Ormat Technologies closed the $42 million refinancing of its Amatitlan geothermal project on 21 May. The provider of the seven-year financing is TCW's Global Project Fund II. The deal is notable for dispensing with both public and private political risk cover, and an advance both for the Guatemalan market and Ormat's financing practice in emerging markets.

Amatitlan is a 20.5MW (net) plant located near the town and lake of the same name, 28km south-east of Guatemala's capital, Guatemala City. The project sells power to the country's state-owned power producer the Instituto Nacional de Electrificacion (INDE) under a 20-year power purchase agreement. It consists of two 12MW and one 1.2MW (gross) turbine units, and is predicted to generate 162,000 MWh per year at a capacity factor of 95%.

The plant is Ormat's second in the country, following its involvement in Zunil, a 24MW facility that came online in 1999. Ormat was the engineering, procurement, and construction contractor on that project, using its own technology, and gradually built up a stake in the plant from original investors CDC, the IFC and FMO. It took complete ownership of the Zunil plant in 2006.

The sponsor, which evolved from being an equipment supplier to contractor to developer and owner, signed the power purchase agreement for Amatitlan in 2003. The PPA in turn, evolved from a tender for capacity that the INDE issued in 1999. It originally planned to finance the project with the Inter-American Development Bank, but was unable to reach terms with the lender.

The traditional credit issues that face geothermal projects – resource risk and their high upfront capital costs – proved impossible for the multilateral borrower to overcome. The same wariness frustrated Ormat's attempts to come to terms with the Multilateral Investment Guarantee Agency (MIGA) on political risk insurance for its equity.

It spent three years trying, according to the project's carbon credit registration, and ultimately decided to continue with the development of the project using its own resources, with political risk insurance that it bought from a private provider at substantial cost. The project commenced operations in March 2007, although not at its full design capacity. At financial close the plant has a capacity of 17MW, but will reach full capacity when an additional well is connected to the project.

In the middle of 2008 it approached TCW, which runs several project finance debt funds, about financing the plant. Amatitlan had been in operations for over a year and presented no construction and limited resource risk.

According to Nachman Isaac, Ormat's director of project finance, "TCW presented a very competitive financing package, and we liked the fact that they had some experience with geothermal." TCW led one of the refinancings of the Wayang Windu plant in Indonesia before the most recent Standard Chartered-led deal, and provided a $180 million fixed-rate loan to Nevada Geothermal's Blue Mountain project. Ormat is the EPC contractor for Blue Mountain.

The collapse of Lehman Brothers, which had worked on the refinancing of several Ormat US plants, caused a bump in the financing process, and an increase in the interest rate on offer. The six-year loan has an interest rate of 9.84%. However, the TCW loan did not need to be syndicated, and its terms could be tweaked to accommodate a potential expansion.

Financing an expansion can create tensions with lenders. While the Ormat equipment is modular, wells and turbines draw their energy from a single resource. Existing lenders are often wary of allowing outside lenders a lien on a geothermal resource. Additional wells can use up a geothermal resource at the expense of existing units. The first complication has its precedents in the way lenders to multi-unit gas plants share security, but the second has no precedent.

The compromise with TCW allows the borrower to prepay the TCW loan without penalty if the lender will not consent to provide an expansion financing or agree to share security with a third-party lender. The INDE power purchase agreement allows Ormat to build up to 50MW of capacity, so the need for additional financing is a real possibility.

The financing compares well with the loan that TCW provided to Blue Mountain, which was priced at nearer 14%. That deal, however, was for a plant that was not yet complete, and for a developer that needed to close financing to avoid a repricing of its EPC contract with Ormat. As an indication of the risk profile of that deal, the Blue Mountain loan ended up in a TCW mezzanine-focused fund.

As part of the financing, Ormat agreed to cancel its political risk insurance for the project, something it did reluctantly, despite the cost savings. However, such an equity insurance product might have created complications in the event that the debt provider had to enforce its security, and TCW has indicated that it has little interest in taking out PRI on the debt.

The plant has also been registered with the board of the United Nations Framework Convention on Climate Change to produce certified emissions reductions, and already has in place a purchase agreement for these credits with an unnamed European buyer. Revenues from these sales will be deposited into the same account as the revenues from power sales for the benefit of lenders.

Credit market conditions and TCW's growing dominance of this niche suggest that a repeat of the deal for other emerging market assets is a real possibility, although less stable host countries might still require political risk cover. The alternative, a development and multilateral bank package like the deal that Ormat assembled for its Olkaria III plant in Kenya, is still competitive, however.

Ortitlan Limitada
Status: Signed 19 May 2009
Size: $50 million
Location: Amatitlan, Guatemala
Description: 20.5MW geothermal power plant
Sponsor: Ormat Technologies
Debt: $42 million
Provider: TCW Global Project Fund II
Independent engineer: Luminate
Geothermal engineer: GeothermEx
Insurance adviser: Moore-McNeil
Paying agent: Bank of New York Mellon
Sponsor legal counsel: Chadbourne & Parke
Lender legal counsel: Paul Hastings