Puerto Rico's EcoEléctrica LNG/Power Project Marks A Project Financing First

Artist's rendering shows the EcoEléctrica power plant currently under construction in the Pe?uelas/Guayanilla area on the southern coast of Puerto Rico. The EcoEléctrica complex will include a 500-mw, gas-fired cogeneration power plant, an LNG import terminal and storage facility, and a desalination plant. Artist's rendering courtesy of Enron.

On Dec. 15, 1997, Enron International and Kenetech Energy Services achieved financial close on the $670 million EcoEléctrica liquefied natural gas terminal and cogeneration project proposed for Puerto Rico.

The project involves construction of a liquefied natural gas terminal, cogeneration plant, and desalination unit on the southern coast of Puerto Rico, in the Pe?uelas/Guayanilla area. EcoEléctrica will include a 500-mw, combined-cycle cogeneration power plant fueled mainly by LNG imported from the 400 MMcfd Atlantic LNG project on the island of Trinidad (OGJ, Dec. 22, 1997, p. 27).

Achieving financial close on a project of this size is always a time-consuming matter and one with a number of challenges. These challenges were increased by the unique nature of both the project and its financing-no project financing had ever before been completed that combined an LNG terminal and power plant.

However, in the end, these same unique aspects also made the project one with strong underlying fundamentals and therefore attractive to the lead underwriters, ABN AMRO and Banque Paribas.

Project overview

Kenetech and Enron were originally awarded the project early in 1994, after a lengthy, competitive international selection process involving several different companies, technologies, and fuels.

The project is currently owned on a 50-50 basis indirectly by Enron Corp. subsidiary Enron International and Kenetech Corp. subsidiary Kenetech Energy Systems Inc.

When completed, EcoEléctrica will supply the Puerto Rico Electric Power Authority (Prepa) with much-needed clean energy produced by its 500 mw gas-fired cogeneration power plant. The electricity produced by the power plant will be sold under a 22-year power purchase and operating agreement with Prepa.

The EcoEléctrica industrial complex, currently under construction in the Pe?uelas/Guayanilla area on the south coast of Puerto Rico, also will include an LNG import terminal and storage facility and a desalination plant. The LNG import terminal and storage facility are being constructed to satisfy the needs of the power plant and provide the opportunity for importation of additional LNG into the island for existing power plants. The desalination plant will supply all the water needed for the plant's operations. Excess water production will be sold to Prepa for use in its generating plants, and to the Puerto Rico Aqueduct and Sewer Authority for use in local markets.

Enron Engineering & Construction, an affiliate of Enron Corp., will construct the project under a turnkey contract, and another Enron affiliate will manage the operations of the project and act as fuel manager. A Kenetech affiliate will serve as the administrative manager for the project.

The EcoEléctrica project marks many firsts for the island's electricity sector and for the world as well, for the manner in which the financing has been achieved.

EcoEléctrica is the first private power generation project developed in Puerto Rico. It will bring LNG and natural gas to the island for the first time and will offer the opportunity to convert many of Prepa's power plants to this safe and environmentally sound fuel. Although the plant is anticipated to operate on LNG once the terminal facility and storage tanks are completed, the plant has been designed to operate on three primary fuels: LNG, LPG, and distillate fuel oil (No. 2 low-sulfur fuel oil). The project has obtained 100% financing during construction.

Financing details, challenges

Project costs are estimated to total $670 million. These costs will be financed during construction through a $603 million construction loan and a $67 million sponsor construction loan.

The financing for this project is nonrecourse, so payment of the loan will be made solely from the cash flow of the project. Additional financing is provided for working capital and debt-service reserve requirements, as well as for the issuance of letters of credit related to the fuel and power contracts.

Being the first to develop a project of this magnitude has its challenges. It was not only necessary to ensure that all customary procedures were followed, but, in some cases, new procedures had to be established. For example, the use of LNG and the beneficial economics for the island of using an independent power producer had to be fully studied by the government of Puerto Rico. In addition, it took over 19 months to acquire all necessary permits. Although time-consuming, the process benefits EcoEléctrica, Prepa and the people of Puerto Rico by assuring compliance with the most stringent standards of both the commonwealth and the federal government.

Holding a long-term fuel agreement is typically a prerequisite for financing. This presented a challenge to the project before it obtained the LNG contract with Cabot LNG Corp. Enron was able to rely on its extensive experience in gas contracting and fuel hedging to provide the banks with a project model that assured financeable economics for the project. Therefore, although EcoEléctrica ultimately secured a long-term LNG contract, the original structure allowed the project to close without one. This enabled EcoEléctrica to negotiate in the market as if the project were already financed and to obtain an LNG contract structured more like a U.S. pipeline gas supply contract than a typical LNG supply contract.

EcoEléctrica also contracted with ProCaribe, an Enron-owned LPG facility adjacent to the EcoEléctrica site, to import and provide a terminal for the LPG needed for the first 6-8 months of operations while the LNG terminal and storage tanks are being completed. Thereafter, the ProCaribe facility will provide back-up LPG fuel storage for EcoEléctrica.

Key investment considerations

Beyond the strong economics, a number of factors made this project very attractive to the lenders.

For example, the previously mentioned multiple fuel capability attracted the lenders because, in the unlikely event that LNG would become unavailable, the project would still be able to satisfy its obligations by fueling with LPG or No. 2 fuel oil subject to certain limitations.

The lenders also took into consideration Prepa's financial strength and its well-defined need for the power the plant will generate. As of June 30, 1997, Prepa's assets and annual revenues totaled $4.2 billion and $1.6 billion, respectively. Prepa's senior unsecured debt is rated BBB+ by Standard & Poor's and Baa1 by Moody's.

As the public corporation responsible for the generation, transmission, and distribution of electricity on the island, Prepa is committed to satisfying Puerto Rico's growing energy demand. Most importantly, Prepa has unique concerns related to its nearly total reliance on imported fuel oil and its need for a relatively high reserve margin due to its inability to import power from external sources. EcoEléctrica was selected as an ideal solution to Prepa's current production and diversification concerns. The project will provide energy to Prepa below its current average cost of production.

Integrated project prospects

As the world sees the energy sector integrate more and more each day, and energy companies acquire greater experience through mergers and acquisitions, the opportunity for integrated energy projects will increase along with the number of companies that are capable of securing them.

The challenge is to look at new and innovative ways of making these projects feasible, as well as attractive to lenders.

The confidence that ABN AMRO and Banque Paribas have shown for this project seems to be mirrored by the interest of financial institutions in the loan's syndication currently under way-early indications are very strong.

The Author

Rick Lammers was principal of the International Project Finance Group for Enron International during the development and financial close of the EcoEléctrica project. In that capacity, he was responsible for recommending financing structures and obtaining project financing from several sources, including commercial banks, institutional investors, and multilateral and bilateral lending institutions for Latin America, Europe, and Africa. Lammers has a BA in economics from the University of Texas and an MBA from Pepperdine University. Currently, he is principal responsible for development in Latin America for Enron International. Scott Taylor is vice-president of project finance for Kenetech Energy Systems Inc. In that capacity, he is responsible for arranging debt and equity for independent power projects both in and outside the U.S. Taylor has a BA in finance and economics from the University of Illinois at Chicago and an MBA from the Univeristy of Chicago. Prior to his move to Kenetech in 1991, Taylor worked 7 years at ABN AMRO, where he was responsible for arranging and providing financing for independent power projects.

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