Latin American Private Power Deal of the Year 2001
2001 was set to be an essentially disappointing year for the
Brazilian electricity sector. The promise that was heralded by the
series of hydroelectric financings, including Cana Brava, Dona
Francisca and AES Tiete did not translate to gas-fired facilities.
Termobahia, which closed just before the end of the year, ends on a
high ? gas-fired financings can be done if the sponsor is strong
enough.
The Brazilian government certainly wants to increase the proportion of gas-fired capacity in the country's fuel mix. The electricity sector currently sources about 95% of its requirements from hydroelectric plants. A series of droughts and electricity rationing have underscored that even in as large and diverse a state as Brazil, this source can be very erratic. It hopes to have added 49 thermal plants by 2003.
But a number of obstacles have seen this process stall. Most plants built before now have been constructed on balance-sheet. Enron and El Paso both have interests in the country, and Enron had apparently made good money selling power on the spot market, although how it accounted for these earnings is a separate question entirely. Others, including AES, had threatened to withdraw from the country, citing an unhelpful regulatory environment.
Brazil's chief difficulty is a tariff structure that makes it difficult to pass on higher fuel costs (far more a reflection of the dollar's value than the cost of local production) to distributors and, by extension, the consumer. Given the instability endemic to the Real, reviews of the tariff allowed have to be relatively up to date. It is this mismatch between tariffs and gas, construction and financing costs (all linked to the dollar) that has held up development as well as difficulties in signing offtakers up to long-term power purchase agreements.
One solution, as many have long suspected, is to bring Petrobras, the state-owned oil and gas producer, on board. In the case of Termobahia, the project was largely a Petrobras idea. Petrobras sees its contribution to the IPP development programme in two ways ? as a way of hedging its own energy costs and as a way of monetising its own gas reserves. Termobahia accomplished both goals. It bid out a contract to built a cogeneration plant to produce 190MW of power, as well as steam, in 1996.
ABB (then ABB Alstom) won the contract in 1997, and took a 49% equity stake in project Termobahia Ltda. Petrobras owns a further 49%, with the balance held by A&A Electricity Investment, affiliated to Swiss financial group A&A Actienbank. ABB has gradually moved away from the electricity sector, following the demerger of the Alstom division, and now runs its contribution through its Equity Ventures arm. Alstom now holds the fixed price, turnkey EPC contract, and will install GT24 turbines at the site.
The plant is designed to sell power and steam to the Petrobras Landulfo Alves Refinery, located at Mataripe in the state of Bahia. The refinery uses elderly generating capacity, although it was the site of a JBIC-financed upgrade in 1996. The plant will produce 350 metric tonnes of steam per hour, in addition to the 190MW of power. Any electricity that Petrobras does not use can be sold on the spot market, although this does not figure in the financial profile of the plant.
Petrobras has signed an energy conversion agreement with the project company, in effect a tolling agreement. How Petrobras has mitigated the currency aspect of the agreement has not been disclosed, but as a purchaser and also a supplier it is believed to be capable of putting in place some form of hedging mechanism on its exposure.
The sponsors have already started work on the project using their own equity, as is common given the long lead time in obtaining financing in the sector. For this reason it was unable to tap export credit agencies for its funding, despite the fact that many are eager to increase their exposure to Brazil. The Inter-American Development Bank (IDB), which has been a useful participant on two hydroelectric financings, offered the project an A/B loan package.
This breaks down into an A loan of $62 million and a B loan of $124 million, leaving the sponsors to front just over $70 million in equity. The financing is understood to have a tenor of roughly 14 years. Bank of America was appointed to run the B loan, its second recent success in Brazil after the earlier AES Tiete bond deal. It has brought in a further five institutions on the financing.
Backed by the IDB umbrella and a sponsor with the strength of Petrobras, the deal is unlikely to face much in the way of adverse comment in the market. The indications are that the structure will form a template for other upcoming deals, although there are signs that export credit agencies, in particular US Ex-Im (working over Araucaria) and Opic (who were to have been working with Enron on the Electrobolt plant), will be active on the next wave of deals.
Moreover the electricity crisis appears to have been beneficial from the independent power producers' perspective because it has focused the government's mind and created the conditions for a number of crucial concessions. The delays in pass-through of fuel costs have ended, and utilities can now pass on their costs through increases over the next three years. They will receive this money upfront, through a BNDEA loan secured on these receivables. The faulty spot market, however, has not yet been repaired, so the huge returns that were possible during the summer crisis may not return.
Nevertheless, these are all promising signs for a market that was sorely in need of an example of the government's commitment to getting plants running. Petrobras will still be the partner of choice, but other offtakers may be able to provide some of the comfort necessary, especially if they are in the hands of well-capitalised international players. Solving Brazil's fuel mix will be a long task, but Termobahia is an important first step, and a second phase, of 295MW, should follow at the site this year. The current investors are eager to be involved in the repeat.
Termobahia Ltda.
Status: closed December 2001
Size: $256 million
Location: Mataripe, Bahia state, Brazil
Description: 190MW first phase cogeneration plant built to supply a Petrobras refinery
Sponsors: ABB Equity Ventures, Petrobras, A&A Electricity Investment
Debt: Inter-American Development A loan of $62 million, and B loan of $124 million
B loan arranger: Bank of America
Independent Engineer: Stone & Webster
Economic Consultant: Estudios Energéticos Ltda
Insurance Consultant: AON Risk Services
Tax and Accounting Consultant: Nieto Auditores & Consultores
Environmental Consultant: URS Greiner Woodward Clyde
Lawyers to the lenders: White & Case (International), Felsberg & Associados (local)
Lawyers to the borrower: Milbank, Tweed, Hadley & McCloy (international), Machado, Meyer, Sendacz e Opice Advogados (local)
The Brazilian government certainly wants to increase the proportion of gas-fired capacity in the country's fuel mix. The electricity sector currently sources about 95% of its requirements from hydroelectric plants. A series of droughts and electricity rationing have underscored that even in as large and diverse a state as Brazil, this source can be very erratic. It hopes to have added 49 thermal plants by 2003.
