MPX Energia and Energias de Portugal (EdP) closed the dollar- and reais-denominated long-term financing for their $1.36 billion Porto do Pecem project in Brazil on 10 July. The financing is the first for a coal project in Brazil, at least for a large one running on imported coal. The deal's terms are generous to the sponsors, but no longer reflect those available to Brazilian borrowers since the terms were locked in May 2008.

The first Porto do Pecem unit is a 720MW facility, located 40km from Fortaleza, in the state of Ceara in north-eastern Brazil. It will be fitted with flue-gas desulphurisation technology, and will run on imported coal. This last detail is important, since Brazilian coal is of poor quality and imported coal tends to burn more efficiently and create less ash.

Roughly 85% of Brazil's electricity comes from hydroelectric sources, and attempts to promote the use of natural gas as a fuel have to date been an expensive distraction. But despite improvements in transmission, as well as a slew of new large and small hydro plants, the country faces capacity shortages in coming years, and remains heavily dependent on rainfall patterns.

MPX, which has existed for over two decades, is a publicly-traded affiliate of the EBX group, which has mining, ports, and logistics interests. Crucially, MPX owns options on coal resources in Colombia, which possesses good-quality coal. It decided to focus on coal more recently, and participated in the 2007 auction of thermal power capacity, competing against a mixture of gas and domestic coal users.

EdP owns 62.4% of Energia, the holding company for its Brazilian assets, and sold the rest of its shareholding in an initial public offering in 2005. At the time, 90% of its revenues came from its distribution operations, but it wanted to have a greater presence in generation. EdP and MPX formed a venture in 2007, under which EdP took a 50% stake in MPX' Pecem I plant, and MPX took a 50% stake in a plant that EdP was developing in Maranhao. The Maranhao plant, however, did not have its final environmental permit in place for the 2007 auction, and so the two devoted their energies in the auction to Pecem. MPX subsequently bought out EdP's stake in the Maranhao project.

Pecem was successful in the auction, which allowed it to sign power purchase agreements with 32 different offtakers. The generator receives a fixed capacity payment, and is allowed to pass through all fuel costs to its customers. The tariff was formulated in 2004, following a period in which Brazil's central bank frowned upon utilities taking on dollar exposures, fearing it would stoke inflation. Brazil's inability to diversify its power market away from hydroelectric caused its regulator, ANEEL, to hold auctions for thermal capacity with the pass-through provision.

The sponsors moved quickly to hedge the foreign exchange and Libor risk associated with the equipment that would have to be paid for in dollars, by executing both interest rate (10-year) and foreign exchange (five-year) hedges through Citigroup. In February 2008, Citi was mandated as financial adviser, and also arranged and syndicated a bridge loan for the plant, which allowed the sponsors to make progress payments on their longer lead-time pieces of equipment. Participants in the $270 million bridge were Citi, Banco do Brasil, Banco Espirito Santo, Banco Comercial Portugues, ING, and West LB.

The plant used Siemens turbines and Doosan Babcock boilers, while the project's engineering, procurement and construction contractor is a joint venture between Maire Tecnimont and EFACEC called Mabe Construção e Administração de Projetos. Although this international group of equipment and contracting providers would have allowed the sponsor to use export credit support from Italy, Korea and Germany, the sponsors decided at an early stage to use the combination of the Inter-American Development Bank and BNDES.

EdP, through Energia's Bandeirante subsidiary, had substantial experience with the IDB, while its first ever generation project used BNDES as a lender, and BNDES accounts for roughly 45% of Energia's R4 billion in debt. The two banks have worked together before, particularly in the transmission sector.

Neither, however, had substantial experience with financing coal projects, still less with imported coal projects. Scrutiny of multilateral support for coal projects is becoming intense, as the Asian Development Bank has found with its support for India's ultra mega coal projects. The IDB insisted on two substantial environmental commitments from the project.

The first was that the sponsors put in place – and stuck to – minimum guidelines for coal quality. Pecem could only run on low-sulphur, low-mercury high quality coal, which counted out domestic supplies, and made it likely that the project would use coal from Colombia, or South Africa. The lenders also had to be certain that the project could have access not just to sufficient supplies, but also coal handling facilities. Price, because fuel costs could be passed through to offtakers, was less of a concern, although MPX has indicated that it would give in-house resources.

