the end of November. Nonetheless, Standard & Poor’s kept its ‘BB+’ rating for the project on
CreditWatch with negative implications, because of its weak liquidity. Without support from
MidAmerican it would not be able to make its US$35.3 million principal and interest pay-
ment the following month. Indeed, MidAmerican affiliates provided the funds required for
that payment on 15 November. By that time the project had been tested under normal condi-
tions, but CE Casecnan was taking additional precautionary measures before beginning nor-
mal commercial operations, to avoid the risk of damage that could result if the project caused
instability in the Philippine transmission grid. The project began commercial operation on 11
December and began the 20-year cooperation period outlined in the Project Agreement with
the NIA.
Meanwhile, because of a dispute with CE Casecnan the EPC contractor was resisting the
payment of about US$23 million in liquidated damages that it owed as a result of its con-
struction delay. The damages were supported by a guarantee from Banca di Roma.
In March 2002 Moody’s confirmed its ‘Ba2’ rating for CE Casecnan’s notes with a pos-
itive outlook. The rating was based on the strong terms of the 20-year BOT contract with the
NIA, backed by a performance undertaking from the government of the Philippines. The rat-
ing also reflected the NIA’s strong commitment to the project, given the importance of the
irrigation that it provided to one of the country’s major rice-growing regions. However, the
rating also reflected the outstanding arbitration with the EPC contractor, the outcome of
which could have a material impact on the project’s liquidity and its ability to meet its debt-
service obligations. Moody’s positive outlook was based on four factors.
- The project had begun to generate cash flow for future debt servicing.
- The agency expected the project’s debt service coverage ratio to be at least in line with
the Ba2 rating level, if not higher, given the historical hydrology of the region and the
resulting performance of the hydroelectric dam. - There were strong incentives for MidAmerican to continue to support the project even if
the outcome of the arbitration with the EPC contractor was unfavourable. - It was likely that the NIA would honour its obligations, even though all the canals
required to carry water to the target irrigation areas would not be completed until 2004.
Lessons learned
The Korean EPC contractor was recognised as a weak link at the time of the project financ-
ing. EPC contractors often do not fail, standby letters of credit often are not called upon and,
when they are, they often are not dishonoured by their opening parties. The Casecnan Water
& Energy case study reminds us that these risks do materialise from time to time, and illus-
trates how the problems can be resolved.
(^1) This case study is based on the project prospectus, articles in the financial press and an interview with Jonathan D.
Bram, Managing Director, Project & Lease Finance, Credit Suisse First Boston Corporation.
(^2) ‘Court Orders Korea First Bank to Deposit $79,329,000 in a New York Bank Account’, PR Newswire, 20 May
1997.
(^3) ‘CE Casecnan Issues Notice to Proceed to Replacement EPC Contractor’, PR Newswire, 7 August 1997.
(^4) ‘CE Casecnan Obtains Summary Judgement Against Korea First Bank on Letter Drecit Draw’, PR Newswire, 27
August 1997.
(^5) ‘CalEnergy Wins $93 million Battle; Court Rules Against Korean Bank’, Global Power Report,17 April 1998.
CASECNAN WATER & ENERGY COMPANY, THE PHILIPPINES