Low fat spread
Since its de-merger from National Power in October 2000,
International Power has stuck to its strategy of growth in the US,
Europe and the Middle East and Australia, claiming that the
geographical spread of its operations will protect it from any
market downturn. ?The international spread of our operations
mitigates our exposure to the business cycles of any single market
and provides a strong platform for sustained growth in shareholder
value,? declared chairman Sir Neville Simms in the company's
interim results, published in September this year. Let's hope he's
right ? as any company sitting on top of two power plants in
Pakistan needs all the geographical diversity it can get.
To be fair, International Power's two Pakistan-based plants may be about to pay the company a dividend for the first time in three years. International Power has a 26% stake in the Hub River project (run by Hubco), the 1,292MW residual fuel oil-fired plant 45km outside Karachi, and a 36% stake in Kot Addu, a 1,600MW CCGT plant located in the Punjab region of the country. Hubco, which is the largest IPP in Pakistan, announced at the end of October that it will hold a board meeting this month (November) to approve its full-year results which will entail payment of a 1.70 rupee per share dividend. Both plants have long-term PPAs with the Water and Power Development Agency (WAPDA) and it is the settling of a bitter tariff dispute with WAPDA last December that has made this dividend payment possible. The dispute was settled by Hubco agreeing to reduce its tariffs from 6.5 cents per kw/hr to 5.6 cents per kw/hr.
The actual dividend payment that International Power will receive from Hubco is incidental but it is a step in the right direction. ?We have lender approval for the dividend and have rewritten the schedule for the PPA,? explains Peter Barlow, director of finance at International Power in London. Hubco recommenced payments under the agreement (it had been in technical default) in the second quarter of this year. ?We have assumed that we will get no income out of Pakistan and that is reflected in our credit rating [BB],? admits Barlow. ?These dividends are too small to make a difference but they are a demonstration of our relationship with WABTA.? The Hubco dividend should amount to around £5 million and International Power is now also in the process of agreeing a revised tariff on its other Pakistan investment, Kot Addu. The potential dividend from the Kot Addu stake is far greater than that from Hubco as the plant is a pure equity investment with no bank finance (there are 59 lenders in the Hub River deal). ?There are only two small points that need agreement for us to secure the dividend from Kot Addu,? says Barlow. The deteriorating situation in Pakistan is clearly a concern, but Barlow is upbeat about the investments. ?The problems in Afghanistan should strengthen US support for getting the economy in Pakistan sorted out,? he predicts. ?Political risks have increased but the attitude towards foreign investment has also improved.? The plants have World Bank guarantees, which should be more than enough protection. ?The last thing that Pakistan will do is default on its World Bank obligations,? says Barlow. International Power wrote down half of the book value of both investments last year, a total write-down of £131 million.
Despite tensions in the region, International Power is still very positive about its investments elsewhere in the Middle East, and is in the final stages of syndicating its latest project, the $1.6 billion Shuweihat IWPP power and desalination plant in Abu Dhabi. International Power and CMS Energy signed a 20-year power and water purchase agreement with the Abu Dhabi Water and Electricity Authority (ADWEA) for the project in August this year and have taken a 20% stake each. The remainder is held by ADWEA. International Power is investing about $80 million in the plant, a reflection of its belief in the region and increasing focus on projects with secure income streams. ?We still feel that there is substantial opportunity in new build in the Middle East,? says Barlow. ?Abu Dhabi is stable politically and is the best credit risk in the region.? It seems that some lenders might, however, have taken some convincing and Barlow freely admits that the deal was ?not an easy syndication.? The $1.285 million debt tranche was syndicated by Barclays Capital, Citibank, Bank of Tokyo Mitsubishi and National Bank of Abu Dhabi. ?Some banks have thought that it is a difficult time to do this but we have been surprised by the remaining interest in the market,? says Barlow. The risk profile of the deal is certainly very attractive as there is substantial support from the Abu Dhabi government in the form of pass-throughs: the cost of fuel supply from the Abu Dhabi National Oil Company is being passed through to the offtaker. The income stream is thus extremely secure. International Power's other recent investment in the region, the 280MW Al Kamil plant in Oman, which was awarded last year, is similarly secure. The Al Kamil plant has a 15 year PPA with Oman's Ministry of Energy and Water and was partly financed through a 15 year $94 million non-recourse term loan jointly arranged by Societe Generale and Bank Muscat. The margin on that loan, which was signed in August this year, was 110 bp for the first eight years, rising to 125bp for years nine and 10 and 150bp for 11 to 13 and 170bp thereafter (to encourage refinancing). International Power has a $33 million (25%) stake in the project.
