Belchatow: Merchant emissions

The Eu879 million financing of BOT Elektrownia Belchatow (EBSA), a subsidiary of Polish state-owned BOT, is perhaps the first true merchant power financing in the CEE.

The financing comprises a Eu250 million 10-year term loan, a Eu90 million 8-year standby facility, a Eu264 million EIB guarantee (of which Eu220 million is a direct EIB loan and the remainder funded by commercial banks), a Eu125 million EBRD facility over 12 and 16 years and a Eu150 million 19-year Nordic Investment Bank facility.

Citibank and ING were mandated lead arrangers. Financial close was reached on 10 August 2006 and the MLAs brought in a further 11 banks in syndication, which closed in the last week of January 2007. The banks that came in were Fortis (at senior lead arranger level), and at lead arranger level: WBK, Bayerische, Dexia, Credit Bank, Nordea, Rabobank, Unicredit Group, WestLB, Bank Millennium and Raiffeisen.

The deal is essentially a corporate deal with project finance enhancements. Although some of the strong bank appetite for the deal had been put down to a relationship play with the borrower's parent, the state incumbent BOT, there are no parent guarantees.

Given that the lenders are taking 100% polish merchant risk on 4,440MW the appetite of the banks (36 banks were shortlisted for the mandated lead arranger role and the sell-down was over-subscribed) was clearly whetted by the quality of the assets, the experience of the management team and their technical track record.

The project consists of construction of a new 833MW lignite fired unit at an existing 4,440MW lignite power plant operated by BOT Elektrownia Belchatow SA and the modernisation of existing power units, and the environmental upgrade of some of the units such as additional flue gas desulphurisation (FGD) installations and a new waste disposal system. The new unit will be more efficient and the upgrades will improve the efficiency of the older units so that less lignite is burned per megawatt generated and fewer emissions are released into the atmosphere.

The project represents a major step in upgrading existing generating assets in Poland to ensure that they meet EU environmental legislation post 2008, most notably to meet the requirements of the EU Large Combustion Plant and IPPC directives. The project is also an integral part of Polish governmental energy security program.

The management team has had a good and proven track record since EBSA's incorporation in the mid-80s with a well-defined capex plan. Starting in 1990 management has been continually upgrading the units in light of environmental regulation to reduce emissions. The plant has installed flue gas desulphurization (FGD) on eight units, modernised burners, optimised boiler combustion process and electrostatic precipitators (ESPs) on existing units, which has resulted in a drastic reduction of emissions over the past decade.

The new 833MW unit is unlikely to add substantial new capacity. It will allow for the reconstruction and modernisation of 10 existing blocks and afterwards for the shut down of two blocks (planned in the year 2016).

Belchatow currently provides almost 19% of the Polish electricity supply, so banks have had to get comfortable with Polish electricity market risk. Currently about 40% of the Polish market is contracted through power purchase agreements (PPA) – these are likely to be entirely phased out over time. The last of BOT's agreements elapsed in 2005, so it has been fully merchant for over a year.

A steady increase in electricity demand is anticipated, and although there is an excess of installed capacity on the supply side, much of the capacity needs substantial investment to meet current environmental regulation and it is likely that some plants will be decommissioned.

While banks have taken a view on market prices they have also arrived at a benign assessment of the restructuring of the power sector and the government's desire to form large vertically integrated companies. Given the modernisation head-start EBSA has over other generators in Poland it seems almost a certainty that EBSA will remain a base load supplier to the Polish market.

Although market price risk can be mitigated through the mix of project and corporate covenants whose resilience have been tested through the modelling of external shocks and market downturn scenarios, lenders to European power projects have had to accept that there are no easy mitigants to the European Union's CO2 emissions allocation that run out in 2008. Will companies get the same allocation in 2008? Nobody knows, so lenders are taking a small leap of faith that the emissions regime will remain relatively stable and are tweaking base cases in due diligence to provide a buffer if a borrower has to go into the market to buy emission credits.

Despite the uncertainty of the EU CO2 regime, the EBSA deal has dissipated the fear of financing merchant power projects, and shown that price and market-structural risks can be managed and do not need to be avoided. Given the overwhelming bank support to the deal together with the need to modernise, decommission and build new generating capacity in the CEE region it is likely that elements of the deal will be replicated elsewhere.

BOT Elektrownia Belchatow SA (EBSA)
Status: Financial close 10 August 2006, syndicated in the last week of January 2007
Description: Eu879 million finance to fund the expansion and upgrade of the Belchatow power project
Borrower: BOT Elektrownia Belchatow SA
Mandated lead arrangers: Citibank and ING
Senior lead arranger: Fortis
Lead arrangers: WBK, Bayerische, Dexia, Credit Bank, Nordea, Rabobank, Unicredit Group, WestLB, Bank Millennium and Raiffeisen
Borrower legal counsel: Weil, Gotshal & Manges
Lender legal counsel: Allen & Overy