Middle East Power Deal of the Year 2001 - Suez and East Port Said
The successful financing of Electricite de France's (EdF's) $695
million project to set up two power stations in Suez and East Port
Said sets another milestone for Egypt's power sector ? it is only
the second independent power deal to have been done under the
country's build own operate transfer (BOOT) scheme for private
power. The deal is also the largest single foreign investment in
the Egyptian power sector. It is noteworthy for having used a
sturdy multilateral financing umbrella (to avoid complexities of
withholding tax) while allowing for an increased tenor and
minimized syndication risk.
Barclays Capital, Credit Lyonnais and Societe Generale (SG) lead arranged the deal, which had a further 15 banks joining the syndication. The two projects were financed through one package, which reached financial close on April 3, 2001.
Financing splits into four tranches: a $90 million IFC A loan; a $305 million IFC B loan; a $200 million Edf-backed equity bridge and a $100 million institutional tranche provided by John Hancock. A bridge loan (arranged and completed last year by SG, Barclays Capital and Credit Lyonnais) was put in place earlier to fund construction, which has already begun.
The $305 million IFC B loan breaks into two portions: a $205 million 17-year loan and a $100 million, 13-year loan. The margin on the construction phase (which is guaranteed by EdF) is 60bp. The operation phase sees the margin rise to 180bp and then notch up on a four-yearly basis to 200bp, 225bp and 250bp. Syndication is expected to close at the end of May, 2001.
The project is Egypt's second independent power financing following 1999's Sidi Krir, sponsored by Intergen and Edison International. The pricing on this deal is understood to be slightly cheaper than for Sidi Krir. Furthermore, Edf, in contrast to the previous developers, is providing a construction guarantee. It is also paying withholding tax on the non-IFC debt. The IFC A tranche runs for 19 years.
The principal advantage of a structure with IFC involvement is that interest payments on the loan will be exempt from withholding tax ? supranational (multilateral) institutions are exempt. The tax is charged at a basic rate of 32%, dropping to 15% if the bank is in a country with a double-taxation treaty with Egypt. IFC involvement also enabled the tenor to be stretched. Witholding tax is understood to be responsible for rumoured difficulties in selling down Sidi Krir's debt. The IFC umbrella resolves issues such as withholding tax and its involvement also helps explain the syndication's welcome reception.
The John Hancock portion runs for 20 years and has a fixed rate throughout ? between 200bp to 250bp over US treasuries. This makes these funds more expensive than the bank loans at the outset athough this evens out over the life of the loan. The main contractors on the project are: Foster Wheeler Corporation which will supply boilers for $110 million; Toshiba Corporation of Japan, with the $70 million turbine order and a joint venture of SAE International and local company Orascom Construction Industries which has the $80 million civil works contract. Alstom won the $9 million transformer supply contract and Entropie picked up the $3 million order for desalination equipment. Finally, CimiMontubi won the $30 million contract to carry out the mechanical erection for both plants.
?It was a challenging deal to close but we ended up with favourable agreements on the project,? says EdF's head of project finance, Myriam Berdy. ?But, through the continued support of all our counsels and advisers, with close collaboration with IFC and John Hancock, we ended up with an exceptional deal with a landmark tenor.?
The 340MW plants will both use natural gas as primary fuel but will also be able to burn fuel oil as a back-up fuel. CityGas, a private venture which includes Orascom, is to supply the Suez site with gas at $1.04/BTU. The Port Said site is being furnished with gas from Egyptian Gas Co (Gasco) ? an affiliate of the Egyptian General Petroleum Corporation ? also at $1.04/BTU. Power purchase agreements are in place for both schemes with the Egyptian Electricity Authority which will buy the electricity over a 20-year period.
The projects are expected to reach commercial operation by mid-2003 and will provide a long-term source of low-cost power for Egypt's ever-expanding consumer and industrial base. Their combined total output will account for roughly 10% of Egypt's installed capacity. EdF has suggested that it may consider selling stakes to other investors when the plants come on line, either through a stock market flotation or through the strategic sales. The developer won the contract for the two plants in October 1999, following an international tender in which EdF submitted the lowest price of $0.0237/kWh for the sale of electricity.
Although the government has benefited from the low tariffs and the interest from potential developers, its enthusiasm for private sector generation has since waned considerably. In fact, it is currently re-evaluating its approach to IPPs and their economics. One reason is that the denomination of tariffs in US dollars has caused much concern for the government, particularly since the devaluation of the Egyptian pound. One suggestion for future projects is to denominate tariffs under a mixture of currencies. The added complexity of hedging foreign exchange risk is something that any future IPP developers in Egypt will most likely have to contend with.
Some estimates put Egypt's annual demand growth at 6%, meaning that an additional generating capacity of some 600-1,000MW needs to be added each year to keep up with demand. But it seems unlikely that further IPPs will be pursued by the government in the short run ? at least until the tariff denomination issues.
