Gebze gas-fired combined cycle merchant power project in Turkey reached financial close on 12 July 2011 under the auspices of the Turkish power plant developer Unit Investment and Italian energy company Ansaldo Energia. 

The project is a trailblazer in the region for a number of reasons. The borrowers and lenders had to get comfortable with the risk associated with merchant projects through some innovative conditions. A diversifying natural gas supply market posed new market competition challenges and the project was – perhaps most notably – a limited-recourse financing in a market which has traditionally seen power projects financed on corporate balance sheets.

Project financing

The financing for the US$1.08 billion project featured:

• A 14-year term loan of US$700 million, arranged by Türkiye Garanti Bankası, Türkiye Iş Bankasi, T. Vakıflar Bankası, and Yapi ve Kredi Bankasi. The term loan has a grace period during construction (3 years) plus an 11-year amortisation profile
• A letter of credit guarantee facility of US$80 million also provided by the four lending banks
• Sponsor equity of US$300 million.

The pricing and amortisation structure of the debt has not been disclosed, but similar corporate-financed projects in the region for gas-fired assets in recent years have seen margins of up to 600bps. However, a source close to the project company says that the borrowers achieved keen pricing on Gebze.

The project used the first real limited-recourse financing for such an asset; previous similar-sized plants in Turkey have all been financed with full recourse to the parent company, including previous deals by Unit Investment.

Project scope

The project involves design, procurement, construction and operation of the 865MW natural gas-fired combined cycle power plant. The facility will be constructed at the Kocaeli-Gebze (IMES) Organised Industrial Zone near Istanbul, Turkey.

The sponsor has a robust track record in the region. Unit Investment has operated in the Turkish power market for around 30 years and Ansaldo Energia has a strong background in developing thermoelectric power plants and particularly CCGT plants in its domestic market – Italy.

Unit Investment holds a 60 per cent stake in the project company, Yeni Elektrik Üretim; Ansaldo holds the remaining 40 per cent. Ansaldo also holds the fixed-rate EPC contract, paid as a lump-sum under a turnkey agreement. The Italian energy company’s EPC performance obligations are supported by its majority shareholder, the industrial conglomerate Finmeccanica. The project is expected to be commissioned by the fourth quarter of 2013.

Once online, Gebze CCGT will generate 6.5 billion kWh of electricity per year; approximately 2.5 per cent of Turkey’s projected total consumption for 2014.

Turkey’s gas market regulation

Turkey’s active liberalisation of the electricity and gas markets has posed a challenge to some power sponsors and developers, particularly for greenfield developments. According to a source close the sponsor, a particular challenge was in balancing investor return and lender covenants, while navigating the evolving Turkish energy markets.

Prior to 2001, the Turkish gas market had been state-controlled. Though the state-run entity BOTAS still retains a 90 per cent stake in the Turkish wholesale market, the government has mandated that the country reduce its gas imports to 20 per cent, which has sparked stiff competition between Turkish energy companies.

However, the Kocaeli-Gebze region is a particularly populous industrial region which has seen an increased electricity demand, at a greater rate than the national demand, and so the project is well-placed to face down national competition due to its locale.

Merchant power

The risks posed by the merchant nature of the project resulted in the developer and lenders coming to an agreement on how to manage capacity sale. The project mitigated its risk in this area through offtake volume and pricing which, according to an adviser on the project, was a coup given the increased level of competition facing gas-fired projects and the volatilities of a changing regulatory environment.

Despite the project being financed as merchant generator in the first instance, the lending agreement includes sales strategy requiring the project company to enter into a certain number of power purchase agreements (PPAs) as that market develops, within the terms of the credit agreement’s pricing and volume covenants. At present, there is no tried-and-tested precedent for PPAs in the country but utilities and other commercial offtakers are beginning to adopt the long-term contracted purchase model.

Deal participants

Clifford Chance is legal adviser to the project company and to Unit Investment. Hergüner Bilgen Özeke Attorney Partnership advised the project company in Turkey. Chiomenti Studio Legale is Ansaldo’s legal adviser. White & Case is legal counsel to the lenders along with Turkish law firms Akol Avukatlık Bürosu, Cakmak Avukatlık Bürosu and Bonelli Erede Pappalardo Studio Legale.

Deloitte is acting as the electricity market adviser to the project while Fichtner is the technical adviser and JLT is the insurance adviser. Concurrently, ADG Danışmalık is the gas market adviser while Ernst & Young provided modelling. Tractebel is the engineering consultant to the developer. Gifford advised the borrower’s market adviser and Marsh was the borrower’s insurance adviser.