This emphasis on secure projects with long-term PPAs is a reflection not only of the region but also of the balancing act that International Power is playing between its various investments worldwide. The US has been the overwhelming focus of new investment for the company, which has five operating power plants in the country (at Hartwell, Oyster Creek, Milford, Bayonne and Midlothian) and has a further 2,790MW of gross capacity under construction. The US is soon expected to account for a full 50% of International Power's assets ? and these assets are all merchant risk. International Power's exposure to commodity price risk has been a concern for the rating agencies (the company is rated BB by Standard and Poors, ** by Moody's) but Peter Barlow downplays any such concerns. ?Our risk exposure is 60% merchant, 40% contracted and we are certainly not on the speculative end of the spectrum,? he claims (see Chart 1). He also questions the definitions used ?If you have contracts for differences or six-month offtake agreements is that merchant risk or contracted risk?? he asks. ?Merchant risk covers a multitude of sins and is not necessarily speculative. If we see opportunities to lock in spark spread then we will do it.? He also emphasises that, unlike some other IPPs, the company's trading operations concentrate on trading just its own output.
But there are signs that the company is concentrating on trying to match its merchant risk with contracted projects. ?We need classical PPA for balance,? Barlow agrees. The Shuweihat project has a 25 year PPA and is a very secure project and the company can therefore leverage it against its other risks. Jan Willem Plantagie, sector analyst at Standard and Poors, still sees commodity risk exposure as a problem for the company. ?Investments in merchant power expose about 40% of future revenues to commodity price risk,? he says. ?All the US exposure is merchant risk but there are signs that the level of exposure to merchant risk is decreasing.? In addition to the fact that the company's US risk is uncontracted, there is concern that it is so far all concentrated in two states, Massachusetts and Texas. International Power expects to invest another $1 billion in the US market, but Barlow confirms that any further exposure in the US ?will not be in those two markets.? He admits that there has been concern about overbuild in Texas but says that a lot of the new plant is replacing old rather than adding to capacity. ?There is still 30 and 40 year old plant in use which find it difficult to meet environmental restrictions.? The chaos in California last year will not have limited opportunities for the company in the US but will not make its job any easier. ?It will be tougher to do things. Every utility has been frightened by California and has seen what can happen when distributors do not own generation. There are less assets being privatised and regulators want to keep overall control.? But the company is still forging ahead. Its next planned project is the development of a 650MW natural gas-fired plant in Brookhaven, Long Island. Construction is planned for the second half of 2002. International Power sees the New York area as a fertile source of new business as the state estimates that 8.600MW of new generation is needed by 2005 and only 1,700MW of new capacity is currently under construction. The application to build at Brookhaven is now being considered by the Siting Board.
All this expansion into the US has to be paid for, and International Power decided to do this via a bumper financing facility, which was signed in June this year. The deal, ANP Funding 1, involved a $1,375 rated five-year term loan is to finance the equity investments in the construction programme of five combined cycle, gas-fired plants in Massachussetts and Texas amounting to capacity of 4,029 MW. Funds were borrowed through International Power's US subsidiary American National Power (ANP) and, in an unusual step, the deal was rated ? BBB- by Standard and Poors and Baa3 by Moody's. The deal was lead arranged by Societe Generale, ABN Amro, ING, Citigroup and Deutsche Bank. ?Rating is more common in the US but the market was nervous,? reveals Barlow at International Power. The company opted to undertake the financing as one jumbo deal rather than split it into separate deals based on each individual project in order to get portfolio diversification benefits but Barlow admits that the company ?didn't get as much [benefit] as we had hoped.? The deal faced two problems. Firstly it was launched as the power shortages in California were beginning to bite and therefore suffered from some scepticism on the power sector, and secondly there have been questions raised over the reliability of the turbines that are being used in these new plants. ?International Power went to the market in the middle of the California crisis,? says Plantagie at Standard and Poors. ?They had a lot of equity investment from National Power that needed to be refinanced but I don't think it would have made much difference if it had been done individually or as one large deal.? Plantagie reckons that International Power did not benefit as much as it expected to from portfolio diversification as all the assets in the portfolio were US-based. ?Even if you have a portfolio of assets you still have to look at each one on its own merits,? he says. There does, however, seem to be very low correlation between the Texas and North-Eastern markets which was a positive aspect for the rating. But Plantagie insists that ANP Funding has a portfolio of assets that is ?heavily concentrated on one technology (GT24B turbines), one fuel (natural gas) and [relatively concentrated in] one power pool (Texas). Barlow believes that the deal was quite a hard sell as there were five sites all of which were in the middle of being built. ?A lot of retail demand disappeared because of California,? he says. The deal also had a bullet maturity but lenders were protected by cash sweeps and traps in the structure. Concern over the Alstom-built GT24B turbines remains, however, and the equipment is still not operating as planned. ?This is cutting edge technology,? says Barlow. ?The turbines have had teething problems and are not operating at their guaranteed rate yet.? The ANP Funding loan was priced at 162.5bp over Libor for years one to three and syndicated to a large group of international banks.
