Beating the Competition
"We were three months away from financial close when the Russian
financial crisis exploded and that didn't kill the project," says
Alberto Cibils, president and project director for the AES Paraná
project in Buenos Aries. "Then we were close to signing the deal
again when Brazil exploded but that didn't kill the project either.
Paraná's financing structure is solid enough to survive both of
these events."
Financing for the $448 million AES Paraná project, the first true merchant power plant in Argentina to be funded on a non-recourse basis, signed at the end of June. Raising $214 million in financing from the Inter-American Development Bank (IADB) and Jexim ? the first time the two institutions have worked together on a private deal since they signed a co-financing agreement ? the deal has overcome some particularly tough market conditions. To ensure profitability the structure had to be right. Argentina has become one of the most competitive power markets in Latin America and to stay ahead of the game, power generators need ever more efficient technology.
Plans to develop the 826MW natural gas-fired combined-cycle power plant emerged shortly after AES and PSEG acquired the 650MW San Nicolás power project. The bulk of Argentina's ambitious power sector privatization was carried out between 1990 and 1993. AES and PSEG won the San Nicolás concession ? the third largest plant of its type at the time ? in 1993. In an effort to avoid the complications that had occurred when Chile privatized its power assets in the mid 1980s, the Argentine government placed restrictions on the ownership of generation assets in the country. In contrast with Chile, which has only two main operators and transmission and generation assets are held by the same groups, the Argentine government prevents any one group owning more than 15% of generation capacity. In turn, the Argentine transmission operator is prevented from owning generation assets.
Those companies which won power generating concessions were nearly guaranteed success. Before privatization Argentina's power generation assets were split between hydro (45%), thermal (45%) and the remainder nuclear. Says Cibils: "Thermal units were operating at 40% to 45% availability before privatization ? a disaster. But two to three years after the plants were privatized, this was redressed and the availability rose to 70% to 80%. That caused a major drop in power prices."
Prices a MegaWatt hour have halved since the power market opened. Power developers usually expect the market to take a few years to settle down but a drop from around $50 a MegaWatt hour to $25 to $28 dollars a MegaWatt hour is still impressive. "When it started almost no-one could have predicted how truly competitive the market would become or whether it work," says Cibils.
In such environment one of the best ways to beat the competition is to introduce more efficient technology. AES and PSEG responded by proposing a new project ? Paraná.
Initial plans for Paraná were outlined in 1996 and Cibils says that very early on the sponsors decided to involve the IADB. Says Cibils: "We wanted a multilateral bank because we knew that we wanted to do this project without any power-purchase agreements. We understand the spot market but we felt that if we were to project finance a pure merchant power project in an emerging market we would need to mitigate the political risk ? at the very least." The IADB, together with the World Bank, had already been involved in the restructuring of the Argentine power sector and it was a logical step for them to be involved in financing a power project.
Says a spokesperson for the IADB in Washington DC: "We were interested in the project from a development perspective because it will provide low cost and environmentally friendly energy within an increasingly competitive electricity market. We also knew that through our B-loan facility the IADB would act as the catalyst to attract commercial banks. Our presence facilitated their participation in the deal."
Jexim joined the deal on the back on the back of Mitsubishi and Nichimen's fixed priced turnkey construction contract for the project. While relationship banks for the sponsors ? ING, WestLB, BoT-Mitsubishi, KBC, HypoVereinsbank and MeesPierson/Generale ? joined the deal on the B-loan.
Significant changes in the financial markets have had an effect on the deal's structure and while the banks were locked into a 12.8 year tenor, the margin probably at least 100bp than higher than it might have been when the project was first conceived. Perhaps this is irrelevant now. What the deal has done, however, is indicate to international lenders that the economic and political environment in Argentina is enticing commercial banks back to the country
AES Paraná
Location: San Nicolás, Province of Buenos Aires, Argentina
Description: The project involves the construction of a 826MW natural-gas fired combined cycle power plant located next to the San Nicolás power plant, which is also owned by AES and PSEG. Mitsubishi and Nichimen hold the fixed priced turnkey construction contract. A 500kV transmission line and gas pipeline will also be built. The project is structured to run as a base load facility for the interconnected grid and its commercial operation is expected to begin in the third quarter of 2001.
Half of the gas for the project will be provided under a 14-year contract from a gas broker and the remainder will be provided by Total. Power from the plant will be sold into the Argentine spot market.
Cost: $448 million
Sponsors: AES Paraná (66.67%) and PSEG Global (33.33%)
Financing: The $214 million, 12.8-year non-recourse financing is being provided by the Inter-American Development Bank (IADB) and Jexim. The average margin is 450 basis points over Libor, although this rises by a quarter of percentage point on the A-loan.
The facility is split into two tranches: Tranche A is a $112 million A-B loan provided by the IADB facility. The $52 million B loan is syndicated to ING, WestLB, BoT-Mitsubishi, KBC, HypoVereinsbank and MeesPierson/Generale Bank. Tranche B is a $102 million export credit facility provided by Jexim, commercial financial institutions and Japan's Miti.
