In February 1998 Standard & Poor’s reaffirmed its existing ratings for Quezon Power, but
revised its outlook from stable to negative. The revision was in response to deteriorating eco-
nomic conditions in the Philippines, not to any significant change in the risk profile of the
project. The agency noted that progress on the transmission line was somewhat slower than
had originally been forecast because the project’s access to the right of way was blocked by
about 3 per cent of the landowners concerned. However, it also noted that, as of January 1998,
progress on construction of the power plant supported the 36-month guaranteed construction
schedule. The plant was 51 per cent complete, compared to a target level of 57 per cent and
a guaranteed level of 42 per cent.
Standard & Poor’s once again affirmed its ‘BB+’ foreign currency rating and its ‘BBB-’
local currency rating in December 1999, this time with a stable outlook. By then the project
was 99 per cent complete. The agency noted that the target completion date had been delayed
from January 2000 to March 2000 because, during the autumn of 1999, the NPC had restrict-
ed grid access for Quezon Power’s testing and commissioning. Another IPP venture was
being tested and commissioned at the time, and the NPC had been concerned that testing both
plants at the same time would subject the grid to undue risk. In the agency’s opinion there
were adequate funds to support the project under the revised construction schedule and to
support further significant delays if they occurred. A total of US$58 million was available to
support the project beyond the funds already required to reach commercial operation. The
additional funds included a development fee of US$8 million, US$20 million sponsors’ con-
tingent equity in the form of a direct-draw letter of credit and US$30 million of contingent
equity in the form of loan notes. However, the agency noted that, under the revised construc-
tion schedule, the project would not need to rely on any of this US$58 million to meet debt
service or complete project construction.
In March 2000, in a periodic review of construction progress, Standard & Poor’s reaffirmed
its ratings and the stable outlook, observing that the project had fallen four months behind its
original construction schedule and was now expected to be operational by May 2000. By this
time the project had completed a 240-hour provisional acceptance performance test.
In early 2001 Standard & Poor’s placed the project on CreditWatch because of the pos-
sibility that it could face refinancing risk if it did not meet the conditions precedent for con-
verting US Eximbank’s construction loan into a long-term financing by the deadline date of
30 April. On 27 April, after the project met the conditions, the agency removed it from
CreditWatch and reaffirmed its existing ratings. It noted that the project was complete, that
the Commercial Operations Date under the PPA had been declared to be 30 May 2000 and
that the final acceptance date under the EPCM contracts was likely to be declared, retroac-
tively, to be during July 2000. The agency’s rating outlook for the project at that time was
negative, reflecting the negative outlook for the sovereign rating of the Philippines, which
was ‘BB+’ foreign currency and ‘BB-’ local currency.
On 20 July 2001 Standard & Poor’s reaffirmed the project’s ratings with a negative out-
look because of a possibility that the project’s returns would be reduced as a result of rene-
gotiation of the PPA. The recently passed Electric Power Industry Reform Law 2001 had
required Meralco, the project offtaker, to make a reasonable best effort to reduce the costs of
existing contracts with IPPs to levels not exceeding the average buying price of other land-
based electric power generators, as a condition for Meralco to recover its stranded contract
costs. Meralco had sought what it considered to be a more equitable risk-sharing agreement
with Quezon Power, proposing that Quezon Power take a higher share of plant availability
QUEZON POWER, THE PHILIPPINES