Power marketing risk
Aquila, the former manager of short-term energy transactions for both projects, was among
the top five energy marketers in North America for combined gas and electricity marketing
at the time of the project financing. Following Aquila’s exit from the energy trading business
TPS will find a new power manager, possibly a large utility with a trading arm.
Transmission risk
A power station operates under the risk that regional transmission capacity may be insuffi-
cient to handle growing power loads and that bottlenecks may delay the transmission of elec-
tricity from a power plant to its customers, thereby reducing the plant’s revenues.
Financial projections
The project loans were structured to have investment-grade credit characteristics based on
crosscollateralisation of the two projects’ assets, strong debt service coverage ratios, opera-
tions in diversified markets and multiple independent generating systems. The transaction
structure provided strong incentives for the sponsors to obtain investment-grade ratings as
soon as possible. When such ratings were realised, pricing on the loans would drop by 12 bps.
Until such ratings were granted cash distributions would be prohibited and 50 per cent of
excess cash would be swept to pay down the bank debt.
The Partnership developed financial models for each project and for both projects on a con-
solidated basis, incorporating assumptions about plant performance and future conditions in the
two local markets. For the Base Case and Sensitivity Cases the sponsors used fuel price forecasts
from Pace Global Energy Services and power market price forecasts from R.W. Beck, Inc. On a
combined basis the Base Case estimated average and minimum debt-service coverage ratios of
3.24 times and 2.42 times, respectively, based on an estimated 18-year amortisation period. In
other words, it assumed that the bank debt would be paid off and refinanced with 18-year bonds.
The Base Case and Sensitivity Cases were developed to gauge the impact of certain con-
ditions on the two projects’ financial performance, including a 25-year bond financing case,
a market overbuild case, a low-fuel-price case, and a higher O&M expenses case. In all cases
average debt-service coverage ratios exceeded three times on a combined basis.
Subsequent developments
In the months following the Enron bankruptcy in December 2001 the merchant power busi-
ness in general, and power players such as TECO Energy and Panda Energy in particular,
were affected by a combination of events described as a ‘perfect storm’, including:
- the economic slowdown;
- declining electricity demand;
- the resulting decline in electricity prices;
- accounting scandals;
- scepticism about power companies engaged in trading and other unregulated activities; and
- concern over power companies’ ability to refinance three-to-five-year ‘miniperm’ project
loans.
POWER PLANT