But a number of obstacles have seen this process stall. Most plants built before now have been constructed on balance-sheet. Enron and El Paso both have interests in the country, and Enron had apparently made good money selling power on the spot market, although how it accounted for these earnings is a separate question entirely. Others, including AES, had threatened to withdraw from the country, citing an unhelpful regulatory environment.
Brazil's chief difficulty is a tariff structure that makes it difficult to pass on higher fuel costs (far more a reflection of the dollar's value than the cost of local production) to distributors and, by extension, the consumer. Given the instability endemic to the Real, reviews of the tariff allowed have to be relatively up to date. It is this mismatch between tariffs and gas, construction and financing costs (all linked to the dollar) that has held up development as well as difficulties in signing offtakers up to long-term power purchase agreements.
One solution, as many have long suspected, is to bring Petrobras, the state-owned oil and gas producer, on board. In the case of Termobahia, the project was largely a Petrobras idea. Petrobras sees its contribution to the IPP development programme in two ways ? as a way of hedging its own energy costs and as a way of monetising its own gas reserves. Termobahia accomplished both goals. It bid out a contract to built a cogeneration plant to produce 190MW of power, as well as steam, in 1996.
ABB (then ABB Alstom) won the contract in 1997, and took a 49% equity stake in project Termobahia Ltda. Petrobras owns a further 49%, with the balance held by A&A Electricity Investment, affiliated to Swiss financial group A&A Actienbank. ABB has gradually moved away from the electricity sector, following the demerger of the Alstom division, and now runs its contribution through its Equity Ventures arm. Alstom now holds the fixed price, turnkey EPC contract, and will install GT24 turbines at the site.
The plant is designed to sell power and steam to the Petrobras Landulfo Alves Refinery, located at Mataripe in the state of Bahia. The refinery uses elderly generating capacity, although it was the site of a JBIC-financed upgrade in 1996. The plant will produce 350 metric tonnes of steam per hour, in addition to the 190MW of power. Any electricity that Petrobras does not use can be sold on the spot market, although this does not figure in the financial profile of the plant.
Petrobras has signed an energy conversion agreement with the project company, in effect a tolling agreement. How Petrobras has mitigated the currency aspect of the agreement has not been disclosed, but as a purchaser and also a supplier it is believed to be capable of putting in place some form of hedging mechanism on its exposure.
The sponsors have already started work on the project using their own equity, as is common given the long lead time in obtaining financing in the sector. For this reason it was unable to tap export credit agencies for its funding, despite the fact that many are eager to increase their exposure to Brazil. The Inter-American Development Bank (IDB), which has been a useful participant on two hydroelectric financings, offered the project an A/B loan package.
This breaks down into an A loan of $62 million and a B loan of $124 million, leaving the sponsors to front just over $70 million in equity. The financing is understood to have a tenor of roughly 14 years. Bank of America was appointed to run the B loan, its second recent success in Brazil after the earlier AES Tiete bond deal. It has brought in a further five institutions on the financing.
Backed by the IDB umbrella and a sponsor with the strength of Petrobras, the deal is unlikely to face much in the way of adverse comment in the market. The indications are that the structure will form a template for other upcoming deals, although there are signs that export credit agencies, in particular US Ex-Im (working over Araucaria) and Opic (who were to have been working with Enron on the Electrobolt plant), will be active on the next wave of deals.
Moreover the electricity crisis appears to have been beneficial from the independent power producers' perspective because it has focused the government's mind and created the conditions for a number of crucial concessions. The delays in pass-through of fuel costs have ended, and utilities can now pass on their costs through increases over the next three years. They will receive this money upfront, through a BNDEA loan secured on these receivables. The faulty spot market, however, has not yet been repaired, so the huge returns that were possible during the summer crisis may not return.
Nevertheless, these are all promising signs for a market that was sorely in need of an example of the government's commitment to getting plants running. Petrobras will still be the partner of choice, but other offtakers may be able to provide some of the comfort necessary, especially if they are in the hands of well-capitalised international players. Solving Brazil's fuel mix will be a long task, but Termobahia is an important first step, and a second phase, of 295MW, should follow at the site this year. The current investors are eager to be involved in the repeat.
Termobahia Ltda.
Status: closed December 2001
Size: $256 million
Location: Mataripe, Bahia state, Brazil
Description: 190MW first phase cogeneration plant built to supply a Petrobras refinery
Sponsors: ABB Equity Ventures, Petrobras, A&A Electricity Investment
Debt: Inter-American Development A loan of $62 million, and B loan of $124 million
B loan arranger: Bank of America
Independent Engineer: Stone & Webster
Economic Consultant: Estudios Energéticos Ltda
Insurance Consultant: AON Risk Services
Tax and Accounting Consultant: Nieto Auditores & Consultores
Environmental Consultant: URS Greiner Woodward Clyde
Lawyers to the lenders: White & Case (International), Felsberg & Associados (local)
Lawyers to the borrower: Milbank, Tweed, Hadley & McCloy (international), Machado, Meyer, Sendacz e Opice Advogados (local)
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