Davis' research into the development of financing for large-scale projects in the electricity sector comes at a critical time for the industry worldwide. Meanwhile, investors pulled out of much of the power sector, causing prices to crash and capital to withdraw.
Introduction
The economic interests of sponsors in the success of a project make an impressive contribution to the project's creditworthiness. 5Hsiao, Henry, “The Use of Financial Guarantees and Contingent Capital in Project Finance,” The Journal of Project Finance, Spring 2001, p.
Laibin B, China
The project sponsors bear the risk of the first 5 percent movement from the base rate under the PPA. The Concession Agreement is the overarching document that summarizes the main rights and obligations of the Project Company and the Guangxi Provincial Government with respect to the Concession.
Meizhou Wan, China
As with Laibin B, many of the project agreements have equally binding English and Chinese versions. One of the most important issues facing the project's sponsors was how to ensure that they would receive sufficient revenue.
TermoEmcali, Colombia
TermoEmcali was financed 'out of the box' in the Rule 144A private placement market with a backup commercial loan obligation. At the end of the first 20 years, the ownership of the project will be transferred to Emcali without further consideration. It is a special purpose company operating under the laws of the State of Delaware, USA.
The structure of the capacity and energy payments under the PPA was largely designed to insulate the project from variations in dispatch. The agency estimated the cost of the ongoing civil war at 2 to 5 percent of GDP. The project contract's letters of credit support some of the project's payment and performance obligations under the PPA.
With the sale of the 144A banknotes, Emcali effectively insured the interest pass-on costs.
Azito, Côte d’Ivoire
It will be a test of the government's credibility and its willingness to meet its obligations to sponsors and lenders. The company accumulated significant debt despite charging some of the highest electricity tariffs in the world. The government retained ownership of the gas fields and guaranteed the energy sector's contracts with gas producers.
The project also reduces the country's dependence on hydropower in the event of drought. The government has changed the tariff structure to improve the financial viability of the power sector. The government then expanded the scope of financing to include the transmission line.
After the country's economy was hit by the overvaluation of the CFA franc in the 1980s, it was helped by a devaluation in 1994.
Dabhol Power Company, India
The financing of the first phase of the project in 1995 was the first to close after foreign companies entered the Indian electricity sector. In September 1994, representatives of the Indian federal government and DPC signed a counter-guarantee agreement for the first 695 MW phase of the project. A final termination notice would cancel the PPA and transfer ownership of the power plant to MSEB.
The past few months have seen defaults by MSEB and failure of the state and federal governments. Piyush Joshi (in his article cited above) believes that the roots of the crisis lie in the legal framework governing the project. Due to the size of the project, several large companies may wish to form a consortium to purchase the project.
By defaulting on their guarantee and counter-guarantee obligations, the Government of Maharashtra and the Government of India undermined the foundations of the project.
PT Paiton Energy (Paiton I), Indonesia
Ltd (40 percent); GE Paiton (12.5 percent); and PT BHP, a special purpose limited liability company formed by the project's Indonesian sponsors. From the beginning, both lenders and sponsors were concerned about the dependence on fuel supply. PLN's PPA obligations benefited from a letter of support issued by the Government of the Republic of Indonesia.
Baa3' to 'Ba1' as a result of a more than 50 percent decline in the value of the rupee and a loss of investor confidence. The agency predicted that the Indonesian economy would contract by more than 5 percent in 1998 and that about 40 percent of bank loans would be in default by the end of the year. After further review of the restructuring, Standard & Poor's restored Indonesia's foreign currency rating to 'CCC+'.
For the rest of the year, PLN refused to buy electricity and only paid Paiton Energy for fuel costs.
Samalayuca II, Mexico
A Mexican business trust is the owner of the plant, the lessor of the plant to the CFE and the debtor of the project debt. An example concerns the English adjective 'material': the Spanish words important and substantial do not have the same meaning in the context of Mexican law. In principle, the project risks are allocated as follows: the commercial banks assumed construction and commercial risk during the construction phase;.
US Eximbank and the IDB accepted political risk; and. the sponsors assumed all other residual risks. In effect, the IDB provided the same political-risk coverage as US Eximbank, but. the documents were completely different. Negotiations for the project financing took a long time for several reasons, including:. the lack of precedents in Mexico for similar projects;. the transition from Salinas' presidency to Zedillo's;. the devaluation of the peso in December 1994; and. the temporary shutdown of the US federal government.