Lawyers: Vincent & Elkins, Milbank; Hadley & McCloy and Latham & Watkins
Financing for the $448 million AES Paraná project, the first true merchant power plant in Argentina to be funded on a non-recourse basis, signed at the end of June. Raising $214 million in financing from the Inter-American Development Bank (IADB) and Jexim ? the first time the two institutions have worked together on a private deal since they signed a co-financing agreement ? the deal has overcome some particularly tough market conditions. To ensure profitability the structure had to be right. Argentina has become one of the most competitive power markets in Latin America and to stay ahead of the game, power generators need ever more efficient technology.
Plans to develop the 826MW natural gas-fired combined-cycle power plant emerged shortly after AES and PSEG acquired the 650MW San Nicolás power project. The bulk of Argentina's ambitious power sector privatization was carried out between 1990 and 1993. AES and PSEG won the San Nicolás concession ? the third largest plant of its type at the time ? in 1993. In an effort to avoid the complications that had occurred when Chile privatized its power assets in the mid 1980s, the Argentine government placed restrictions on the ownership of generation assets in the country. In contrast with Chile, which has only two main operators and transmission and generation assets are held by the same groups, the Argentine government prevents any one group owning more than 15% of generation capacity. In turn, the Argentine transmission operator is prevented from owning generation assets.
Those companies which won power generating concessions were nearly guaranteed success. Before privatization Argentina's power generation assets were split between hydro (45%), thermal (45%) and the remainder nuclear. Says Cibils: "Thermal units were operating at 40% to 45% availability before privatization ? a disaster. But two to three years after the plants were privatized, this was redressed and the availability rose to 70% to 80%. That caused a major drop in power prices."
Prices a MegaWatt hour have halved since the power market opened. Power developers usually expect the market to take a few years to settle down but a drop from around $50 a MegaWatt hour to $25 to $28 dollars a MegaWatt hour is still impressive. "When it started almost no-one could have predicted how truly competitive the market would become or whether it work," says Cibils.
In such environment one of the best ways to beat the competition is to introduce more efficient technology. AES and PSEG responded by proposing a new project ? Paraná.
Initial plans for Paraná were outlined in 1996 and Cibils says that very early on the sponsors decided to involve the IADB. Says Cibils: "We wanted a multilateral bank because we knew that we wanted to do this project without any power-purchase agreements. We understand the spot market but we felt that if we were to project finance a pure merchant power project in an emerging market we would need to mitigate the political risk ? at the very least." The IADB, together with the World Bank, had already been involved in the restructuring of the Argentine power sector and it was a logical step for them to be involved in financing a power project.
Says a spokesperson for the IADB in Washington DC: "We were interested in the project from a development perspective because it will provide low cost and environmentally friendly energy within an increasingly competitive electricity market. We also knew that through our B-loan facility the IADB would act as the catalyst to attract commercial banks. Our presence facilitated their participation in the deal."
Jexim joined the deal on the back on the back of Mitsubishi and Nichimen's fixed priced turnkey construction contract for the project. While relationship banks for the sponsors ? ING, WestLB, BoT-Mitsubishi, KBC, HypoVereinsbank and MeesPierson/Generale ? joined the deal on the B-loan.
Significant changes in the financial markets have had an effect on the deal's structure and while the banks were locked into a 12.8 year tenor, the margin probably at least 100bp than higher than it might have been when the project was first conceived. Perhaps this is irrelevant now. What the deal has done, however, is indicate to international lenders that the economic and political environment in Argentina is enticing commercial banks back to the country
AES Paraná
Location: San Nicolás, Province of Buenos Aires, Argentina
Description: The project involves the construction of a 826MW natural-gas fired combined cycle power plant located next to the San Nicolás power plant, which is also owned by AES and PSEG. Mitsubishi and Nichimen hold the fixed priced turnkey construction contract. A 500kV transmission line and gas pipeline will also be built. The project is structured to run as a base load facility for the interconnected grid and its commercial operation is expected to begin in the third quarter of 2001.
Half of the gas for the project will be provided under a 14-year contract from a gas broker and the remainder will be provided by Total. Power from the plant will be sold into the Argentine spot market.
Cost: $448 million
Sponsors: AES Paraná (66.67%) and PSEG Global (33.33%)
Financing: The $214 million, 12.8-year non-recourse financing is being provided by the Inter-American Development Bank (IADB) and Jexim. The average margin is 450 basis points over Libor, although this rises by a quarter of percentage point on the A-loan.
The facility is split into two tranches: Tranche A is a $112 million A-B loan provided by the IADB facility. The $52 million B loan is syndicated to ING, WestLB, BoT-Mitsubishi, KBC, HypoVereinsbank and MeesPierson/Generale Bank. Tranche B is a $102 million export credit facility provided by Jexim, commercial financial institutions and Japan's Miti.
Lawyers: Vincent & Elkins, Milbank; Hadley & McCloy and Latham & Watkins
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