Kipevu II: an open close
Financing has closed on the $86 million Kipevu II power project in
Kenya, a tentative sign of a more independent power producer
(IPP)-friendly climate in the country. Kipevu is the first openly
bid project of its type in Kenya, and is run on a build-own-operate
(BOO) basis.
The tender process between the Kenyan government and the initial group of developers, consisting of Finnish industrial group Wartsila and CDC Group, began in 1998. Negotiations with the government and national electricity utility Kenya Power and Light Company (KPLC) were concluded in November, and at the same time the core group set about finding further partners for the project.
The power purchase agreement (PPA) is not backed by any sovereign guarantee. In part this is because KPLC is not a state-owned entity any longer and is listed on the Nairobi stock exchange. The electricity sector in the country was deregulated in 1997 to access sectorial development funds, in particular from the World Bank. Generation and distribution have been split, and the generating company KenGen recently brought the Kipevu I facility online.
Project company Tsavo Power now enters the generating sector alongside Westmont and Ibera Africa, increasing local capacity by 74MW. Kenya has been suffering from acute power shortages, and independent sources estimate the country's generating capacity deficit at 325MW. At the moment Nairobi is drawing on southern capacity, despite its greater proximity to Ugandan electricity supply and plentiful hydropower.
The PPA is for 20 years, the same length as the concession agreement. What provided the bulk of investor comfort was KPLC's operating history. It has a good record of not defaulting on international debt ? indeed CDC has been one of its creditors ? during its 40-year plus history. Moreover, it is widely regarded as having a healthy business and balance sheet.
The security package consists of an escrow account holding one month's payments ? around 140% of what is required ? and a letter of credit for a further three months. The 1.4x coverage ratio is augmented by a letter of understanding from the Kenyan government insulating the sponsors from force majeure risk.
At the same time as the conclusion of the PPA the International Finance Corporation (IFC) and Industrial Promotion Services Kenya (IPS) came in as sponsors. IPS holds 5% of the equity and the IFC a nominal 5%. IPS is a joint venture between Cinergy Global Power and the Aga Khan Fund for Economic Development, the latter of which has substantial local interests. Cinergy has a gas distribution business in South Africa and a 70% stake in Zambia's Copper Belt Energy electricity network.
The debt/equity split is 75:25, of which 70 is senior debt. A mezzanine facility, of around $4.6 million, was used to reduce the leverage and attract more debt finance. Citibank had been asked to provide senior facilities, but decided the project was not big enough to merit their attention.
It was Wartisila's contacts that brought together the new financing package. The IFC and the Deutsche Investitions- und Entwicklungs-gesellschaft (DEG) lead this $49 million senior debt. IFC's total financing consists of an equity investment of around $1.05 million, a contribution to the sub-debt of $1.4 million, and an A loan of roughly $15.1 million. The mezzanine was conducted through the IFC C loan programme.
More significantly the IFC was able to provide an umbrella for a $22.1 million syndicated B loan ? its first B loan success since the 1980s. The participants largely consist of Finnish institutions: MeritaNordbanken (recently merged with UniDanmark), Leonia Corporate Bank and WD Power Fund (controlled by FinFund), although Dutch development bank the FMO also acted as providers in both the B and C loan programmes.
CDC is also contributing to the senior debt, despite its widely publicised desire to move away from direct lending and into equity and mezzanine stakes. In this instance, however, financing plans had been put in place before the change in emphasis. Moreover, anticipating a possible conflict of interest, CDC gave up a seat with the lenders during the financing discussions, letting the IFC lead. The overall tenor of the debt is 11 years.
All of the project's account structure is offshore and dollar-denominated. The PPA is calculated in dollars, leaving currency risk with KPLC, and the supply contracts are also in dollars. DEG is the only institution not lending in dollars, although its Euro debt is thoroughly hedged. For the time being Tsavo has a 5-year supply contract with Caltex, but since Kipevu II is located in Mombasa, close to large-scale port and industrial facilities (including a refinery), the likelihood of being without a competitive supplier is slim.
The plant runs on heavy diesel fuel oil, described one source close to the deal as ?about as cheap as you can get?, and uses seven 18-cylinder Wartsila 38 engines. Wartsila will also operate and maintain the plant. At the end of the concession period there is an option to extend the PPA (if still competitive) or clear the site.
The size of Kenya's generating deficit suggests that a further large influx of sponsor cash is on its way, especially when KPLC builds up respectable PPA service history. Plans are currently advancing for a series of geothermal plants further into the country, including the $178 million Olkaria II development, which should reach financing shortly.
Kenya's desire to rid itself of dependence on hydropower is understandable, especially in the light of instability around the Lake Victoria region. Kipevu II is a peaker unit and should not suffer unduly from cheaper hydro supplies. However, the future dynamics of the regional market have yet to be set in stone, largely because of plans for an increase in interconnect capacity. AES' Bujagali Falls hydro project in Uganda (the country's largest investment to date) is one of the imponderables that will govern future deal flow. Nevertheless it is a structure that could be duplicated and improved upon throughout the region.
