tion and hydroelectric use in the central Luzon area of the Philippines. An underground
powerhouse located at the end of the water tunnel houses a 150 megawatt power plant.
The high-yield bond offering illustrated the market’s capacity to finance a large and com-
plex project in an emerging-market country. It was structured in three tranches to meet dif-
ferent investors’ needs, and closed after a very tight time schedule to sell the bonds to
institutional investors. During the course of construction the original EPC contractor
failed and was replaced; payment under a standby letter of credit backing the original EPC
contractor’s performance was made by a South Korean bank only after a prolonged legal
battle; and the replacement EPC contractor’s completion was delayed by tunnel-drilling
difficulties. Parent financial support was required because the construction delay strained
project liquidity.
This high-yield-bond project financing illustrates the market’s capacity to finance a large
and complex project.
Background
Project company, cost and purpose
The project company is a privately held Philippine corporation formed in September 1994
solely to develop, construct, own and operate a multipurpose irrigation and hydroelectric
power facility, with a rated capacity of approximately 150 MW, on the island of Luzon in the
Philippines.
At the time of the project financing the company was owned indirectly by California
Energy International (CalEnergy), now a subsidiary of MidAmerican Energy Holdings
Company, which held 35 per cent; Peter Kiewit Sons, Inc., which also held 35 per cent; and
two Philippine minority shareholders.
CalEnergy was the largest independent geothermal power company in the world. It had
over 500 MW of geothermal power projects under construction in the Philippines. CalEnergy
made a commitment to the Philippine government that the project would be completed in four
years. With geothermal projects in the country worth more than US$1 billion, CalEnergy
already had a strong commitment to the Philippines.
Kiewit was a large, privately held construction, mining and telecommunications com-
pany, with extensive hydroelectric, mining and tunnelling experience. Kiewit already had an
international joint venture with CalEnergy and occasionally took an equity interest in its over-
seas projects.
To finance the project the sponsors explored using a World Bank guarantee programme,
but they decided not to pursue it because they could not get a counter-guarantee from the
Philippine government within a reasonable time. When CalEnergy approached Credit Suisse
First Boston about the project its primary interest was to raise the funds quickly, but it also
wanted the best possible price.
The transaction structure and the capital cost of the project are illustrated in Exhibits 15.1
and 15.2.
The project consists of diversion structures in the Casecnan and Denip Rivers that divert
water into a water tunnel about 23 kilometres long. The tunnel transfers the water from the
rivers into the Pantabangan Reservoir, for irrigation and hydroelectric use in the central
Luzon area. An underground powerhouse at the end of the water tunnel, in front of the reser-
voir, houses a new power plant with 150 MW of rated capacity. A tailrace tunnel about three
CASECNAN WATER & ENERGY COMPANY, THE PHILIPPINES