The Mexican Tuxpan #3 & #4 power project is a gas-fired power project that reached financial close on 26 March 2003. The project facility, which consists of four 2 x 250 MW units, commenced operations on 27 May, 2003. Total project costs were US$600 million. The financing was achieved through a multi-tranche structure involving both Japanese and Spanish export credit agencies and insurance providers together with a syndicate of commercial banks.

Jones Day advised the SPV Fuerza Energia de Tuxpan, S.A. de C.V (FET) and the project sponsor Union Fenosa International, one of Spain's largest private sector utilities. The project was constructed on an EPC basis by Mitsubishi Heavy Industries (MHI).

Location 

Municipality of Tuxpanin the state of Veracruz, 250 kilometres northeast of Mexico City

Background

Until 1992, the Mexican electricity sector was the exclusive reserve of the state, run by the Federal  Electricity Commission, Comision Federal de Electricidad, (CFE). Following the passing of the Electricity Law in 1992 the private sector was allowed to generate electricity commercially for the first time. Based on these reforms the government expects that demand for electricity in Mexico will grow 6 per cent per annum through to 2010.

To meet this demand Mexico’s President Vicente Fox has actively encouraged private participation through an IPP programme of approximately15 projects established in 1995. The Tuxpan #3 & #4 project is in line with such government policy and is expected to contribute to the stable power supplies in Mexico.

Investment climate

The Mexican government has set economic targets for 2010 that require a substantial increase in generating capacity. According to recent economic figures, in order to create 1.35 million jobs the government has calculated that the country requires a 7 per cent annual growth rate in GDP. This requires 9 per cent annual growth in the generating capacity. Projected annual growth rates of 6 per cent indicate that Mexico will need significant investment in the sector to satisfy the shortfall.

In 1995 commercial activities in the Mexican energy sector opened to private investors and an estimated 15 IPP’s were earmarked for concessions. The Tuxpan project is the 13 th landmark project approved by the government.

The project

The Tuxpan #3 & #4 power project consists of the construction, operation and maintenance of two combined-cycle power blocks on a BOO basis. Each block generates 500 MW so the overall output is 1000 MW.

The plant consists of:

• four sets of upgraded M501F gas turbines• two sets of steam turbines, • four sets of HRSGs (heat recovery steam generators) with higher than conventional performance levels  due to exceptionally low NOx emissions Union Fenosa is the owner of this plant and supplies the electricity through CFE's grid. MHI uses the same design philosophy for Tuxpan #3 & #4 as the previous Tuxpan 2 and Altamira 2 combined cycle power plants. The plant is fired with gas from PGPB, a subsidisry of Pemex, the state-run petroleum company of Mexico. Gas will be sold to the CFE under a 25-year PPA.

The players

• Tuxpan #3 & #4 has a Spanish-Japanese flavour. Spain’s involvement comes through the sponsor, Union Fenosa International (UFI). Their parent is Union Fenosa (SA), the Spanish entity. The sponsor for the deal for all purposes was UFI.
•  Instituto de Credito Oficial (ICO), the Spanish public financial institution participates as a lender. Participation of JBIC and ICO adds the significant value to the project as an international cooperative project.
• The electricity industry is regulated by the Comision Reguladora de Energia (CRE) - a body that regulates both public and private operators in Tuxpan’s case meaning power generation and gas sectors. Pemex supplies the fuel for the project through CFE’s establishment of the San Fernando pipeline.
• Mexico’s Federal Electricity Commission (Comision Federal de Electricidad (CFE)) will purchase the power under a 25-year PPA. This will be paid for by adjustment of public electricity tariffs.

Financing

Total project costs were US$600 million and divided as follows: US$170 million equity came from the sponsor Union Fenosa International  (UFI), a Spanish company.

On the senior debt side, a direct loan was offered by JBIC for US$192 million. The final tranche of the direct loan was offered by Spanish public financial institution Instituto Credito Oficial (ICO), for US$110 million. There was also a commercial bank tranche that had political risk coverage by Nippon Export Investment Insurance for US$128 million.

The ICO loan had its own coverage by the Spanish Export Credit agency called CESCE. The debt equity ratio was estimated at  72:28. Deutsche Bank and Bank of Tokyo Mitsubishi acted as lead arrangers.

Legal issues

The 1992 Electricity Act permits Mexico’s IPP program. Richard Puttre of Jones Day advised the sponsor UFI and SPV, Fuerza Energia De Tuxpan. He was involved in the project contracts, construction issues and operation contracts. Mexican local counsel Lopez-Velarde provided advice on local permits and local legislation.

The concession was awarded to Fuerza in 2001 and CFE gave them the PPA, a public document outlining the terms of the agreement. The sponsors clarified some points on the PPA. Mexican law says that these terms couldn’t be changed after the amendments were accepted. Mr Puttre gave an overview of the kinds of PPA terms concerning the sponsor: “The receipt of money from the CFE, the timing of the payments for the gas, and other technical areas such as the financing of the whole project."

Under the contracts the financing documents were done in US dollars, while the PPA and fuel supply agreement are in Mexican pesos.

Risks

A critical issue in the project transaction was the fuel risk; that there would not be an adequate source of fuel readily available for the project. “Prior to the Tupxan #3 & #4 project CFE was always the fuel supplier, so they had the fuel risk,” explained Mr Puttre. “In the Tuxpan transaction, the sponsor, UFI had to accept the fuel risk. There was the issue of whether pipelines could bring the fuel and whether in fact the fuel supplies were readily available.”

A deal was reached between CFE and UFI. CFE assumed the infrastructure risk by building the San Fernando pipeline that is already in operation and will alleviate the fuel supply issues for projects in the Tuxpan region.

In order to further mitigate fuel supply risks, UFI set some extra terms and conditions for CFE. “In certain circumstances, the CFE will agree to make certain payments during periods of fuel supply failures. The fuel supply agreement also has penalties if they don’t deliver, and minimal amounts that the project companies require with typical provisions,” said Mr Puttre. 

UFI also faced market risk of non-returns on capital. Both the Tuxpan 2 and Altamira IPP's shared this same risk and projects. Tuxpan 3 & 4 mitigated this risk by acquiring guarantees by credit agencies.

In fact, every single IPP program of CFE has involved a multilateral insurance agency such as JBIC. The involvement of such agencies lowers the risk and stabilises the project: “The commercial banks are involved in these deals, but there’s never been a financing yet that’s been purely commercial bank financing,” said Mr Puttre.

The commercial banks in the Tuxpan #3 & #4 are covered by Nippon, so if there’s a government default in Mexico the banks can turn to the political risk insurance provider. Tariffs in the sector are heavily subsidised, with industrial tariff rates at 4.4 cents/ kWh and residential rates are 4.8 cents/ kWh (1998). A competitive structure is likely to be established whereby private investment will be encouraged without the need for federal government guarantees.

Market Outlook

While neither CFE nor Pemex privatisation is likely in the near term, the Fox Administration has plans for a certain degree of rationalizing and re-organizing of CFE and Pemex, as well as a continuation of entry of private parties into the energy sector.

A number of firms from industrialized countries such as Japan have actively invested in Mexican power projects with the utilization of financing from public financial institutions.  Fox’s government has set some strong GDP targets for the country for 2010. The electricity sector plays a major role here.

Through international cooperation, the introduction of amendments to PPA’s, and the establishment of strong working relationships with Japanese companies and export credit agencies, Mexico is moving towards the creation of an investor-friendly atmosphere. Due consideration must be made however, to the future roles of CFE and Pemex. IJ