenders and investors to assume new risks. This was partly a result of more institutional investors becoming interested, and developing expertise, in project finance. These trends reversed as a result of the worldwide ripples caused by...

Why project finance is used

Project finance can be more leveraged than traditional on-balance-sheet financing, resulting in a lower cost of financing. In countries with power and other infrastructure needs, project finance allows governments to provide some support without taking on additional direct debt. The growth of project finance in recent years has coincided with a trend toward privatisation. For sponsor companies project finance may accomplish one or more of the following objectives undertaking a project that is...

About the author

Davis is a writer and consultant working in the fields of banking and corporate finance. He currently serves as managing editor of three quarterly professional journals, the Journal of Investment Compliance, the Journal of Structured and Project Finance, and Strategic Investor Relations, published by Euromoney's US affiliate, Institutional Investor. Mr Davis has also written or co-authored 11 books including Financial Turnarounds Preserving Value with William W. Sihler Financial...

Project Finance Practical Case Studies

Published by Euromoney Books Nestor House, Playhouse Yard London EC4V 5EX United Kingdom Tel 44 0 20 7779 8999 or USA 1 800 437 9997 Fax 44 0 20 7779 8300 www.euromoneybooks.com E-mail hotline euromoneyplc.com Copyright 2003 Euromoney Institutional Investor PLC The authors give notice of their right under Section 77 of the Copyright, Designs and Patents Act 1988 to be identified as the authors of this book. This publication is not included in the CLA Licence. No part of this book may be...

Power plants

1 Laibin B - Coal fired power plant 30 Introduction 31 Project summary 31 Background 32 How the financing was arranged 34 Government approvals and support 34 Risk analysis 35 Principal contracts 37 Lessons learned 38 2 Meizhou Wan - Pulverised-coal-fired power plant 39 Introduction 40 Project summary 40 Background 40 Principal contracts 42 How the financing was arranged 43 Lessons learned 43 3 TermoEmcali - Gas-fired power plant 45 Project summary 46 Project economics 48 Ownership and...

Acknowledgements

A detailed book of case studies cannot be completed without information and advice from many experts. In particular, the author would like to acknowledge the never-ending patience of Stuart Allen, Johanna Geary, Elizabeth Gray and Paul McNamara of Euromoney Books and the generous assistance provided by the following individuals, listed alphabetically. Dino Barajas, Milbank, Tweed, Hadley amp McCloy Brandon A. Blaylock, GE Capital Services Structured Finance Group William H. Chew, Standard amp...