Project Finance: Practical Case Studies - UNTAG

1 Project finance : Practical case StudiesSecond EditionVOLUME IPower and WaterHenry A. 6/4/07 7:07 PM Page iiiProject finance : Practical case StudiesSecond EditionVOLUME IPower and 6/4/07 7:07 PM Page iPublished by Euromoney BooksNestor House, Playhouse YardLondon EC4V 5 EXUnited KingdomTel: +44 (0) 20 7779 8999 or USA +1 800 437 9997 Fax: +44 (0) 20 7779 Copyright 2003 Euromoney Institutional Investor PLCThe authors give notice of their right under Section 77 of the Copyright, Designs and PatentsAct 1988 to be identified as the authors of this 1 85564 845 8 All rights reserved. This publication is not included in the CLA Licence. No part of this book may be reproducedor used in any form (graphic, electronic or mechanical, including photocopying, recording,taping or information storage and retrieval systems) without permission by the Institutional Investor PLC believes that the sources of information upon whichthe book is based are reliable and has made every effort to ensure the complete accuracy ofthe text.

2 However, neither Euromoney, the author, nor any contributor can accept any legalresponsibility whatsoever for consequences that may arise from errors or omissions or anyopinions or advice given. This book is intended to serve as a guide only. It is not a substitute for seeking professionaladvice at all in England by Hobbs the Printers 6/4/07 7:07 PM Page ivvContentsAbout the authorixAcknowldegementsxForewordxiIntro duction1 The nature of Project finance4 Trends in Project finance6 Effect of Enron12 Caution among lenders and investors15 Common themes20 Reasons for financial difficulty21 Lessons learned24 Power plants1 Laibin B Coal fired power plant30 Introduction31 Project summary31 Background32 How the financing was arranged34 Government approvals and support34 Risk analysis35 Principal contracts37 Lessons learned382 Meizhou Wan Pulverised-coal-fired power plant39 Introduction40 Project summary40 Background40 Principal contracts42 How the financing was arranged43 Lessons learned433 TermoEmcali Gas-fired power plant45 Project summary46 Project economics48 Ownership and contractual relationships48 Financing

3 Structure53 Risk analysis54 Structure of 6/4/07 7:07 PM Page vCONTENTSviLessons learned644 Azito 288 MW power plant and 225 kV transmission system69 Project summary70 The power sector in C te d Ivoire70 Project description72 Project risk factors75 Critical success factors and lessons learned765 Dabhol Power Company Power station and port facilities78 Project summary79 Background80 Lessons learned926PT Paiton Energy (Paiton I) Coal-fired power plant94 Project summary95 Background95 Lessons learned as of 1996103 Developments since 1996104 Lessons learned as of 20031127 Samalayuca II Power plant113 Introduction114 Project summary114 Background115 Lessons learned1228 Merida III Power plant124 Introduction124 Project summary124 Background125 Lessons learned1279 Bajio, La Rosita and TEG Natural-gas-fired power plants128 Introduction128 Mexican power projects following Samalayuca II and Merida III129 Bajio129La Rosita I and II130 TEG I131 TEG II133 Fuel supply issues133 Future structure of the Mexican power industry134 Lessons 6/4/07 7.

4 07 PM Page vi10 CBK Hydroelectric power plant and pumped storage facility136 Project summary136 Background137 Arrangement of finance139 Project debt service coverage ratios139 Political risk insurance140 Lessons learned14211 Quezon Power Pulverised-coal-fired power plant144 Project summary145 Background145 How the financing was arranged150 Principal Project contracts152 Description of additional agreements154 Other Project documentation156 Risk factors158 Lessons learned17012 Drax Coal-fired power plant171 Project summary171 Power plant description172 Background172 How the financing was arranged175 Sources and uses of funds177 Independent consultants reports179 Initial credit ratings182 Subsequent developments183 Lessons learned19113 Panda Energy TECO Power joint venture Two natural-gas-fired power plants193 Project summary193 Background194 Credit and risk management200 Contracts201 How the financing was arranged203 Environmental permits205 Risk summary205 Financial projections208 Subsequent developments208 Lessons learned213 Power Project portfolio14 Calpine Power plant portfolio214 Summary of approach to 6/4/07 7:07 PM Page viiFinancing methods216 Risk considerations and credit ratings219 Lessons learned225 Water and power15 Casecnan Water & Energy Company Irrigation and hydroelectric power facility226 Project summary226 Background227 Events since 1996231 Lessons 6/4/07 7:07 PM Page viiiAbout the authorHenry A.

