Maritza East 1: Coal comfort

AES' financing for its Maritza East 1 plant is a sign of better days for both the sponsor and the Bulgarian energy sector. It cements both the host country's claim to be a viable EU accession state and AES's claim to be a viable force in global power. These achievements are for the third of three power financings at a single location.

Maritza East 1 is a 600MW lignite-fired power project near Galabovo, 250km south-east of Sofia. It is one of three units that crowd around an open-cast mine that was first exploited to fire capacity in the Communist era. The third unit at the site – a joint venture between Enel and state power company NEK – was the subject of a Eu348 million financing in 2003. The second is state-owned.

The reason for the activity is the looming promise of EU accession, and the need to bring generating capacity up to the EU's emissions standards. Moreover, Bulgaria's unreliable nuclear capacity will, and must, be retired soon. It has been taking steps since the late 1990s to bring in outside operators to achieve this.

Following an international tender, the small developer Access International signed an energy conversion agreement, similar to a tolling agreement, with NEK, short for Natsionalna Elektricheska Kompania, in October 1998. AES bought into the project in 1999, and now owns the whole project.

The unbundling of the Bulgarian state's various energy interests meant that the project could not lay off supply and offtake risk to the same party. Instead, the project had to enter into separate power purchase and fuel supply agreements. On 13 June 2001 it signed a 15-year power purchase agreement NEK and a coal supply agreement of the same duration with Mini Maritza Iztok.

Following the agreements, AES began work on finalising the engineering, procurement and construction (EPC) contracts and was working towards a financing and the start of construction in 2002. However, AES' precipitous credit slide and a general market turn against power projects tossed the project back into limbo.

AES, after completing its own restructuring, began to resurrect the project in mid-2004. It is the first large-scale greenfield generation deal that AES has attempted since the restructuring, although it has completed financings for several groups of utilities and a wind project.

The intervening period has been kind to the sponsor – country perceptions of Bulgaria have improved as it begins the work towards accession. More importantly, the Maritza East 3 financing, while it was for a rehabilitation, involved similar underlying contracts and – crucially – a similar cast of financing institutions. The Multilateral Investment Guarantee Agency (MIGA), the European Bank for Reconstruction and Development (EBRD), the Black Sea Trade and Development Bank (BSTDB), and one of the mandated leads, Calyon (then as Credit Agricole), all worked on financing that 840MW asset.

The 1 project is subject to Eu825 million in senior loans, and the signatories to the common terms agreements are the EBRD and mandated leads Calyon, ING and BNP Paribas. The lead arrangers underwrote a third each of the Eu711 million covered facilities, which the remaining Eu114 million coming direct from the EBRD's books as an A loan. Of that Eu114 million, Eu18 million is novated to the BSTDB.

The Eu711 million breaks down into a EBRD B loan of Eu228 million, a Coface-covered tranche of Eu102 million, a Hermes-covered tranche of Eu200 million, Eu65 million in MIGA-covered debt, a Eu48 million debt service reserve account letter of credit; a Eu20 million working capital facility; and an uncovered local bank facility of Eu48 million.

All of the above facilities have a tenor of 16 years with the four-year grace period that coal plant construction times demand. Pricing varies according to tranche, but is in the region of 200bp, about two-thirds of that on the 3 transaction. Moreover, the size of the EBRD B loan gives a clear indication as to the depth of bank appetite for Bulgarian deals. Hermes and Coface offer comprehensive political and commercial cover, while MIGA's is political alone.

The project surmounted election season in Bulgaria, as well as the possibility that restructuring might leave purchaser and supplier in private hands. These must, according to the agreements with the government, be BB-rated or above. The government also provided a letter of support that, while no guarantee, increased sponsor and lender comfort immensely.

The only final sticking point was the requirement that AES create a separate subsidiary to dispose of ash (lignite produces a lot when burned) and gypsom (a byproduct of the flue-gas desulphurisation process) in an environmentally-friendly way. The EPC contractor for the plant is Alstom, which has a long record in building coal capacity.

The project is in syndication, and has attracted a strong response from potential participants. It is the largest private financing for Bulgaria, and possibly the region, and as Matthew Bartley, who led the development process for AES, notes, the project is a large one by the standards of any country. Since the growth associated with accession is expected to result in an increase in electricity demand, the experience will likely be repeated.

Bartley says that he hopes the experience of working with the EBRD will prove to be beneficial in working on future developments in Eastern Europe. It also re-establishes AES' ability to raise debt on the large scale, and its position in the region. Fast-growing countries in economic and social transition will take note of the process.

Maritza East 1
Status: Closed 7 December 2005
Size: Eu1.15 billion
Location: Galabovo, Bulgaria
Sponsor: AES
EPC Contractor: Alstom
Debt: Eu825 million
Lead arrangers: BNP Paribas, Calyon and ING
Multilateral debt providers: EBRD; Black Sea Trade and Development Bank
ECA guarantors: Coface, Hermes, MIGA
Model audit: Ernst & Young
Insurance: Miller
Market study: NERA
Fuel study: Boyd
Technical adviser to the lender: Fichtner
Legal adviser to the lender: Linklaters (international), Spasov and Brantanov (local)
Legal adviser to the sponsor: Allen & Overy (international), Novell Consult (local)