When AES bought out the parties that were to develop a 600MW coal-fired power plant in Bulgaria back in the late 1990s it didn't expect it would be another six years before the financing would be closed

But then again, few would have predicted the wave of uncertainties thrown up by the combination of a 2002 slump in world energy markets, together with changes in the Bulgarian regulatory framework, necessitating a series of amendments to agreements that were thought to have been signed and sealed.

Now a market up-turn has moved the financing and legal arrangements for the project forward, while the prospect of EU membership has significantly influenced the shape of the project. Off-take and supply agreements and a government support letter (GSL) have all been finalised and €825m (US$996m) in senior debt arranged.

All that remains, is for the power plant to be constructed.

Background

At the end of the 1990s, AES purchased a major stake in a consortium which had won a series of tenders to develop the Maritsa East 1 plant in SE Bulgaria.

Over the following two years, a PPA was set up with the state electricity board - NEK - and the EBRD got involved in the project which looked set to be up-and-running by 2007 at the latest.

But difficulties sourcing the equity meant that it was not until December 2004 that the current mandated lead arrangers - BNP Paribas, ING and Calyon - came on board.

The following year - 2005 - was marked by a number of updates and changes to the supply and off-take agreements, as well as the GSL, to reflect internal reforms including the 2003 energy law.

Moving forward - the Brussels lure

With its ex-Soviet bloc neighbours acceding to the EU in May 2004, Bulgaria has become increasingly eager to join the party. In anticipation of this, it will  carry out the kind of liberalisation of the electricity market being rolled out elsewhere across the union.

The GSL was ammended to provide assurances that the integrity of the PPA will be maintained even as Bulgaria establishes a liberalised electricity market in line with new EU standards.

What the bankers wanted - and didn't get - was a government financial guarantee for the off-take agreement to cover risks that might be caused by the unbundling of the NEK.

What they got was a 'performance undertaking', which gives the players recourse to international arbitration, further backed by the political risk guarantees on the covered facilities.

Why no explicit financial commitment from the state, but willingness to lock itself into regulations which effectively amount to the same thing?

The Brussels booty rears its head again. Keen to be a model candidate for accession, the reformist government is not taking any chances on the transparency of its balance sheet - power projects which are effectively subsidised wouldn't look good to the Brussels bureaucrats.

But Sofia knows that it needs to get Maritsa onstream sooner rather than later. Although the country has an installed capacity of some 12,228MW, actual available capacity is 1,500MW lower.

And while GDP continues to grow, pushing up energy demand - capacity will continue to drop. The final two units of the Kozloduy nuclear facility - which provides about 23 per cent of its total output - are in the process of being decommissioned - again to meet EU accession requirements.

Continuing this spirit of cooperation with the sponsors, the government - through the NEK - has committed itself to connecting the plant to the grid. Although AES will foot the bill, they know that it is being managed by national experts. Government departments have also enabled land acquisitions for the construction of the plant and disposal of the ash waste product.

The Project

AES-3C Maritsa East 1 EOOD (ME1) - a wholly-owned subsidiary of AES Corporation - is the sponsor of a 2x 300MW net lignite plant at Galabovo, 270km south east of the capital, Sofia, and lying close to the Turkish border.

At full output (670MW) the plant will operate at a gross fuel efficiency of 39 per cent.

ME1 has appointed Alstom Power Generation and Alstom Power Boiler as turnkey EPC contractors on the site - which is adjacent to the Brikel facility - a lignite to charcoal factory.

Alstom will install flue-gas desulphurisation (FGD) technology and other emissions control systems, so that the plant is in line with EU regulations on sulphur dioxide and nitrogen oxide emissions. The plant is expected to be in full commercial operation by mid-2009.

Power will be sold under a 15-year PPA  to NEK, which has a total all-in average nominal price estimated at €0.532/kWh (US$0.642/kWh). An agreement for the same term has been set up with Mini Maritsa Iztok EAD (MMI) to supply lignite from the adjacent mines of the Troyanovo Maritsa East mines complex.

Financing

Financial close was reached on 7 December 2005 - and when the numbers were done Maritsa emerged as the largest FDI the south east European country has ever seen.

The total project costs of €1.15bn (US$1.39bn) are being financed on a 70:30 debt: equity basis. The senior debt facilities come to €825m (US$996m) and are split between commercial banks, multilateral agencies, ECAs and local banks.

EBRD, Calyon, ING and BNP acted as the MLAs, with EBRD putting up €114m (US$138m) as an A-loan - €18m (US$22m) of which is syndicated to the Black Sea Trade and Development Bank - and €228m (US$275m) as a B-loan.

The commercial banks are underwriting €237m (US$286m) each. COFACE is providing a €102m (US$123m) covered facility, HERMES a €200m (US$242m) covered facility and MIGA a €65m (US$79m) covered facility.

There is also a €48m (US$58m) local branch uncovered facility, a €48m (US$58m) debt service reserve account letter of credit and a €20m (US$24m) working capital facility.

The EBRD loans are priced at 185bps above EURIBOR, rising to 230bps. The pricing on all other facilities vary and the underwriters were tight-lipped on the matter, but we are looking at a cap of 220bps on the highest risk facilities, with the other tranches being 'progressively lower' according to a source close to the deal.

All loans will have a two-step increase attached over time, have 16-year terms from the date of the first drawdown (or 16.5 years from signing) and a 4-year grace period.

Syndication has yet to be finalised. It is likely to start at the beginning of February and be completed by early March. It is designed to be 'quick and neat, a one-step approach to the market' according to David Stearns at Calyon.

Conclusion

The biggest FDI in the history of Bulgaria, Maritsa East 1 is Bulgaria's first baseload IPP and a testament to government commitment to open the power sector to private investment.

If it is a success then it may prove to be a model for future power projects in the country. Deals may be finalised with increasing frequency as the economy expands and the need to overcome serious fuel poverty is persistently underscored.

While it is using dirty lignite as a fuel, this is preferred by the Bulgarians as it is an indigenous fuel source and EU pressure has meant that FGD technology will be installed, thus improving the plant's environmental credentials.

The project at a glance