International Power is now back in the market with a $540 million three-year revolver to replace an existing one-year revolving bank loan facility with an availability of £715 million. It is being arranged by ING, ABN Amro, RBS and Deutsche Bank. The deal has been increased from an original $500 million. The company is also planning a A$1 billion deal for the poorly-performing Hazelwood plant in Australia. International Power has a 92% stake in the project but has had to write down £15 million of its book value. It has also raised £170 million for the UK-based 1,000MW Rugely plant that it purchased in July from TXU in a seven-year deal arranged by ING and Toronto Dominion Bank. International Power has a four-year tolling contract with TXU for Rugely and has a tolling contract with Innogy on its 500MW Deeside plant which expires next year. Following this the plant can either negotiate a new tolling contract or operate on a merchant basis. Barlow declines to say which route is favoured but is critical of the way in which NETA has operated so far.
By keeping a broad geographical spread of investment, International Power hopes to mitigate any effects of any change in conditions in any one market (see Chart 2). It keeps a high degree of operational control over its investments and raises financing at the investment level rather than the corporate level. This strategy seems to be paying off, and its interim results for the half year to June 2001 showed a 39% increase in PBIT to £152 million. International Power now expects to spend between £300 million and £400 million per year on equity investments for acquisitions and Greenfield developments over the next five years. According to Plantagie at Standard & Poor's cash coming from projects that have some form of offtake agreement will improve to 47% over the next five years from the 28% that was forecast in 2000 ? alleviating concerns over merchant risk. Despite the focus on the US, 40% of cashflow is forecast to come from Europe, and the company has signed a second agreement with Ansaldo Energia of Italy to develop up to 4,000MW of CCGT plants in Italy. The two will develop five Greenfield sites of 800MW each ? three near Naples and two in Calabria.
To be fair, International Power's two Pakistan-based plants may be about to pay the company a dividend for the first time in three years. International Power has a 26% stake in the Hub River project (run by Hubco), the 1,292MW residual fuel oil-fired plant 45km outside Karachi, and a 36% stake in Kot Addu, a 1,600MW CCGT plant located in the Punjab region of the country. Hubco, which is the largest IPP in Pakistan, announced at the end of October that it will hold a board meeting this month (November) to approve its full-year results which will entail payment of a 1.70 rupee per share dividend. Both plants have long-term PPAs with the Water and Power Development Agency (WAPDA) and it is the settling of a bitter tariff dispute with WAPDA last December that has made this dividend payment possible. The dispute was settled by Hubco agreeing to reduce its tariffs from 6.5 cents per kw/hr to 5.6 cents per kw/hr.
The actual dividend payment that International Power will receive from Hubco is incidental but it is a step in the right direction. ?We have lender approval for the dividend and have rewritten the schedule for the PPA,? explains Peter Barlow, director of finance at International Power in London. Hubco recommenced payments under the agreement (it had been in technical default) in the second quarter of this year. ?We have assumed that we will get no income out of Pakistan and that is reflected in our credit rating [BB],? admits Barlow. ?These dividends are too small to make a difference but they are a demonstration of our relationship with WABTA.? The Hubco dividend should amount to around £5 million and International Power is now also in the process of agreeing a revised tariff on its other Pakistan investment, Kot Addu. The potential dividend from the Kot Addu stake is far greater than that from Hubco as the plant is a pure equity investment with no bank finance (there are 59 lenders in the Hub River deal). ?There are only two small points that need agreement for us to secure the dividend from Kot Addu,? says Barlow. The deteriorating situation in Pakistan is clearly a concern, but Barlow is upbeat about the investments. ?The problems in Afghanistan should strengthen US support for getting the economy in Pakistan sorted out,? he predicts. ?Political risks have increased but the attitude towards foreign investment has also improved.? The plants have World Bank guarantees, which should be more than enough protection. ?The last thing that Pakistan will do is default on its World Bank obligations,? says Barlow. International Power wrote down half of the book value of both investments last year, a total write-down of £131 million.
