Altamira II
Latin American Power Deal of the Year 2002
Altamira II
The Mexican power sector was left in a state of suspended animation after the end of the last wave of public sector power deals from 2000. A number of innovative developers, InterGen, Sithe and Alstom in particular, devised ways to work outside of the framework provided by the Comision Federal de Electricidad (CFE), the state electricity monopoly. But the crucial difficulty for independent power producers (IPPs) ? buying gas from Petroleos de Mexico ? stayed unresolved until Altamira II's close.
Altamira was a long time in coming, and was at one point slated to ink at the end of 2001. This long lead time is perhaps better appreciated if the challenges of working with two separate arms of the state-owned energy monopoly are taken into account. Put simply, no sponsor had come up with a solution to the mismatch between gas supply and electricity demand contracts until this EdF/Mitsubishi project closed.
Altamira, or to give it its full name, Electricidad Aguila de Altamira, is a 495MW combined-cycle gas-fired project located in Tamaulipas state in the northeast of Mexico. The CFE put out a request for bids for capacity contracts in 1998, and awarded the contract to Mitsubishi Corporation. Mitsubishi viewed the deal as a useful way to win a contract for its turbine technology, and has a strong presence in the country.
Traditionally, power projects in Mexico have used the CFE as an intermediary when buying fuel. This lays off most of the gas supply risk onto the sovereign and makes the contract more financeable. This means that gas is supplied as and when a plant dispatches, albeit while reinforcing the impression that both arms of the energy monopoly work in tandem.
Market reforms, however, have paradoxically made it more difficult for independent power projects to get built. Pemex, to be run along more commercial lines, would negotiate with its customers directly, meaning that gas supply contracts would be negotiated without regard to the output of the plant. Market and fuel studies can go some of the way to estimating how much, and even when, gas will be required. But the possibility of a default under either agreement, having bought fuel but not burned it, or not having the fuel to satisfy a power purchase agreement (PPA), would make a lender highly nervous.
Pemex includes and element of flexibility in its gas contracts, offering a mix of firm and swing capacity to consumers. The lower the level of firm capacity in a contracts, the higher the penalty paid if gas is not used, and the higher the per unit cost of swing gas. This feeds directly into the economics of the contract that an IPP will offer to the CFE, and margins on offtake contracts are still thin, even though the list of possible competitors has shrunk markedly in recent months.
Mitsubishi brought in Electricite de France as a strategic partner, and since EdF, with a number of stations in the country, prefers to take a controlling interest in its ventures, Mitsubishi retained only a 49% stake. The two sponsors, led by the Mitsubishi team, set about the arduous process of negotiating agreements with Pemex and the CFE separately. Several participants expressed frustration at the slow pace, and it appears that a shortening of the list of future bidders forced the hands of the CRE, the umbrella regulator for the industry.
Pemex had agreed to sell on gas that was not used at market prices, and this improved the economic of the project significantly. But the ability to avoid default events under the contracts had not been increased. The definition of a force majeure event, for the purposes of the contract, and the responsibility of the government for events not covered this, definition, still had to be clarified.
Moreover, the sponsors ultimately had to provide some support for the project's economics, in the form of contingent equity. This solution, while not necessarily the most elegant, had the effect of providing a tier of lender comfort that allowed the banks to sign off on financing documents. It is this final element, however, on which other, less well-capitalised, developers will have to improve. Strong sponsors always improve a deal's attractiveness, but this outlay may well be beyond the means of EdF and Mitsubishi's peers. The two also provided a subordinated loan of $40 million.
Another crucial strength came from the presence of the Japan Bank for International co-operation (JBIC), which provided a direct loan of $118 million. NEXI provided political risk cover on 97.5% of the commercial bank debt. Fuji Bank, now Mizuho, and Citigroup were the mandated lead arrangers, and brought in ING Barings and Bank of Tokyo-Mitsubishi at top-level underwriting positions. Given the ultimate size of the commercial bank debt, a formal syndication did not take place.
The deal also used a new holding company structure to allow lenders to take a security interest on an asset. Their ability to do this had been severely constrained by reent legislation designed to protect ordinary Mexicans from overly aggressive lenders. It meant that Altamira required a complex voting trust structure to ease lenders' fears.
Given this set of straightened circumstances, as well as the compromises that were necessary to get the deal done, the deal is by no means the definitive template as to how to get pure CFE deals done. Those participating in the negotiations say that the list of area considered non-negotiable by Pemex and the CFE is short, clear and reasonable. Whether upcoming financings, including that of the latest Tuxpan units, will benefit from this process is one of the imponderables of 2003.
Electricidad Aguila de Altamira
Status: Signed 15 October 2002
Size: $296 million
Location: Tamaulipas, Mexico
Description: 495MW gas-fired plant
Sponsors: Mitsubishi Corp (49%), EdF (51%)
Debt: $78 million 10-year commercial piece, $118 million 12-year JBIC credit, $40 million subordinated sponsor loan
Lead arrangers: Mizuho, Citigroup
Lawyers to the borrower: Milbank Tweed, Hadley & McCloy
Lawyers to the lenders: Shearman & Sterling
Altamira II
The Mexican power sector was left in a state of suspended animation after the end of the last wave of public sector power deals from 2000. A number of innovative developers, InterGen, Sithe and Alstom in particular, devised ways to work outside of the framework provided by the Comision Federal de Electricidad (CFE), the state electricity monopoly. But the crucial difficulty for independent power producers (IPPs) ? buying gas from Petroleos de Mexico ? stayed unresolved until Altamira II's close.
