Environmental impact
The project was designed to make the least possible impact on the surrounding environment.
The rivers flow through a rain forest that is inhabited by the Bugkalot people. Building a dam
to capture the water’s electricity-generating potential would have flooded their land, while the
tunnel, about 21 feet in diameter, was not expected to disrupt the area significantly. The
power generation plant was built underground to preserve the appearance of the surrounding
lands. Areas excavated for construction were later covered with topsoil and planted with
50,000 citrus seedlings, to encourage the revegetation of the area and to create the country’s
largest citrus nursery. The project company also helped the Bugkalots to develop an opera-
tion manufacturing rattan furniture.
Project risks
Economic viability is not an issue. After completion the project is tantamount to a sovereign
credit. The capacity payments that the NIA is obliged to make cover 70 per cent of projected
cash flow, which is more than the amount required to service the debt. There are plenty of
data to show that river flow should be more than adequate.
The most important risk was construction risk, particularly the financial risk related to
relatively small contractors. By world standards Hanbo Steel and You One were not well-
known. They were selected because of You One’s experience in tunnelling and the amount of
tunnelling equipment that it had available: nine tunnel-boring machines, each the size of two
locomotive engines and costing about US$30 million. Kiewit, by contrast, had only three tun-
nel-boring machines, and did not bid as aggressively for the construction work on the project.
As South Korea is very mountainous, with many roads going through tunnels, it seemed log-
ical that the country would have a leading tunnelling contractor. The project’s construction
risk was mitigated in three ways:
•a very generous construction budget with contingencies;
- liquidation damages of 100 per cent guaranteed by Hanbo Steel; and
•a letter of credit for 50 per cent of the liquidated damages from Korea First Bank.
Marketing the bonds
The biggest problem for Credit Suisse First Boston, Bear Stearns and Lehman Brothers in
marketing the bonds was the sheer size as well as the maturity of the offering. It was more
than three times the size of the recent Subic Bay power plant offering. Unfortunately, the
Subic Bay bonds were held heavily by one institution, so institutional investors in general did
not have a lot of experience with Philippine high-yield bonds.
The underwriters decided that the bonds would have to be marketed around the world
and that they should be divided into several tranches to appeal to different investors’ inter-
ests. Asian institutional investors, both bank and nonbank, tended to be floating-rate, short-
term buyers. A US$75 million floating-rate tranche maturing in seven years was developed
for them. A number of US high-yield mutual funds had been enthusiastic about CalEnergy
and, although the project was unusual, they were expected to give CalEnergy the benefit of
the doubt. The high-yield mutual funds tend not to like maturities of more than 10 years, so
a 10-year high-yield bond with a seven-year noncall provision was developed for them.
WATER AND POWER