US-type deal goes cross border
Financing on the $815 million AES Puerto Rico power plant will go
into general syndication shortly. The financing, a mix of bank
debt, institutional and long-dated tax-exempt bonds backs a plant
held tight by the AES-favoured long-term contracts.
AES is the second independent power project in Puerto Rico, which has commonwealth status within the United States. The first, the EcoElectrica plant, was sponsored by Edison Mission and Kennetech (later bought out by Enron) and ran on liquefied natural gas. Its $775 million financing was put together in 1997 using a package of long-dated debt arranged by Paribas and ABN Amro. As a cogen facility tied to a desalination plant it is difficult to assess its immediate impact on the Puerto Rican market, given it has only been operating since March.
AES has decided to use cogen technology for the Puerto Rico plant, and therefore exploit the presence of Philips Petroleum subsidiary Philips Core. Philips operates a petrochemical plant and will be the offtake for the facility's steam.
The immediate issue for sponsors AES is not so much the existence of independent rivals but the quality of much of the rest of the island's capacity. Puerto Rico's electricity has been generated historically using heavy fuel oil, readily available in the Caribbean but requiring a formidable amount of treatment. Generating capacity is run-down and some way from new environmental standards likely to hit other parts of the US. The ideal situation, in other words, for AES to move in and dominate the market.
The plant is a base-load facility that will sell its output to the quasi-municipal Puerto Rico Electrical Power Authority (PREPA) under a 25-year offtake contract. The AES plant has been approved on the basis of a forecast deficit in capacity, with demand growing at 3.4% per year and uses coal shipped in from abroad. The plant is circulating fluidized bed facility and marks the arrival to Puerto Rico of solid fuel.
If there is a snag it lies with the potential effect of unstable fuel arrangements on the plant's operating costs. In merchant markets the usual AES tactic is to install tolling agreements, but the coal supply here is contracted only for a minimum 12 months, with the requirement of a minimum of a month's supply at the plant. It is also likely that work will be required on the site's Puerto Las Mareas loading terminal to enable it to handle bigger loads.
This risk is lessened by the ability to transmit any price volatility to PREPA, as well as the plant's ability to source (presently very cheap) coal from a number of Latin producers. Further additions of coal capacity are unlikely and the plant is well within planned federal clean air legislation. The technology is ABB combustion boilers, with which AES is familiar, installed on an EPC basis by Duke/Fluor Daniel and covered by construction guarantees.
Moody's Investors' Service rated the project Baa2 and Fitch IBCA (now Fitch) BBB. This is a reflection of the fact that whilst relatively heavily leveraged, at 10%, it carries hefty debt service enhancements, including dividend restrictions and an interest only debt service reserve.
AES and its advisors Credit Lyonnais and TD Securities put together a structure that aims to take into account the length of the power contract and a good fit with revenue streams. The most interesting part of the structure is the $155 million of tax-exempt revenue bonds, issued through the Puerto Rico Industrial, Tourism, educational, Medical and Environmental Pollution Control Facilities Financing Authority's Revenue Bonds scheme. The plant has clearly impressed with its environmental credentials, and AES has discovered a suitably low-cost source of financing. A further $40 million, however, have not managed to escape the tax man's attentions.
The bonds, however, do not amortize until around 21 years into the financing, so that the bank debt has effective first call on revenue. This debt has been arranged and underwritten by Credit Lyonnais, TD Securities and ABN Amro, and breaks down into three tranches. The first and second are 15-year and 18-year term loans sold down into the bank market, with the third, a 20-year piece, marketed to the institutions. Sources close to the deal say that the co-arranging stage has gone well, in a market where merchant facilities are sorely testing the exposure appetite of US investors.
Linda Lavin at TD Securities says: ?We viewed it as a US deal, and we think that the markets did too, as you'd expect with a triple-B rating?. Despite their effective structural subordination, the pricing on the tax-exempt bonds is apparently too attractive to make resistance to manager Goldman Sachs' charms viable.
Construction on the plant began in November 1999, consuming much of AES' $80.7 million equity injection. About 60% of the financing, however, is slated to go towards paying off the EPC, which should be carried out within 31 months. About $93 million will have to go into the plant's development costs before this point.
PREPA has been aggressive about the plant meeting availability targets and while AES' record has been good (and it would be extremely surprising if the plant did not stay high up on the dispatch curve), buy-back penalties are in place that would not entirely compensate creditors.
AES are rapidly building up a core competence of exploiting tax savings and aggressively searching for coal contracts (witness last year's Drax coup, albeit in a vastly different market). Whilst bankers draw comparisons with 1998's $800 million Southland acquisition it is the ingenuity and flexibility of more recent deals that the sponsor drew on in the Caribbean commonwealth.
