Moody’s. In its rating analysis Moody’s cited contracts providing for strong cash flow in sup-
port of debt-service coverage ratios, a fuel-cost passthrough, and minimum firm capacity pay-
ments to cover operations and maintenance. Other strengths that the agency cited were the
turnkey construction contract with Bechtel Power Corporation and the 25 per cent equity con-
tribution from the sponsors. Moody’s also noted that the project was expected to provide
power to the offtaker at a competitive cost for the term of the contract. In 2002 Meralco was
expected to pay Quezon Power 8.2 cents per KW hour compared to a long-term marginal cost
of power of 9 cents starting in 2000.
In the same month Standard & Poor’s rated the senior secured bonds at ‘BB+’. It cited
the following project risks:
- construction could be hindered because the project was sited in a remote area;
- the project sponsors were obliged to pay Meralco, the project offtaker, liquidated dam-
ages if the plant failed to maintain a load factor between 79 per cent and 88 per cent; and - the enforceability of the 25-year PPA was threatened by uncertainties in the Philippine
judicial and political systems.
Offsetting these risks, the agency noted that the project economics were strong and that
Meralco’s capacity payments alone would service the debt. The project was strategically
important to Meralco, which wanted to diversify its power supplies away from the NPC. The
forecast debt-service coverage ratio was a minimum of 1.54 and an average of 2.18. Other
strengths included the plant’s simple and proven technology, the experience of the EPC con-
tractors – units of Bechtel Corporation – and the fact that the project had reached financial
closing when the ratings were issued.
In August 1997 Standard & Poor’s reaffirmed its ‘BB+’ foreign currency rating and its
‘BBB-’ local currency rating in response to the company’s proposal to senior lenders and
bondholders to eliminate the Capitalised Interest Account through an amendment to the Trust
and Retention Agreement Account. The elimination of this account ended the requirement
that the Collateral Trustee segregate certain bond proceeds allocated to bond interest pay-
ments prior to construction completion. As a result those funds could be used solely for con-
struction. The agency noted that, even though the Capitalised Interest Account provided
bondholders with assurances of interest payments until December 1999, the project’s target-
ed completion date, the rating horizon looked past construction to the project’s operating
phase, when that account would already have been depleted. In addition, the agency made the
following points to support its rating affirmation.
- There were sufficient funds to pay bondholder interest during the construction of approx-
imately US$50 million from other sources, including the partners’ equity contribution,
the commercial bank facilities other than the US Eximbank facility and unexpended
development funds. - The partners’ equity contributions were already secured by a standby letter of credit from
a single-A-rated company for the base equity amount of US$207.7 million, and in addi-
tion there was another standby letter of credit for contingent equity contributions for cost
overruns up to US$20 million. - Eliminating the Capitalised Interest Account reduced negative arbitrage and made better
economic use of funding sources, saving the project an estimated US$2.5 million.
POWER PLANT