Bids for a third and fourth IPP, both 750MW combined cycle plants to be built at Nuberiya and Cairo North were to have been submitted last year. But the government has since shelved its plans, opting for development agency funding for both schemes instead. EdF and Intergen were among the seven pre-qualified bidders. Nevertheless, EdF and its competitors are still confident that IPPs will have a future in Egypt.
Barclays Capital, Credit Lyonnais and Societe Generale (SG) lead arranged the deal, which had a further 15 banks joining the syndication. The two projects were financed through one package, which reached financial close on April 3, 2001.
Financing splits into four tranches: a $90 million IFC A loan; a $305 million IFC B loan; a $200 million Edf-backed equity bridge and a $100 million institutional tranche provided by John Hancock. A bridge loan (arranged and completed last year by SG, Barclays Capital and Credit Lyonnais) was put in place earlier to fund construction, which has already begun.
The $305 million IFC B loan breaks into two portions: a $205 million 17-year loan and a $100 million, 13-year loan. The margin on the construction phase (which is guaranteed by EdF) is 60bp. The operation phase sees the margin rise to 180bp and then notch up on a four-yearly basis to 200bp, 225bp and 250bp. Syndication is expected to close at the end of May, 2001.
The project is Egypt's second independent power financing following 1999's Sidi Krir, sponsored by Intergen and Edison International. The pricing on this deal is understood to be slightly cheaper than for Sidi Krir. Furthermore, Edf, in contrast to the previous developers, is providing a construction guarantee. It is also paying withholding tax on the non-IFC debt. The IFC A tranche runs for 19 years.
The principal advantage of a structure with IFC involvement is that interest payments on the loan will be exempt from withholding tax ? supranational (multilateral) institutions are exempt. The tax is charged at a basic rate of 32%, dropping to 15% if the bank is in a country with a double-taxation treaty with Egypt. IFC involvement also enabled the tenor to be stretched. Witholding tax is understood to be responsible for rumoured difficulties in selling down Sidi Krir's debt. The IFC umbrella resolves issues such as withholding tax and its involvement also helps explain the syndication's welcome reception.
The John Hancock portion runs for 20 years and has a fixed rate throughout ? between 200bp to 250bp over US treasuries. This makes these funds more expensive than the bank loans at the outset athough this evens out over the life of the loan. The main contractors on the project are: Foster Wheeler Corporation which will supply boilers for $110 million; Toshiba Corporation of Japan, with the $70 million turbine order and a joint venture of SAE International and local company Orascom Construction Industries which has the $80 million civil works contract. Alstom won the $9 million transformer supply contract and Entropie picked up the $3 million order for desalination equipment. Finally, CimiMontubi won the $30 million contract to carry out the mechanical erection for both plants.
?It was a challenging deal to close but we ended up with favourable agreements on the project,? says EdF's head of project finance, Myriam Berdy. ?But, through the continued support of all our counsels and advisers, with close collaboration with IFC and John Hancock, we ended up with an exceptional deal with a landmark tenor.?
The 340MW plants will both use natural gas as primary fuel but will also be able to burn fuel oil as a back-up fuel. CityGas, a private venture which includes Orascom, is to supply the Suez site with gas at $1.04/BTU. The Port Said site is being furnished with gas from Egyptian Gas Co (Gasco) ? an affiliate of the Egyptian General Petroleum Corporation ? also at $1.04/BTU. Power purchase agreements are in place for both schemes with the Egyptian Electricity Authority which will buy the electricity over a 20-year period.
The projects are expected to reach commercial operation by mid-2003 and will provide a long-term source of low-cost power for Egypt's ever-expanding consumer and industrial base. Their combined total output will account for roughly 10% of Egypt's installed capacity. EdF has suggested that it may consider selling stakes to other investors when the plants come on line, either through a stock market flotation or through the strategic sales. The developer won the contract for the two plants in October 1999, following an international tender in which EdF submitted the lowest price of $0.0237/kWh for the sale of electricity.
Although the government has benefited from the low tariffs and the interest from potential developers, its enthusiasm for private sector generation has since waned considerably. In fact, it is currently re-evaluating its approach to IPPs and their economics. One reason is that the denomination of tariffs in US dollars has caused much concern for the government, particularly since the devaluation of the Egyptian pound. One suggestion for future projects is to denominate tariffs under a mixture of currencies. The added complexity of hedging foreign exchange risk is something that any future IPP developers in Egypt will most likely have to contend with.
Some estimates put Egypt's annual demand growth at 6%, meaning that an additional generating capacity of some 600-1,000MW needs to be added each year to keep up with demand. But it seems unlikely that further IPPs will be pursued by the government in the short run ? at least until the tariff denomination issues.
Bids for a third and fourth IPP, both 750MW combined cycle plants to be built at Nuberiya and Cairo North were to have been submitted last year. But the government has since shelved its plans, opting for development agency funding for both schemes instead. EdF and Intergen were among the seven pre-qualified bidders. Nevertheless, EdF and its competitors are still confident that IPPs will have a future in Egypt.
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