The tender process between the Kenyan government and the initial group of developers, consisting of Finnish industrial group Wartsila and CDC Group, began in 1998. Negotiations with the government and national electricity utility Kenya Power and Light Company (KPLC) were concluded in November, and at the same time the core group set about finding further partners for the project.
The power purchase agreement (PPA) is not backed by any sovereign guarantee. In part this is because KPLC is not a state-owned entity any longer and is listed on the Nairobi stock exchange. The electricity sector in the country was deregulated in 1997 to access sectorial development funds, in particular from the World Bank. Generation and distribution have been split, and the generating company KenGen recently brought the Kipevu I facility online.
Project company Tsavo Power now enters the generating sector alongside Westmont and Ibera Africa, increasing local capacity by 74MW. Kenya has been suffering from acute power shortages, and independent sources estimate the country's generating capacity deficit at 325MW. At the moment Nairobi is drawing on southern capacity, despite its greater proximity to Ugandan electricity supply and plentiful hydropower.
The PPA is for 20 years, the same length as the concession agreement. What provided the bulk of investor comfort was KPLC's operating history. It has a good record of not defaulting on international debt ? indeed CDC has been one of its creditors ? during its 40-year plus history. Moreover, it is widely regarded as having a healthy business and balance sheet.
The security package consists of an escrow account holding one month's payments ? around 140% of what is required ? and a letter of credit for a further three months. The 1.4x coverage ratio is augmented by a letter of understanding from the Kenyan government insulating the sponsors from force majeure risk.
At the same time as the conclusion of the PPA the International Finance Corporation (IFC) and Industrial Promotion Services Kenya (IPS) came in as sponsors. IPS holds 5% of the equity and the IFC a nominal 5%. IPS is a joint venture between Cinergy Global Power and the Aga Khan Fund for Economic Development, the latter of which has substantial local interests. Cinergy has a gas distribution business in South Africa and a 70% stake in Zambia's Copper Belt Energy electricity network.
The debt/equity split is 75:25, of which 70 is senior debt. A mezzanine facility, of around $4.6 million, was used to reduce the leverage and attract more debt finance. Citibank had been asked to provide senior facilities, but decided the project was not big enough to merit their attention.
It was Wartisila's contacts that brought together the new financing package. The IFC and the Deutsche Investitions- und Entwicklungs-gesellschaft (DEG) lead this $49 million senior debt. IFC's total financing consists of an equity investment of around $1.05 million, a contribution to the sub-debt of $1.4 million, and an A loan of roughly $15.1 million. The mezzanine was conducted through the IFC C loan programme.
More significantly the IFC was able to provide an umbrella for a $22.1 million syndicated B loan ? its first B loan success since the 1980s. The participants largely consist of Finnish institutions: MeritaNordbanken (recently merged with UniDanmark), Leonia Corporate Bank and WD Power Fund (controlled by FinFund), although Dutch development bank the FMO also acted as providers in both the B and C loan programmes.
CDC is also contributing to the senior debt, despite its widely publicised desire to move away from direct lending and into equity and mezzanine stakes. In this instance, however, financing plans had been put in place before the change in emphasis. Moreover, anticipating a possible conflict of interest, CDC gave up a seat with the lenders during the financing discussions, letting the IFC lead. The overall tenor of the debt is 11 years.
All of the project's account structure is offshore and dollar-denominated. The PPA is calculated in dollars, leaving currency risk with KPLC, and the supply contracts are also in dollars. DEG is the only institution not lending in dollars, although its Euro debt is thoroughly hedged. For the time being Tsavo has a 5-year supply contract with Caltex, but since Kipevu II is located in Mombasa, close to large-scale port and industrial facilities (including a refinery), the likelihood of being without a competitive supplier is slim.
The plant runs on heavy diesel fuel oil, described one source close to the deal as ?about as cheap as you can get?, and uses seven 18-cylinder Wartsila 38 engines. Wartsila will also operate and maintain the plant. At the end of the concession period there is an option to extend the PPA (if still competitive) or clear the site.
The size of Kenya's generating deficit suggests that a further large influx of sponsor cash is on its way, especially when KPLC builds up respectable PPA service history. Plans are currently advancing for a series of geothermal plants further into the country, including the $178 million Olkaria II development, which should reach financing shortly.
Kenya's desire to rid itself of dependence on hydropower is understandable, especially in the light of instability around the Lake Victoria region. Kipevu II is a peaker unit and should not suffer unduly from cheaper hydro supplies. However, the future dynamics of the regional market have yet to be set in stone, largely because of plans for an increase in interconnect capacity. AES' Bujagali Falls hydro project in Uganda (the country's largest investment to date) is one of the imponderables that will govern future deal flow. Nevertheless it is a structure that could be duplicated and improved upon throughout the region.
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