Israel’s first private sector-led cogeneration and combined-cycle gas turbine development is a politically significant project financing for the Israeli power market. The sponsors of the combined Ashdod Energy and Ramat Negev Energy project are Edeltech (58%) and Zorlu Enerji Elektrik (42%).

Like the 840MW Dorad Energy project – Israel’s largest independent CCGT generator – which is due to start operations later this year and in which Zorlu also has a 25% shareholding – Ashdod and Ramat have signed 16-year gas supply agreements with Israel’s Tamar gas field project (for details of Tamar, also an award-winning financing, see following page).

The projects will both boost Israeli power reserve margins, which are at an all-time low, and competition within the electricity sector, which although liberalised is still dominated by state-owned Israel Electric Corporation (IEC). They will also benefit from security of fuel supply, which has historically been a source of nervousness in Israel, and has become more acute in recent years.

Gas supply moved to centre stage when imports of Egyptian gas, which met around 40% of Israeli power needs, dried up after the revolution. The sponsors had originally signed a gas supply contract with Egypt’s East Mediterranean Gas Company (EMG) in 2009.

In the long term the discovery of the Tamar and Leviathan gas fields will probably settle these supply worries, although the debate over whether both fields should be used for domestic supply only continues. The Leviathan deposit has been earmarked for export and Tamar for domestic use. The growing demand for gas, made concrete by the supply agreement signings, has in turn given those projects a concrete economic case for development.

Not only does Tamar offer certainty of supply but also certainty of pricing. In Israel the price of gas is linked to the cost of generating electricity, a cost set by Israel’s Public Utilities Authority (PUA). In December 2012 the PUA said it would not allow IEC to recognise higher gas prices than those agreed in its gas supply contract with Tamar, signed in May 2012; nor would it recognize higher prices for spot sales of gas in contracts between Tamar and independent power producers.

The gas supply agreements with the Tamar shareholders – Noble Energy (36%), Isramco Negev 2 (28.75%), Avner Oil Exploration (15.625%), Delek Drilling (15.625%) and Dor Gas Exploration (4%) – are worth around $1.2 billion over their 16-year duration. The sellers have the right to extend the supply agreement by up to two years if all contractual volumes have not been used by the end of the 16 years.

Ramat Negev is taking up to 200 million cubic metres per year and Ashdod up to 110 million. The original minimum volume take-or-pay agreement was amended in August 2012, following a request from the Electricity Authority and Antitrust Authority designed to instill competition in the gas market. Under the new agreements, the sponsors are entitled to reduce the minimum volume of gas they buy from Tamar so that it does not exceed 50% of the average annual amount consumed during the three years before exercising that option.

M+W Israel is building the plants under a fixed-price turnkey, engineering procurement and construction contract with no sponsor support or construction guarantees. Both plants are to be operational by mid-2014. Ashdod will generate up to 55MW of electricity and 40 tons per hour of steam, and Ramat Negev 120MW and 70 tons per hour of steam.

The plants are semi-inside-the-fence facilities. Ashdod will be built at the Agan Chemicals site, while Ramat Negev will be located at the Makhteshim Chemicals Works in Ramat Hovav. The majority owner of both of the chemicals plants is ChemChina, The projects benefit from 18-year offtake agreements with each plant, and will sell any surplus electricity to the IEC, which under the Israeli regulatory regime is obliged to take it, at a tariff that is significantly higher than that paid by private customers. The tariff is changing to a lower rate for future deals, but Ashdod and Ramat closed before those changes.

Financing for the projects comprises around Sh1.1 billion ($300 million) of 18-year debt split into Sh766 million for Ramat and Sh355 million for Ashdod. The debt to equity ratio is 85/15 averaged across the combined projects, with pricing on the debt set at an annual 5.75% linked to the CPI index. Bank Leumi lead arranged the deal, while Clal Insurance Company, Menora Mivtachim and Psagot participated.

The joint financing for the separate projects features common conditions and default language, which is set out in a common terms agreement. The project companies also entered into a joint support agreement, which requires them to provide financial support to the other borrower, as well as allowing them to share gas resources and provide back-up electricity supply support to each other.
 
Ashdod Energy and Ramat Negev Energy
STATUS
Financial close 8 August 2012
DESCRIPTION
Combined financing for the first two gas-fired cogen projects under new Israeli energy regulation.
PROJECT COST
$350 million
SPONSORS
Edeltech, Zorlu Enerji
MANDATED LEAD ARRANGER
Bank Leumi
PARTICIPANTS
Clal Insurance Company, Menora Mivtachim, Psagot
FINANCIAL ADVISER
Uzan & Co
PROJECT/SPONSOR COUNSEL
Goldfarb, Seligman & Co; Doron Almog Advocates; Zellermayer Pelossof Rosovsky Tsafrir Teledano & Co
LENDER COUNSEL
Herzog, Fox & Neeman & Co
EPC CONTRACTOR
M+W Israel, O&M, Zorlu O&M Enerji Tesisleri Isletme & Bakim
GAS SUPPLY
Tamar Gas project