5 Davis is a writer and consultant working in the fields of banking and corporatefinance. He currently serves as managing editor of three quarterly professional journals, theJournal of Investment Compliance, the Journal of Structured and Project finance , andStrategic Investor Relations, published by Euromoney s US affiliate, Institutional Davis has also written or co-authored 11 books including Financial Turnarounds:Preserving Valuewith William W. Sihler (Financial Executives Research Foundation, 2001and Financial Times-Prentice Hall, 2002), Project finance in Latin America: Practical CaseStudies(Euromoney Books, 2000), Building Value with Capital Structure StrategieswithWilliam W. Sihler (Financial Executives Research Foundation, 1998), Cash Flow andPerformance Measurement: Managing for Value(Financial Executives Research Foundation,1996), Project finance : Practical case Studies (Euromoney Books, 1996), Lender s Guideto the Knowledge-Based Economywith Richard D.

6 Crawford (Amacom Books, 1996),Foreign Exchange Risk Management: A Survey of Corporate Practiceswith Frederick (Financial Executives Research Foundation, 1995) and The EmpoweredOrganization: Redefining the Roles and Practices of Financewith Frederick C. Militello(Financial Executives Research Foundation, 1994). He has contributed articles to numerousfinancial publications, including International Treasurer, Latin finance , and Risk. Mr Davisbegan his career in banking, working for Bankers Trust Company and Bank of Boston, andworked for two consulting firms, the Globecon Group and Ferguson & Company. He earnedhis Bachelor s degree at Princeton University and his MBA at the Darden Graduate BusinessSchool at the University of 6/4/07 7:07 PM Page ixxAcknowledgementsA detailed book of case Studies cannot be completed without information and advice frommany experts.

7 In particular, the author would like to acknowledge the never-ending patienceof Stuart Allen, Johanna Geary, Elizabeth Gray and Paul McNamara of Euromoney Booksand the generous assistance provided by the following individuals, listed Barajas, Milbank, Tweed, Hadley & McCloyBrandon A. Blaylock, GE Capital Services Structured finance GroupJonathan D. Bram, CS First BostonWilliam H. Chew, Standard & Poor sRohn Crabtree, CalpineAna Demel, Cleary, Gottleib, Steen & HamiltonElizabeth U. Eshbach, Darden Graduate Business School Library, University of VirginiaBenjamin Esty, Harvard Business SchoolRoger D. Feldman, Bingham McCutchenBarry P. Gold, CitigroupDavid Gore, Soci t G n rale AsiaJames F. Guidera, Credit LyonnaisRichard Hunter, Fitch RatingsKen Hawkes, Mibank, Tweed, Hadley & McCloyPiyush Joshi, British Gas IndiaStephen T.

8 Kargman, Export-Import Bank of the United StatesKenneth M. Koprowski, GE Capital Services Structured finance GroupJohn W. Kunkle, Fitch RatingsBarry N. Machlin, Mayer, Brown, Rowe & MawJan Willem Plantagie, Standard & Poor sJohn S. Strong, School of Business Administration, College of William & Mary, and World BankRobert Tiong, Nanyang Technological University, SingpaoreBrian Urban, Panda EnergyEnid Veron, Bingham McCutchenGary Wigmore, Milbank, Tweed, Hadley & McCloyJacob J. Worenklein, Soci t G n 6/4/07 7:07 PM Page xForewordJacob J. WorenkleinManaging Director and Global Head of Project and Sectorial finance GroupSoci t G n raleHenry A. Davis s survey of the major Project financing developments in the power sectorappears at a critical time for the industry globally.

9 In both the developing world and the rich-est nations, major portions of the power and infrastructure sectors are convulsed by crisis. In the developing world, the largest and most important private-sector power projects ofthe 1990s including the multi-billion dollar Dabhol and Paiton projects in India andIndonesia discussed in Chapters 5 and 6 of this book went into default. The Indian govern-ment was unwilling, and the Indonesian government and others were unable, to honour theirobligations to some of the world s largest industrial and financial companies, as well as to thegovernments of the United States, Japan and Germany. These companies, banks and govern-mental agencies had shown their confidence in these countries as well as others such asArgentina and Brazil by investing billions of dollars in the largest power projects that thesedeveloping nations ever had undertaken.

10 This confidence, however, was shattered andinvestors learned tough lessons that, sadly, will hurt developing countries seeking private-sec-tor infrastructure investments for years to the United States and the United Kingdom too, the power sector has been racked bythe loss of confidence in the industry among investors, beginning with the failure and fraudof Enron, and by collapsing power prices arising from excess capacity; the freezing of dereg-ulation midstream, which created an uneven playing field between regulated and unregulatedentities; the elimination of long-term contracting capability among most power marketers andtraders; and other factors. As a result, many now question both the business models that tookhold in the power sector and the credibility of deregulation.