AES is the second independent power project in Puerto Rico, which has commonwealth status within the United States. The first, the EcoElectrica plant, was sponsored by Edison Mission and Kennetech (later bought out by Enron) and ran on liquefied natural gas. Its $775 million financing was put together in 1997 using a package of long-dated debt arranged by Paribas and ABN Amro. As a cogen facility tied to a desalination plant it is difficult to assess its immediate impact on the Puerto Rican market, given it has only been operating since March.
AES has decided to use cogen technology for the Puerto Rico plant, and therefore exploit the presence of Philips Petroleum subsidiary Philips Core. Philips operates a petrochemical plant and will be the offtake for the facility's steam.
The immediate issue for sponsors AES is not so much the existence of independent rivals but the quality of much of the rest of the island's capacity. Puerto Rico's electricity has been generated historically using heavy fuel oil, readily available in the Caribbean but requiring a formidable amount of treatment. Generating capacity is run-down and some way from new environmental standards likely to hit other parts of the US. The ideal situation, in other words, for AES to move in and dominate the market.
The plant is a base-load facility that will sell its output to the quasi-municipal Puerto Rico Electrical Power Authority (PREPA) under a 25-year offtake contract. The AES plant has been approved on the basis of a forecast deficit in capacity, with demand growing at 3.4% per year and uses coal shipped in from abroad. The plant is circulating fluidized bed facility and marks the arrival to Puerto Rico of solid fuel.
If there is a snag it lies with the potential effect of unstable fuel arrangements on the plant's operating costs. In merchant markets the usual AES tactic is to install tolling agreements, but the coal supply here is contracted only for a minimum 12 months, with the requirement of a minimum of a month's supply at the plant. It is also likely that work will be required on the site's Puerto Las Mareas loading terminal to enable it to handle bigger loads.
This risk is lessened by the ability to transmit any price volatility to PREPA, as well as the plant's ability to source (presently very cheap) coal from a number of Latin producers. Further additions of coal capacity are unlikely and the plant is well within planned federal clean air legislation. The technology is ABB combustion boilers, with which AES is familiar, installed on an EPC basis by Duke/Fluor Daniel and covered by construction guarantees.
Moody's Investors' Service rated the project Baa2 and Fitch IBCA (now Fitch) BBB. This is a reflection of the fact that whilst relatively heavily leveraged, at 10%, it carries hefty debt service enhancements, including dividend restrictions and an interest only debt service reserve.
AES and its advisors Credit Lyonnais and TD Securities put together a structure that aims to take into account the length of the power contract and a good fit with revenue streams. The most interesting part of the structure is the $155 million of tax-exempt revenue bonds, issued through the Puerto Rico Industrial, Tourism, educational, Medical and Environmental Pollution Control Facilities Financing Authority's Revenue Bonds scheme. The plant has clearly impressed with its environmental credentials, and AES has discovered a suitably low-cost source of financing. A further $40 million, however, have not managed to escape the tax man's attentions.
The bonds, however, do not amortize until around 21 years into the financing, so that the bank debt has effective first call on revenue. This debt has been arranged and underwritten by Credit Lyonnais, TD Securities and ABN Amro, and breaks down into three tranches. The first and second are 15-year and 18-year term loans sold down into the bank market, with the third, a 20-year piece, marketed to the institutions. Sources close to the deal say that the co-arranging stage has gone well, in a market where merchant facilities are sorely testing the exposure appetite of US investors.
Linda Lavin at TD Securities says: ?We viewed it as a US deal, and we think that the markets did too, as you'd expect with a triple-B rating?. Despite their effective structural subordination, the pricing on the tax-exempt bonds is apparently too attractive to make resistance to manager Goldman Sachs' charms viable.
Construction on the plant began in November 1999, consuming much of AES' $80.7 million equity injection. About 60% of the financing, however, is slated to go towards paying off the EPC, which should be carried out within 31 months. About $93 million will have to go into the plant's development costs before this point.
PREPA has been aggressive about the plant meeting availability targets and while AES' record has been good (and it would be extremely surprising if the plant did not stay high up on the dispatch curve), buy-back penalties are in place that would not entirely compensate creditors.
AES are rapidly building up a core competence of exploiting tax savings and aggressively searching for coal contracts (witness last year's Drax coup, albeit in a vastly different market). Whilst bankers draw comparisons with 1998's $800 million Southland acquisition it is the ingenuity and flexibility of more recent deals that the sponsor drew on in the Caribbean commonwealth.
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.