Standard & Poor’s took similar action the same month, affirming its ‘BB+’ rating but
revising its outlook for the project from stable to negative. In its discussion of the project risks
the agency cited problems not only with rock quality but also with on-site management and
labour productivity. It said that liquidity could become a problem if corrective measures
failed to speed the progress of construction. Under the revised construction schedule the first
principal payment would be due four months before project completion and the second pay-
ment immediately after startup. These payments were likely to absorb all but US$6 million
of the funds budgeted for the debt service reserve fund. Standard & Poor’s noted that this was
the sponsors’ first irrigation and hydroelectric project. Other risks that it cited were:
- the NIA’s reliance on the willingness of the Philippines and the ability of its central bank
to pay in US dollars;
•a short-to-medium-term electricity oversupply in the Philippines that could exert down-
ward pressure on tariffs and affect project economics; and - uncertainties concerning the Philippine judicial system that could hinder the enforceability
of contracts and security pledges, including the implementation of offshore judgements.
The agency said that the following strengths offset the risks and supported its ‘BB+’ rating
for the project:
•a provision in the amended EPC contract that raised liquidated damages from US$65,000
to US$125,000 per day and prevented the contractor from reducing its liability by claim-
ing change orders relating to underground risks;
- the fact that the new EPC contractor was continuing to assume construction risk under a
fixed-price, turnkey, date-certain contract providing liquidated damages of up to 93 per
cent of the contract value for delay; - security equal to 33 per cent of the contract value in the form of guarantees from Crédit
Agricole Indosuez, Commerzbank AG and Banca di Roma;
•a revised construction plan that shifted tunnelling from the problematic boring machine
to more reliable drilling and blasting, increasing the likelihood of the completion date’s
being met;
•the largely on-schedule construction of the powerhouse, weirs (dams), desilting facilities
and most of the remaining tunnels; - the Philippine government’s undertaking to support the performance of the offtaker’s
contractual obligations; - MidAmerican Energy Holdings’ commitment to the project for its 25-year life; and
- debt service coverage ratios that were expected to average 1.6 times for the first eight
years and rise to four times for years nine and ten.
In March 2000 Standard & Poor’s reaffirmed its ‘BB+’ rating for CE Casecnan with a nega-
tive outlook for the project after its quarterly construction review, and an announcement that
the acquisition investment team of Walter Scott, Jr, David Sokol (Chairman and Chief
Executive of MidAmerican Energy Holdings) and Berkshire Hathaway Inc. had acquired
CalEnergy, CE Casecnan’s 70 per cent parent, through a cash buyout. To reflect the effect of
that acquisition the agency rated MidAmerican ‘BBB-’ with positive implications. In the
agency’s opinion 76 per cent ownership by Berkshire Hathaway was a positive credit devel-
CASECNAN WATER & ENERGY COMPANY, THE PHILIPPINES