Tuxpan V: Speedy

Mexico is a much less challenging place for power developers to do business than it was two years ago. The Comision Federal de Electricidad (CFE), Mexico's state-owned power company, remains an implicit obligation of the United Mexican States, and the CFE now assumes responsibility for supplying projects with natural gas – an attempt to transfer this obligation to state oil and gas company Pemex slowed project development to a crawl.

Last year, the most challenging project was a pidiregas – a hydroelectric plant, El Cajon, which was financed despite having a weakened contractor. El Cajon, this year's Latin American Renewables Deal of the Year, is an example of closing an innovative deal in straightened circumstances. Thermal power projects, now that they have the same supplier and offtaker, are more straightforward.

But the Tuxpan V financing shows what determined and disciplined sponsors and their lenders are capable of, when presented with a favourable backdrop. Tuxpan V's major achievement is that it is the first independent power project financing in Mexico to close before the start of construction. That other projects, even with equally favourable conditions, have been unable to close financing, and that many operating assets have yet to be taken off balance sheet only highlights this achievement.

Tuxpan's sponsors are Mitsubishi Corporation (70%) and Kyushu Electric (30%), which together developed the Tuxpan II project. Mitsubishi also endured the gruelling negotiations that led to the Altamira II financing, an EdF joint venture that had to negotiate a separate supply agreement with Pemex. The two won the Tuxpan V concession in December 2003, and executed a power purchase agreement with the CFE on 23 January 2004.

Tuxpan V is a combined-cycle, natural gas-fired plant with a capacity of 495MW, located near the city of Tuxpan de Rodriguez Cano, in the State of Veracruz. It uses Mitsubishi 501F turbines, and is being constructed by Mitsubishi Heavy Industries, as part of an EPC contract with Mitsubishi Corporation. The plant's operator will be a subsidiary of North American Energy Services.

This is a tight set of contractual arrangements, a demonstration that the project features deep support from its sponsors. The two have agreed to provide letters of credit to support their equity contributions, to fund a six months' debt service reserve, to fund VAT facilities, and to provide letters of credit to back the project's performance under its CFE contract. But they do not appear to have had to provide the level of contingent support that Altamira demanded.

In April, the sponsors mandated Mizuho Corporate Bank as lead arranger, administrative, technical, and insurance agent, and modelling bank, joined by Bank of Tokyo-Mitsubishi and Standard Chartered. The three were to provide an $86 million commercial bank facility, covered by a 97.5% guarantee from the Japan Bank for International Cooperation (JBIC).

JBIC is also providing a $126 million direct loan, on which Mizuho is also agent, under its overseas investment credit programme. The JBIC loan has the same maturity as the commercial bank deal – 14 years. The two facilities have been provided under a common facility agreement, and the fact that JBIC carries political risk on both facilities enabled the commercial lenders to minimise unnecessary due diligence in this regard.

The banks and the sponsors were able to come to terms on 19 July, 6.5 months after the PPA was agreed, and 3.5 months after they were mandated. This speed is unprecedented, and several participants have attested to the discipline and attention to timetable of the financing process. While JBIC has largely abandoned its reputation as a lumbering institution, its transaction speed is much faster than previously thought possible. The loans have a longer average life than any previous JBIC financing.

The sponsors will have benefited from using the documents of the Tuxpan II financing as a rough template, albeit with appropriate revisions. They avoided raising a corporate-backed bridge loan or using equity to find construction, as has been necessary on all previous projects. The sponsors believe that Tuxpan is the fastest project financing ever in the country.

Moreover, the banks have, shielded by JBIC's political risk guarantee, become much more aggressive in assuming commercial risk on the project. And while the exact pricing has not been disclosed, it is understood to be among the most aggressive margins the market has yet seen.
Participants on Tuxpan V are fond of suggesting that the deal could set a new benchmark in project financings in Mexico. Certainly, the CFE would like to speed up the pace of power plant development in Mexico, and has made inroads into Pemex' gas monopoly, in both pipeline and in LNG projects, to assist faster investment.

But the project did benefit from a fair wind – experienced sponsors, supportive ECA, and a site with which the sponsors were very familiar. While the CFE is likely to continue to be as accommodating as it has been to recent financings, matching the terms – and speed – of Tuxpan V will be a challenge.

Electricidad Sol de Tuxpan
Status: Closed 19 July 2004
Size: $300 million
Location: Veracruz, Mexico
Description: 495MW gas-fired plant backed by 25-year PPA
Sponsors: Mitsubishi (70%), Kyushu Electric (30%)
Debt: $126 million JBIC facility, $86 million commercial bank facility
Providers: Mizuho, BTM, Standard Chartered
Tenor: 14 years
Independent engineer: Stone & Webster
Insurance: Aon
Sponsor legal: Paul, Hastings, Janofsky & Walker (international), Ritch, Heather y Mueller (local) Chevez, Ruiz, Zamarripa (local tax)
Bank legal: Shearman & Sterling (international) Galicia y Robles (local)
JBIC legal: Morrison & Foerster
Independent engineer: Shaw Group
Lender insurance consultant: Aon
Sponsor insurance consultant: Marsh