The IDB also insisted, in a separate agreement with MPX, rather than the project, that 10% of the carbon dioxide emissions from Pecem I and MPX' Itaqui project be offset with renewable energy projects that would be eligible for registration under the UN convention on climate change. The project also complies with the World Bank's environmental, health, and safety guidelines for thermal power plants, which were approved in December 2008.

The IDB also allowed the sponsors to assemble a club of banks to participate in the project's B loan, rather than using its syndications group. Millenium BCP, Caixa Geral de Depositos and Calyon were selected as providers, and stuck to the tenor agreed in June and July of 2008, despite the intervening disruptions, though they negotiated a small increase in pricing. The IDB debt consists of a 17-year $147 million A loan directly from the bank, and a 13-year B loan, for which are lined up to be providers. The A loan is priced initially at 350bp over Libor and the B loan at 300bp, with the latter stepping up to 350bp in the last years of the debt.

The sponsors negotiated with BNDES alongside the IDB, with the two banks sharing common counsel, though IDB relied more on US law, and BNDES on Brazilian law. BNDES requires documentation to be substantially complete before approval, and approved its loan in May, following IDB approval in March. The R$1.4 billion ($710 billion) BNDES loan has a 17-year tenor, a 14-year amortisation period and a grace period on interest and principal till July 2012. It is priced at 277bp over the TJLP benchmark rate. The project's debt service coverage ratio is 1.4x.

The sponsors, through a mixture of forward planning and determination, managed to persuade lenders to stick to the terms on the debt despite a particularly difficult period in credit markets. The Sao Paulo metro concession, which was in front of the IDB at roughly the same time, had a shorter tenor, and future deals will struggle to achieve anything like the same terms. MPX has a financing coming up for Itaqui, a 360MW project for which the IDB approved a $50 million A loan and $90 million B loan at the same time as Pecem I. The A loan tenor is 14 years, while the B loan tenor is still being negotiated, though the cost of that project is lower, making a shorter tenor a little easier.

Reaching close on Pecem I will be encouraging for the public shareholders in MPX, which has an ambitious slate of coal-fired projects, and does not have the long-standing bank relationships of its multinational utility partner. Besides Itaqui, for which a combination of IDB debt, BNDES debt and co-financing with both banks is under consideration, it has already closed a bridge loan for a second unit at Pecem and hopes to bring that deal to market soon.

More encouraging, however, will be the market's reception of a Brazilian regulated power purchase agreement. The raft of gas financings from earlier this decade have not been repeated, and BNDES has supported most of the hydro plants to close more recently. If a power developer like MPX can get better terms on its dollar financing than the Sao Paulo PPP concession, the Brazilian thermal power sector has a rosy future.

EdP is already looking at gas projects, and has plans for participating in auctions for wind generators. MPX hopes to develop a 600MW plant in southern Brazil running on domestic coal produced in that region, which would be a tougher sell to overseas lenders. The next step for Brazil's sponsors will be building up export credit agency comfort with the sector. Korean agencies, after building up a substantial presence in the Mexican and Chilean energy finance markets, would be logical partners.

Porto do Pecém Geração de Energia S.A.
Status: Signed 10 July 2009
Size: $1.36 billion
Location: Ceara, Brazil
Description: 720MW coal-fired plant
Sponsors: MPX Energia, EDP (each 50%)
Debt: $147 million IDB A loan, $180 million IDB B loan, R$1.4 billion BNDES loan
B loan providers: BCP Millenium, Caixa Geral de Depósitos and Calyon
Maturity: 17 years (IDB A loan, BNDES loan), 14 years (B loan)
Financial adviser: Citigroup
Borrower legal counsel: Mattos Filho, Veiga Filho, Marrey Jr e Quiroga (Brazil) Allen & Overy (US)
Lender legal counsel: Felsberg, Pedretti, Mannrich e Aidar (Brazil) and Clifford Chance (US)