ment in CalEnergy’s favour. By that time a fourth draw under the letter of credit had increased
the unpaid amount to US$117.5 million. Craig M. Hammett, senior vice president and chief
financial officer of CalEnergy, said that the bank’s action was ‘virtually unprecedented in
international lending transactions’.^5
On 17 April CE Casecnan announced that it had reached mutual agreement with the
Hanbo entities and Korea First Bank to settle their differences related to the Casecnan pro-
ject. Under the settlement Korea First Bank agreed to pay CE Casecnan US$90 million; the
parties ‘discontinued with prejudice’ the pending arbitration and litigation proceedings; and
they released each other from all claims arising out of the litigation and arbitration.
In July 1998 Standard & Poor’s removed its rating on CE Casecnan from CreditWatch
and raised it from ‘BB’ to ‘BB+’, the same level as the foreign currency rating for the
Philippines. The agency’s rating for CE Casecnan had a negative outlook only because of its
negative-outlook Philippine country rating. The agency said that it was satisfied that the
replacement EPC contract and security arrangements did not expose the project to major addi-
tional risks. Factors that it cited to support the rating upgrade included:
- the payment from Korea First Bank under the letter of credit;
- strong and predictable future cash flows, complemented by a new and stronger con-
struction programme;
•a government undertaking to support the project; and - evidence of a capable and persevering sponsor, particularly in a stressed situation.
In August 1998 CalEnergy and MidAmerican Energy Company announced plans to merge.
MidAmerican had among the lowest all-in production costs in the mid-continent region of
North America, which would offset some of the higher-cost geothermal and hydroelectric
plants in CalEnergy’s global portfolio. CE Casecnan would become a subsidiary of the new
combined company, MidAmerican Energy Holdings.
CMC, the new EPC contractor, had begun work on the main 23-kilometre tunnel in 1997,
with one tunnel-boring machine. As progress was slowed by the friability of the rock the con-
tractor brought in two additional borers. In late 1999, after continued delays related to poor
rock conditions, the contractor abandoned the borers in favour of more conventional, but
more labour-intensive, drill-and-blast tunnelling techniques. The EPC contract was amended
to extend the completion date by seven months, to 31 March 2001. Stone & Webster, one of
the project engineering firms, said that the new EPC contract was still feasible because the
river diversion had been proven to be working, and the supply and installation of the two 75
megawatt turbine generators was largely on schedule.
In December 1999 Moody’s reaffirmed its ‘Ba2’ rating for the project, but changed its
outlook from positive to negative. Moody’s said that the delay in the project’s completion and
related changes in the construction contract would not substantially increase risks to
bondholders, because damages payable for failure to meet the new completion date had been
increased under contract amendments, and the contractors’ obligations were backed by letters
of credit from banks rated ‘A2’ and above. The reason that the agency changed the rating out-
look from positive to negative was that the project would have reduced financial flexibility if
further delays arose. However, Moody’s believed that such risk was mitigated by assurances
from CE Casecnan, the EPC contract consortium and the independent engineer that the new
completion date was achievable.
WATER AND POWER