Altamira was a long time in coming, and was at one point slated to ink at the end of 2001. This long lead time is perhaps better appreciated if the challenges of working with two separate arms of the state-owned energy monopoly are taken into account. Put simply, no sponsor had come up with a solution to the mismatch between gas supply and electricity demand contracts until this EdF/Mitsubishi project closed.
Altamira, or to give it its full name, Electricidad Aguila de Altamira, is a 495MW combined-cycle gas-fired project located in Tamaulipas state in the northeast of Mexico. The CFE put out a request for bids for capacity contracts in 1998, and awarded the contract to Mitsubishi Corporation. Mitsubishi viewed the deal as a useful way to win a contract for its turbine technology, and has a strong presence in the country.
Traditionally, power projects in Mexico have used the CFE as an intermediary when buying fuel. This lays off most of the gas supply risk onto the sovereign and makes the contract more financeable. This means that gas is supplied as and when a plant dispatches, albeit while reinforcing the impression that both arms of the energy monopoly work in tandem.
Market reforms, however, have paradoxically made it more difficult for independent power projects to get built. Pemex, to be run along more commercial lines, would negotiate with its customers directly, meaning that gas supply contracts would be negotiated without regard to the output of the plant. Market and fuel studies can go some of the way to estimating how much, and even when, gas will be required. But the possibility of a default under either agreement, having bought fuel but not burned it, or not having the fuel to satisfy a power purchase agreement (PPA), would make a lender highly nervous.
Pemex includes and element of flexibility in its gas contracts, offering a mix of firm and swing capacity to consumers. The lower the level of firm capacity in a contracts, the higher the penalty paid if gas is not used, and the higher the per unit cost of swing gas. This feeds directly into the economics of the contract that an IPP will offer to the CFE, and margins on offtake contracts are still thin, even though the list of possible competitors has shrunk markedly in recent months.
Mitsubishi brought in Electricite de France as a strategic partner, and since EdF, with a number of stations in the country, prefers to take a controlling interest in its ventures, Mitsubishi retained only a 49% stake. The two sponsors, led by the Mitsubishi team, set about the arduous process of negotiating agreements with Pemex and the CFE separately. Several participants expressed frustration at the slow pace, and it appears that a shortening of the list of future bidders forced the hands of the CRE, the umbrella regulator for the industry.
Pemex had agreed to sell on gas that was not used at market prices, and this improved the economic of the project significantly. But the ability to avoid default events under the contracts had not been increased. The definition of a force majeure event, for the purposes of the contract, and the responsibility of the government for events not covered this, definition, still had to be clarified.
Moreover, the sponsors ultimately had to provide some support for the project's economics, in the form of contingent equity. This solution, while not necessarily the most elegant, had the effect of providing a tier of lender comfort that allowed the banks to sign off on financing documents. It is this final element, however, on which other, less well-capitalised, developers will have to improve. Strong sponsors always improve a deal's attractiveness, but this outlay may well be beyond the means of EdF and Mitsubishi's peers. The two also provided a subordinated loan of $40 million.
Another crucial strength came from the presence of the Japan Bank for International co-operation (JBIC), which provided a direct loan of $118 million. NEXI provided political risk cover on 97.5% of the commercial bank debt. Fuji Bank, now Mizuho, and Citigroup were the mandated lead arrangers, and brought in ING Barings and Bank of Tokyo-Mitsubishi at top-level underwriting positions. Given the ultimate size of the commercial bank debt, a formal syndication did not take place.
The deal also used a new holding company structure to allow lenders to take a security interest on an asset. Their ability to do this had been severely constrained by reent legislation designed to protect ordinary Mexicans from overly aggressive lenders. It meant that Altamira required a complex voting trust structure to ease lenders' fears.
Given this set of straightened circumstances, as well as the compromises that were necessary to get the deal done, the deal is by no means the definitive template as to how to get pure CFE deals done. Those participating in the negotiations say that the list of area considered non-negotiable by Pemex and the CFE is short, clear and reasonable. Whether upcoming financings, including that of the latest Tuxpan units, will benefit from this process is one of the imponderables of 2003.
Electricidad Aguila de Altamira
Status: Signed 15 October 2002
Size: $296 million
Location: Tamaulipas, Mexico
Description: 495MW gas-fired plant
Sponsors: Mitsubishi Corp (49%), EdF (51%)
Debt: $78 million 10-year commercial piece, $118 million 12-year JBIC credit, $40 million subordinated sponsor loan
Lead arrangers: Mizuho, Citigroup
Lawyers to the borrower: Milbank Tweed, Hadley & McCloy
Lawyers to the lenders: Shearman & Sterling
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