Project Finance: Practical Case Studies

UPP Finance Company (UPP FinCo), a wholly owned special-purpose subsidiary of UPP.
Lease payments equal debt service on the bonds. As a result UPP does not have legal title to the
leased assets – the power plant – but has all the other typical rights of a project owner. In the
event the lease is terminated and the bonds are cancelled or repaid during their term, UPP may
acquire the leased assets for a nominal payment but will lose the tax benefits afforded by the
lease structure from that time forward. The structure of the security package enables the lenders
to foreclose on both the lessee’s and the lessor’s interests in the lease, thus putting the lenders
in substantially the same position that they would have been without the lease structure.

Flows of funds

During the construction period:

• UPP draws under the non-recourse loan;


• UPP makes an intercompany loan to UPP FinCo using the loan proceeds;


• UPP FinCo uses the intercompany loan proceeds to purchase bonds from Union County; and


• Union County advances proceeds of the bonds to UPP for construction of the power plant
  (see Exhibit 13.4).

After the plant starts to operate:

• UPP makes periodic lease payments to Union County equal to the principal and interest
  that the county pays on the bonds;


• UPP FinCo, as holder of the bonds, receives principal and interest from Union County;


• UPP FinCo makes loan payments to UPP equal to bond payments received from Union
  County; and


• UPP makes payments to service the nonrecourse project loan (see Exhibit 13.5).

Crosscollateralisation

The two projects are fully crosscollateralised, enhancing the lenders’ security by diversifying

POWER PLANT

Exhibit 13.4

Flow of funds during the construction period

Union County Union Power PartnersLP (UPP)

UPP Finance Co

(UPP FinCo)

100%

Credit agreement

Lenders

1

Intercompany

loan

Purchase^2

bonds

3

Construction funds

4