While the S$525 million ($318 million) financing for Keppel Energy's gas-fired power plant may not be the largest ever completed – it is the first of its kind in Singapore's newly restructured national electricity market. The Keppel Merlimau cogeneration project proves that power revenues remain an attractive investment under the new competitive regime.

The deal is underwritten equally by four mandated lead arrangers: Calyon (also technical bank), HSBC (documentation bank), ING (modelling bank) and SMBC (pool bank, responsible for the electricity market analysis). Financial adviser to the sponsor is UFJ, with legal advice from Lovells. Milbank, Tweed, Hadley & McCloy advised the lenders, while Rajah & Tann acted as Singapore counsel.

The project company is Keppel Merlimau Cogen, a special purpose vehicle wholly owned by Keppel Energy, the power generating unit of one of Singapore's largest industrial groups. The facility is split between a S$341 million 16-year term loan and a S$184 million two-year equity bridge loan.

Pricing on the term loan starts at 110bp over the Singapore dollar swap rate during the construction period, stepping up to 115bp at the first repayment date, and 135bp after 6.5 years. The construction period is set at 22 months, though there is some flexibility allowing the first repayment to be stretched to 30 months if necessary. There is also a commitment fee of around 20bp. Repayments on the non-recourse project loan are sculpted to follow a base case for revenues from the project. The shorter equity loan is guaranteed by Keppel and carries a margin of 32bp.

Proceeds will be used to build a 500MW gas-fired power plant on Singapore's Jurong Island. EPC contractor is Alstom (Switzerland), which has also been awarded an 18-year operation and maintenance contract. Notice to proceed was given on 30 March and the plant is scheduled for commissioning in January 2007.

Keppel Merlimau came to market some time after Island Power, a second independent power producer planning a development in Singapore, but caught up fast after the bank group was mandated in December 2004.

The arrangers were able to bring the deal to close in a challenging timeframe of little more than three months because much of the groundwork had already been completed by the sponsor and its advisers, and the EPC contract was already in good shape.

Progress was also smoothed as few counterparties outside of Keppel and the banking group were involved: there is no export credit agency and the deal is fully underwritten by the four lead arrangers.

Interest in the deal has been high, with offers received for over S$2 billion when financing was launched. A small portion of the term loan, expected to be around 30%, is to be syndicated in April.

Aside from the environmental and legal considerations that accompany any greenfield financing, the Merlimau project was also put together within a newly liberalized market. Singapore's electricity market has been progressing towards deregulation since 1995, and Keppel has been operating profitably as an electricity retailer since 2001 through another subsidiary, Keppel Electric.

Licensed to sell electricity to industrial and commercial customers, Keppel Electric will handle retail sales of energy produced by the Merlimau under a long-term agreement. On top of this arrangement, around one third of the new plant's capacity is covered by a vesting contract with SP Services, which handles the purchase of electricity for the national pool.

Although the wholesale price of electricity in Singapore is set twice per hour on a spot basis, vesting contracts – essentially contracts for difference – are designed to ensure some price stability by allowing settlement above or below a theoretical price. The contract with SP Services was agreed as part of Keppel's generating licence, and provides a base case for revenues from the project. Together with the offtake agreement with Keppel Electric, contracts already in place account for around 70% of the Merlimau plant's capacity, according to the sponsor.

Keppel Merlimau will also be able to provide steam and water to neighbouring customers – although no offtake contracts have been agreed and this was not used in modelling project revenues – leaving a small potential upside for the project company. Jurong Island is already home to a large petrochemicals complex and has been earmarked by the Singaporean government for further industrial development.

Keppel also stands to gain from further changes to Singapore's energy market. The city state's natural gas market has also been liberalized to encourage competition, with users no longer restricted to buying gas from the government pool. The Merlimau plant will be fuelled by gas imported from Malaysia by Keppel Gas, another subsidiary of the sponsor, allowing the generating company to protect itself from movements in gas prices while at the same time maximising the spark spread should gas prices fall.

The deal structure is also tax-efficient. As 100% owner of the project company, Keppel is able to benefit from the group tax relief regime, introduced for the 2003 assessment year. This allows the project company's entitlement to capital allowances to be transferred to the parent group if Keppel Merlimau Cogen is unable to utilise the depreciation allowances against its own profits. The parent company will match the tax credits with cash payments, with this additional income worked into the project model. The total amount of plant and equipment costs eligible for depreciation is, according to Keppel, S$450 million.

Keppel Merlimau Cogen
Status: Closed 31 March
Size: S$525 million
Location: Singapore
Description:
500MW cogeneration power plant
Sponsor: Keppel Energy (100%)
Debt: S$341 million term loan, S$184 million equity bridge loan
Lead arrangers:
Calyon, HSBC, ING, SMBC
Financial adviser: UFJ
Legal counsel to sponsor:
Lovells Lee & Lee
Legal counsel to lenders: Milbank (international); Rajah & Tann (local)
EPC contractor: Alstom (Switzerland)