This delayed negotiations between the project's sponsors and one of the main lenders, US Eximbank.
Merida III, Mexico
The Export-Import Bank of Japan provided 40 percent of the debt financing, with IFC A and B loans providing the remaining 60 percent. This gives IFC and the commercial banks participating in its loans a competitive advantage. The IFC and the Inter-American Development Bank (IDB) competed with each other for funding.
The IFC conducted a due diligence investigation into Pemex's ability to supply fuel and the CFE's ability to purchase electricity and make payments. One of the scenarios that the IFC took into account in its due diligence and credit analysis was the privatization of the CFE. AES's strong international reputation and the structure of IFC's A and B loans were both strong selling points for the commercial banks participating in the loan.
IFC is the lender of record for both the A and B loans, although commercial banks are the actual lenders for the B loan.
Bajio, La Rosita and TEG, Mexico
The following sections describe the financing of the Bajio and La Rosita and Termoelectrico del Golfo I and II projects, two on-fence energy projects financed under Mexico's energy self-sufficiency legislation. The commercial note is backed by a comprehensive guarantee from the Export-Import Bank of the United States (US Eximbank), which further reduces costs. In December 2001, InterGen closed a US$625 million commercial bank financing for La Rosita I and II (previously called Rosarito, but renamed due to confusion with other projects) in Baja California, about six miles south of the US border.
InterGen will use 500 MW of the plant's capacity to sell to CFE and 250 MW to export to the California market. Cemex, the pantograph, is one of the largest industrial companies in Mexico and the third largest cement producer in the world. As one of the fastest growing and most innovative cement companies in the world, Cemex made a positive impression in a presentation to the lenders.
One of the key trends in recent IPPs in Mexico is the decoupling of PPAs and fuel supply agreements.
CBK, the Philippines
The Kalayaan I and II power plants, which represent approximately 94 percent of the total project capacity, are the only pumped hydroelectric plants in the Philippines. As mentioned above, CBK Power Company Limited, which is responsible for the project, is now a limited partnership between Impsa of Argentina and Edison Mission Energy of the USA. In the first phase of the project, completed in late 2000, CBK Power rehabilitated Kalayaan I and restored its capacity to 172 MW.
In 1999, CBK Power secured enough bank loan commitments for half of the project's debt component of US$360 million and planned a bond offering for the other half. The NPC requested that CBK Power do advance work because deterioration in the Kalayaan I transformer poses a risk to the integrity of the Luzon grid. At the same time, the lenders were also aware of the growing private political risk insurance market, which tended to take a more flexible approach.
Gore and Hawkes attributed the success of the CBK syndicate to the strong underlying rationale for the project, a natural mitigator for many forms of risk; the complementary experience that Impsa and Edison Mission Energy brought to the project; and the strength and comprehensiveness of the political risk insurance package.
Quezon Power, the Philippines
Commercial Operations Date”, the date when the project company has certified that the generating facility has been completed, inspected and tested and is ready to begin operation. The PPA was structured to ensure stable operating cash flows throughout the life of the project. Under the Plant Operation and Maintenance (O&M) Agreement, signed in December 1995, Ogden Philippines Operating, Inc., the project operator, is responsible for the operation and maintenance of the generating facility.
When the bonds were issued, the Bond Trustee also became a party to the intercreditor agreement. Before the plant was built, there were frequent 'brownouts' and 'blackouts' in the vicinity of the project. Additional expenses may be required by the project company due to new laws or regulations or changes in the interpretation of existing laws and regulations.
Moody's also noted that the project was expected to deliver power to the customer at a competitive price during the contract period.
Drax, United Kingdom
Before it was bought by TXU, Eastern had been one of the nation's 14 regional electric utilities. Exhibit 12.2 shows the structure established by AES in connection with the acquisition of the Drax power plant and refinancing of the project. The capitalization of the project after the bond financing is reflected in the sources and use of funds (see Appendix 12.3).
The absolute levels of the debt service reserve account are reduced by any voluntary prepayments of the senior debt. A baseline scenario for banks and a sensitivity analysis indicated average and minimum expected debt service coverage ratios (DSCRs) over the life of the bonds, as shown in Exhibit 12.5. Between March 2001, when NETA was implemented, and the end of the year, wholesale electricity prices had fallen 30 per cent.
Calpine Corporation, owner of the 1,200 MW Salt End power station in the UK, was the first IPP to be downgraded by the rating agencies.