Despite tensions in the region, International Power is still very positive about its investments elsewhere in the Middle East, and is in the final stages of syndicating its latest project, the $1.6 billion Shuweihat IWPP power and desalination plant in Abu Dhabi. International Power and CMS Energy signed a 20-year power and water purchase agreement with the Abu Dhabi Water and Electricity Authority (ADWEA) for the project in August this year and have taken a 20% stake each. The remainder is held by ADWEA. International Power is investing about $80 million in the plant, a reflection of its belief in the region and increasing focus on projects with secure income streams. ?We still feel that there is substantial opportunity in new build in the Middle East,? says Barlow. ?Abu Dhabi is stable politically and is the best credit risk in the region.? It seems that some lenders might, however, have taken some convincing and Barlow freely admits that the deal was ?not an easy syndication.? The $1.285 million debt tranche was syndicated by Barclays Capital, Citibank, Bank of Tokyo Mitsubishi and National Bank of Abu Dhabi. ?Some banks have thought that it is a difficult time to do this but we have been surprised by the remaining interest in the market,? says Barlow. The risk profile of the deal is certainly very attractive as there is substantial support from the Abu Dhabi government in the form of pass-throughs: the cost of fuel supply from the Abu Dhabi National Oil Company is being passed through to the offtaker. The income stream is thus extremely secure. International Power's other recent investment in the region, the 280MW Al Kamil plant in Oman, which was awarded last year, is similarly secure. The Al Kamil plant has a 15 year PPA with Oman's Ministry of Energy and Water and was partly financed through a 15 year $94 million non-recourse term loan jointly arranged by Societe Generale and Bank Muscat. The margin on that loan, which was signed in August this year, was 110 bp for the first eight years, rising to 125bp for years nine and 10 and 150bp for 11 to 13 and 170bp thereafter (to encourage refinancing). International Power has a $33 million (25%) stake in the project.
This emphasis on secure projects with long-term PPAs is a reflection not only of the region but also of the balancing act that International Power is playing between its various investments worldwide. The US has been the overwhelming focus of new investment for the company, which has five operating power plants in the country (at Hartwell, Oyster Creek, Milford, Bayonne and Midlothian) and has a further 2,790MW of gross capacity under construction. The US is soon expected to account for a full 50% of International Power's assets ? and these assets are all merchant risk. International Power's exposure to commodity price risk has been a concern for the rating agencies (the company is rated BB by Standard and Poors, ** by Moody's) but Peter Barlow downplays any such concerns. ?Our risk exposure is 60% merchant, 40% contracted and we are certainly not on the speculative end of the spectrum,? he claims (see Chart 1). He also questions the definitions used ?If you have contracts for differences or six-month offtake agreements is that merchant risk or contracted risk?? he asks. ?Merchant risk covers a multitude of sins and is not necessarily speculative. If we see opportunities to lock in spark spread then we will do it.? He also emphasises that, unlike some other IPPs, the company's trading operations concentrate on trading just its own output.
But there are signs that the company is concentrating on trying to match its merchant risk with contracted projects. ?We need classical PPA for balance,? Barlow agrees. The Shuweihat project has a 25 year PPA and is a very secure project and the company can therefore leverage it against its other risks. Jan Willem Plantagie, sector analyst at Standard and Poors, still sees commodity risk exposure as a problem for the company. ?Investments in merchant power expose about 40% of future revenues to commodity price risk,? he says. ?All the US exposure is merchant risk but there are signs that the level of exposure to merchant risk is decreasing.? In addition to the fact that the company's US risk is uncontracted, there is concern that it is so far all concentrated in two states, Massachusetts and Texas. International Power expects to invest another $1 billion in the US market, but Barlow confirms that any further exposure in the US ?will not be in those two markets.? He admits that there has been concern about overbuild in Texas but says that a lot of the new plant is replacing old rather than adding to capacity. ?There is still 30 and 40 year old plant in use which find it difficult to meet environmental restrictions.? The chaos in California last year will not have limited opportunities for the company in the US but will not make its job any easier. ?It will be tougher to do things. Every utility has been frightened by California and has seen what can happen when distributors do not own generation. There are less assets being privatised and regulators want to keep overall control.? But the company is still forging ahead. Its next planned project is the development of a 650MW natural gas-fired plant in Brookhaven, Long Island. Construction is planned for the second half of 2002. International Power sees the New York area as a fertile source of new business as the state estimates that 8.600MW of new generation is needed by 2005 and only 1,700MW of new capacity is currently under construction. The application to build at Brookhaven is now being considered by the Siting Board.
