Project Finance: Practical Case Studies

Distribution test

The project must pass a distrib-
ution test, calculated on each
interest payment date, before
distributions are made to the
sponsor. The level of distribu-
tions permitted depends on the
level of capacity that is hedged.
As merchant risk increases, the
distribution test becomes more
demanding, leaving a greater cash cushion in the project and providing more protection for
senior lenders. As shown in Exhibit 12.4, the distribution test consists of three ratio thresh-
olds: the one-year historic average debt service coverage ratio (ADSCR), the two-year pro-
jected ADSCR and the five-year projected ADSCR. These thresholds are set at different
levels depending on the amount of capacity hedged. Where ranges are indicated, the thresh-
olds increase on a straight-line basis in direct proportion to the decrease in hedged capacity.

Cash flow sweep mechanism

A cash sweep of the liquidity account for prepayment of bank debt occurs if historic, two-year
projected, or five-year project DSCRs are less than 1.2 times on two consecutive test dates.

Independent consultants’ reports

The prospectus for the £400 million bond issue contained reports from three independent
consultants: Stone & Webster Management Consultants Ltd, the Independent Engineer;
Caminus Ltd, the Power Market Consultant; and Coal Ink Consultancy, the Fuel
Consultant.

Independent Engineer’s Report

Among the opinions expressed by the Independent Engineer were the following.

• The Drax power station, as National Power’s flagship representing 20 per cent of its gen-
  erating capacity, had been operated and maintained to the highest standards.


• An availability factor of 89.75 per cent, one of the assumptions in the Power Market
  Consultant’s model, was reasonable and achievable, reflecting the plant’s high standards
  of design, construction, operation and maintenance.


• Historically, the plant had achieved a net efficiency, derived from total fuel consumption
  and total net power exported, of 38 per cent. The Independent Engineer estimated that the
  net efficiency would gradually decline from that level to 37 per cent at the end of year 30.


• If the plant were maintained at the level assumed in the maintenance budget, it would be
  capable of operating for another 30 years.


• The Drax power station achieved comparable efficiencies with the flue gas desulphuri-
  sation system as other stations without such systems and therefore was in a strong posi-

DRAX, UNITED KINGDOM

Exhibit 12.4

Average hedged capacity

≥1,890MW <1,890MW

but ≥1,260MW <1,260MW

1-year historic ADSCR >1.25x 1.25–1.50x 1.50–1.60x

2-year projected ADSCR >1.25x 1.25–1.50x 1.50–1.60x

5-year projected ADSCR >1.25x >1.35x >1.60x