ABN Amro and Deutsche co-arranged and syndicated a $277.5 million loan for the deal in December 1999. Market sources say the syndication was substantially oversubscribed.

Financing for the project was composed of a $75 million A loan provided by the Inter-American Development Bank (IDB), while commercial banks arranged a $102 million B loan. French export credit agency, COFACE, additionally provided a $100 million tranche with political risk insurance from the agency. The financing also includes $73.192 million in equity.

"There's certainly an awful lot of CFE paper out there, so one of the draws of this deal was the fact that it was a Cemex offtake and the other thing is that the rationale behind the project was flawless," comments a banker close to the transaction.

According to reports, pricing for the B-loan will be 225 basis points over Libor for years one through three, 262.5 bp over Libor for years four to six, 300 bp over Libor for years seven to 10, and 337.5 bp over Libor from then on. Both the B-loan and COFACE tranche have 14-year maturities. Pre-completion, the COFACE tranche will contain a spread of 185 bp over Libor, dropping to 75 bp upon project completion.

At the time Project Finance went to press, TEG had not closed officially, however bankers close to the deal expect a closing this month, a year and a half after the project was announced. The final stage financing involves collateral security documentation and completion of the conditions precedent to disbursement.

TEG, located at a Cemex facility near Tamuin, in the central Mexican state of San Luis Potosi, will generate and sell electricity to 12 Cemex-owned cement plants in Central and Northern Mexico under a 20-year power purchase agreement.

"One of the most important components of cost with regard to making cement is the use of energy. So it makes a lot of sense to have a plant whose output is being used to fuel two-thirds of the plants Cemex has in Mexico," comments a spokesperson at Cemex. Because Cemex's cement plants are spread throughout the country, TEG will use CFE's distribution network to transfer electricity where it is needed.

Surplus power from TEG will be sold to CFE, the state-run electricity utility at a competitive tariff. The plant is expected to be the lowest marginal cost producer among base load generation plants in Mexico and the lowest marginal cost producer for in Mexico after hydroelectric facilities.

Pemex, Mexico's state-run oil company, will provide a petroleum coke fuel for the plant for 20-years. As Mexico changes its energy matrix, using less diesel and other heavy oils, by retrofitting a number of refineries to produce lighter grade crude products they are left with a lot of petroleum coke. The pet-coke that will be used to fire TEG is a by-product from the Cadereyta Refinery.

Industry sources note that the fuel far is cheaper than gas and that the sale offers Pemex an efficient way to dispose of refuse in an environmentally sound manner.

"We thought the credit risk was manageable and controlled by a strong longterm PPA, an extremely strong credit in Cemex - a very well run and profitable organization backing the purchase of the power," comments Robert Karheiser, senior vice-president for Latin America, Sithe Energies in New York.

"On the political side we see Mexico under the NAFTA umbrella, the stability of their economic policy over the last year and over the past decade, and we also see a low political risk from an expropriation perspective," adds Kartheiser.

Mexico's moves toward limiting government intervention in the electric utility sector as well as CFE's efforts to privatize the power sector are also encouraging to sponsors.

"Because of Mexico's proximity and economic importance to the US, we also see Mexico in general as quote, too big to fail," Kartheiser continues. "$17 billion came in to Mexico from the US Treasury in 1995 at the drop of a hat when there were problems. Plus this transaction has the IADB and COFACE lending and mitigating risks, and it's helpful for equity and for the deal."

At the IADB in Washington, project finance loan officer, Adriana de Aguinaga explains the rationale for participating in TEG from a multilateral lending perspective. "What we are doing is to contributing in order to alleviate the electricity crisis in Mexico by adding much need installed capacity and if the program of CFE to launch bids for independent producers is still not enough, then the private sector takes the roll of developing power plants," says Aguinaga.

"Our role is really to seek private participation in these infrastructure projects. It's in a process now where we support CFE in their efforts to develop IPPs but we also support the private sector."

Market observers predict a wave of the inside-the-fence transactions modelled on TEG over the next several years.

Aguinaga says the IDB is currently reviewing two other projects, Bajio and Monterey III and will likely support, sister facility, TEG II, an inside-the-fence plant selling power to Mexican mining company, Pinoles. The 250MW TEG II power plant at the same site, is expected to have lower project costs because of some economies of scale, say market sources. As in TEG, the new plant for Pinoles is being sponsored by Sithe, which will build, operate, and maintain the plant and Alstom, serving in an engineering and procurement capacity. Financing for the project is projected for the second half of the year.

CFE has announced its intention to increase capacity in Mexico's electricity grid by 13,000MW over the next six years at a cost of approximately $25 billion.