All this expansion into the US has to be paid for, and International Power decided to do this via a bumper financing facility, which was signed in June this year. The deal, ANP Funding 1, involved a $1,375 rated five-year term loan is to finance the equity investments in the construction programme of five combined cycle, gas-fired plants in Massachussetts and Texas amounting to capacity of 4,029 MW. Funds were borrowed through International Power's US subsidiary American National Power (ANP) and, in an unusual step, the deal was rated ? BBB- by Standard and Poors and Baa3 by Moody's. The deal was lead arranged by Societe Generale, ABN Amro, ING, Citigroup and Deutsche Bank. ?Rating is more common in the US but the market was nervous,? reveals Barlow at International Power. The company opted to undertake the financing as one jumbo deal rather than split it into separate deals based on each individual project in order to get portfolio diversification benefits but Barlow admits that the company ?didn't get as much [benefit] as we had hoped.? The deal faced two problems. Firstly it was launched as the power shortages in California were beginning to bite and therefore suffered from some scepticism on the power sector, and secondly there have been questions raised over the reliability of the turbines that are being used in these new plants. ?International Power went to the market in the middle of the California crisis,? says Plantagie at Standard and Poors. ?They had a lot of equity investment from National Power that needed to be refinanced but I don't think it would have made much difference if it had been done individually or as one large deal.? Plantagie reckons that International Power did not benefit as much as it expected to from portfolio diversification as all the assets in the portfolio were US-based. ?Even if you have a portfolio of assets you still have to look at each one on its own merits,? he says. There does, however, seem to be very low correlation between the Texas and North-Eastern markets which was a positive aspect for the rating. But Plantagie insists that ANP Funding has a portfolio of assets that is ?heavily concentrated on one technology (GT24B turbines), one fuel (natural gas) and [relatively concentrated in] one power pool (Texas). Barlow believes that the deal was quite a hard sell as there were five sites all of which were in the middle of being built. ?A lot of retail demand disappeared because of California,? he says. The deal also had a bullet maturity but lenders were protected by cash sweeps and traps in the structure. Concern over the Alstom-built GT24B turbines remains, however, and the equipment is still not operating as planned. ?This is cutting edge technology,? says Barlow. ?The turbines have had teething problems and are not operating at their guaranteed rate yet.? The ANP Funding loan was priced at 162.5bp over Libor for years one to three and syndicated to a large group of international banks.
International Power is now back in the market with a $540 million three-year revolver to replace an existing one-year revolving bank loan facility with an availability of £715 million. It is being arranged by ING, ABN Amro, RBS and Deutsche Bank. The deal has been increased from an original $500 million. The company is also planning a A$1 billion deal for the poorly-performing Hazelwood plant in Australia. International Power has a 92% stake in the project but has had to write down £15 million of its book value. It has also raised £170 million for the UK-based 1,000MW Rugely plant that it purchased in July from TXU in a seven-year deal arranged by ING and Toronto Dominion Bank. International Power has a four-year tolling contract with TXU for Rugely and has a tolling contract with Innogy on its 500MW Deeside plant which expires next year. Following this the plant can either negotiate a new tolling contract or operate on a merchant basis. Barlow declines to say which route is favoured but is critical of the way in which NETA has operated so far.
By keeping a broad geographical spread of investment, International Power hopes to mitigate any effects of any change in conditions in any one market (see Chart 2). It keeps a high degree of operational control over its investments and raises financing at the investment level rather than the corporate level. This strategy seems to be paying off, and its interim results for the half year to June 2001 showed a 39% increase in PBIT to £152 million. International Power now expects to spend between £300 million and £400 million per year on equity investments for acquisitions and Greenfield developments over the next five years. According to Plantagie at Standard & Poor's cash coming from projects that have some form of offtake agreement will improve to 47% over the next five years from the 28% that was forecast in 2000 ? alleviating concerns over merchant risk. Despite the focus on the US, 40% of cashflow is forecast to come from Europe, and the company has signed a second agreement with Ansaldo Energia of Italy to develop up to 4,000MW of CCGT plants in Italy. The two will develop five Greenfield sites of 800MW each ? three near Naples and two in Calabria.
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