The Cartagena power project reached financial close on 21st August 2003. The US$890 million project which involves the development, construction, operation and financing of a 3 x 400 MW combined cycle gas turbine ("CCGT") power station located on the Mediterranean Coast in Cartagena will be the largest independent power project in Spain once completed in 2006 and one of the largest in Europe.

The Project

After a competitive tender process in 1998, the AES Energía Cartagena S.R.L. was awarded a concession to occupy the project site, owned by the Port Authority of Cartagena located in the Escombreras Valley approximately 100 kilometres south of the city of Alicante and 500 metres from the coast of the Mediterranean Sea at Escombreras, Puerto de Cartagena, in Murcia province, Spain. A primary advantage of the site is that it lies very close to the LNG import terminal on the coast (approximately 500 metres away).

The power station is being constructed according to a fixed price, turnkey Engineering, Procurement and Construction contract with a consortium of Mitsubishi Corporation and Initec Tecnología S.A., a part of Grupo Dragados S.A. The power station will be a conventional CCGT-fired power plant having a gross capacity of 1,193 MW.

The plant is a conventional design incorporating three independent, single-shaft 400 MW (nominal) units each consisting of an MHI 701F gas turbine, associated heat recovery steam generator and steam turbine. The plant will have "dual-firing" capability and will be able to burn either natural gas or gas oil; however, the plant’s principal fuel will be natural gas.

According to David Long of AES: "The 701F turbine series is based on well-proven technology developed over many years by Siemens Westinghouse and Mitsubishi Heavy Industries, and offers a strong balance of performance and proven reliability".

Figure 1 below provides a summary of the key process flows and equipment for each single CCGT Unit.

The construction management and operation and maintenance of the power station will be undertaken by a subsidiary of AES pursuant to, respectively, a construction management agreement and an operation and management agreement. In addition, there is a long term services agreement with Mitsubishi for scheduled and unscheduled maintenance of the gas turbines.

The project is fully contracted for up to 24 years under the terms of a long-term energy agreement with the Gaz de France Group. LNG will be imported through the Cartagena import terminal.

Needless to say, the investment of nearly 700 million euros (US$840 million) into the Cartagena economy and the prospect of 25 years of operations of a 1200MW power station producing up to 9 billion kwhs per year brings with it much needed direct employment and tax revenues.

Sponsors

AES, founded in 1981, is the world’s largest independent power company with expertise in both electricity generation and distribution, as well as in the retail marketing of heat and electricity.

AES owns or has interests in plants totalling over 46,500 MW, and also distributes electricity in many countries world-wide. Its existing asset base is in excess of US$34 billion.

Background

The Spanish power market, already the fifth largest market in the EU, has been one of the fastest growing in Europe. Since 1985, demand has grown at a rate of 3.92 per cent and growth has actually accelerated in recent years, averaging 6 per cent since 1997. New project completion has not kept up with this demand growth, which has led to a very tight supply/demand balance.

The Spanish market is not without pitfalls. A number of issues have slowed development of new projects and especially frustrated independent developer:

1) The market is dominated by just a few incumbent utilities who have been largely successful to date in barring new entrants.

2) Access to reliable, cost-effective natural gas supplies and connections to the power transmission grid remains a critical issue.

3) The permitting process for new plants has proven to be very difficult.

4) The forwards markets lack liquidity, preventing developers from putting effective hedges on power revenues.

Incumbent utilities have had an advantage over independent developers in a number of areas. Firstly, their established presence in local markets has enabled them to obtain permits more quickly than foreign companies.

Secondly, their strong balance sheets have allowed them to take on more project risk than independent developers with one-off projects seeking non-recourse project financing.

Lastly, incumbent utilities have been better able to arrange gas supplies in part because gas suppliers have perceived their projects to have a better chance to succeed. IPPs have therefore found it extremely difficult to conclude the permitting process and then seal the all-important gas supply deal.

Gerrit Nicholas, Project Director at AES, commented: "The Cartagena project financing marks an important milestone in the emerging liberalization of the Spanish electric sector. It is the largest non-recourse project financing of its kind in Spain and will add both needed generation capacity to the Spanish system, and sustainable development opportunities for the region of Murcia, while opening additional avenues for growth to AES in one of Europe's fastest growing markets."

Financing

The financing was arranged through the appointment of three Mandated Lead Arrangers, ABN Amro, Credit Agricole Indosuez and SG, who negotiated the financing documentation and arranged for the underwriting of the transaction. Senior lead arrangers were ANZ, BBVA, ING, WestLB and CIC. Citibank joined the banking group as manager immediately at the post signing stage.

The debt-equity ratio was 80:20. Interest is capitalised during construction and once operational, dividends are payable after the debt has been fully serviced in accordance with the semi annual repayment profile of the "mini-perm".

The mini perm provides an incentive (but does not oblige) the project company to refinance a few years after the plant becomes fully operational .

Peter Conway of Societe Generale said: "The combination of a proven developer and operator, strong contractual structure and favourable location made this an extremely attractive financing opportunity".

Legal Issues

The project benefits from a long-term Energy Agreement entered into with GDF International in April 2002. LNG will be regasified, then transported to the power station under the terms of regasification and transportation contracts between Gaz de France Comercializadora SA and Enagas S.A.

In addition, Enagas is responsible for designing and permitting the natural gas connection facilities to the project under a gas connection agreement. In order to export power to the transmission grid, the project company is required to sign standard electrical grid access agreements with transmission operator Red Eléctrica de España S.A.: one governing construction of the interconnection; the other specifying the terms and conditions of access.

The project had a typical security package, including assignment of the project contracts and the receivables under them.

Figure 2: The Contractual Scheme

Risks

According to Alan Rae Smith of Allen & Overy: "On the construction risk one is concerned that the project will be built on time and to budget. There was, as one would expect, a fixed price date certain turnkey contract with Mitsubishi Corp and Initec Tecnologia S.A. to address and mitigate against this risk".

As with the operational risk on any IPP where there is a pool system, the parties involved were also concerned with insulating the project company from or mitigating against a change in gas price, failure of fuel supply, changes in the pool price and dispatch risk. The energy agreement with Gaz de France International achieved this in a balanced manner and bankable manner.

Norton Rose partner Simon Currie told IJ: "The energy agreement was a bespoke agreement which was interesting to draft as we needed to develop a structure which would underpin the project financing and was compatible with the regulatory regiment for gas and electricity in Spain."

Conclusion

A key question is whether the incumbent Spanish utilities can maintain their stranglehold on the market or whether new entrants will be able to break into the market. The advantages that the incumbents have in market knowledge, permitting, access to gas supplies and risk appetite will be hard for independent developers to overcome.

The answer to this question is critical in determining whether the market will truly become competitive or simply continue the status quo. Maintaining the status quo would not be good for the project finance community as incumbent utilities are more inclined than new entrants to finance new projects on their balance sheets or via shareholder bank arrangements.

Allen&Overy partner Eduardo Sebastián de Erice told IJ: "The Spanish electricity generation industry requires significant investments to keep up pace with increased demand of electricity. As incumbents line up for the construction of new generation facilities it is likely we shall witness a boom in domestic IPP projects."

However, Uría & Menéndez partner Jorge Martí disagrees: "It is difficult to envisage the Spanish incumbents moving into project finance in their domestic market. Even some continental European sponsors are said to be looking to finance their power projects on their books."

Clearly, the project demonstrates that there is strong demand for new generation in Spain and this can be met, in part, by new independant producers such AES. Added to this, there is appetitie to finance similar well structured transactions with proven sponsors.