pt paiton energy a case study in renegotiation cross-border...

Session: Private Sector ParticipationTopic 4.4. Experiences in Renegotiation

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The views expressed here are those of the presenter and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.

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Session on Private Sector Participation

Yong Hee KongPPP Resource & Research Centre, Kuala Lumpur

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PT Paiton During Construction


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PT Paiton Energy (almost complete)

• Pt Paiton Energy -“PE” or the “Project” is a US$ 2.7 billion fully complete and commissioned 1,230 MW (2 x 650 MW) coal-fired base load power plant, located on the Northeast coast of Java, Indonesia.

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Background to IPP

• 1990, GOI introduced IPP policy (World Bank, etc.)

• May 1991 - 6 (plus 2, later in Sept 1991) companies bid for Units 7 & 8

• Units 1 & 2 - PLN, Units 3, 4, 5 and 6 - future IPPs

• June 1992 - Award to BMMG Consortium (BHP, Edison Mission Energy, Mitsui, GE Capital)

• 1994 (after 21 months of negotiation) PT Paiton Energy and PLN executed PPA

• PLN advised by international advisers - Lazard, Warburg, Lehman, Lahmeyer, USAID


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Background to IPP (continued)

• Tariffs were in USD

• COD (Commercial Operations Dates) - May and July 1999

• Rp devalued during turmoil caused by fall of Suharto

• Also, demand fell due to economic crisis

• PLN declined to dispatch plant for several months

• PE and PLN sued each other. President Habibie ordered parties back to negotiating table in November 1999

• New PPA agreed by PLN and PE in December 2001

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Original Tariff Structure

• Four componentsA - capacity chargeB - fixed op/maintenance chargeC - coal fuel charge (‘pass-through’)D - variable operation/ maintenance charge

• Components C & D vary depending on electricity generated

• Component A was scheduled to “step-down” over time as senior long-term debt was amortized. It had “common facilities” for sharing with future IPP on same site.


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Tariffs (continued)

• Costs included building common infrastructure facilities that would be shared with the other units eventually

• Component A (of the Tariffs) is projected as follows:Years 1-6 Rupiah eqv of 6.12 cents/kWhYears 7-12 Rupiah eqv of 5.97 cents/kWhYears 13-30 Rupiah eqv of 3.10 cents/kWh

• GOI wanted a ‘front-loaded’ tariff to lower the cost of power in later years

• Projected ave total tariff – Rupiah eqv 6.3 cents/kWh

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FSA - Coal Supply Agreement

• Lenders insisted on assurances on ample coal supply

• 1995 Coal-Supply Agreement signed with PT Adaro Indonesia, a subsidiary of BHP - advised by international experts. Main terms:

Single source coal supplierDedicated reserves for 15 years, at all timesDedicated stockpile of 200,000 tonne at Kelanis barge-loading facilityDedicated fleet of tugs and barges from Kelanis to Indonesia Bulk Terminal (IBT) facility2 dedicated Handymax vessels to transport from IBT to Paiton sitePlant stockpile of 670,000 tonnes capacity


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Original Coal Supply Chain

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Why Renegotiation Was Necessary

• Rp tumbled. (exchange rate dropped from 2450 to 7400 USD)

• PLN’s revenue was in Rp. (USD equivalent tariff dropped from 7 cents to 2 cents per KWh)

• PLNs demand collapse temporarily due to 1997 financial crisis

• GOI was called to help but PLN’s position because untenable.


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Why Renegotiation Was Necessary (continued)

• PLN refused to used Paiton for dispatching

• Under the terms of Paiton’s financing documents, PE was forced to go to court. PLN also sought to declare Paiton PPA null and void.

• When Habibie came into power in November 1999, he sought an amicable solution to this problem.

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Group Discussion (10 minutes)

• How would you advise on:What PLN and IPP should do? (Should IPP dispatch/ supply power during negotiation? Should GOI not ‘honour’ their Letter of Comfort? Should IPP continue to sue PLN and GOI? Should PLN sue for ‘unfair’ PPA?)

The tariff structure and rates?

The fuel supply chain (and its rates)?

The way to negotiate?


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Restructuring the PPA

• November 1999 - PLN and PE began negotiation.

• February 2000 - First interim agreement. (PLN agrees to pay for actual cost of energy dispatched plus a small amount for capacity charge) (insufficient)

• January 2001 - Second Interim Agreement (increased amount for capacity charge) (sufficient to cover opex and interest)

• December 2001 - Commercial Agreement on pricing, arrearages and related provisions of PPA. Binding Term Sheet (BTS) prepared.

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BTS - Four Parts to It(Both parties agree to abide)

1. Standstill of all legal proceedings

2. Confidentiality of ongoing discussions

3. Agreed-upon commercial issues (including changes to PPA)

4. BTS implementation plan (deadline - 31 March 2002)


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Broad Re-Structured Terms

• Terms extended from 30 to 40 years

• Component A (capacity charge) - no longer step-down, now constant.

• Resultant tariff 30% lower

• Component C (coal fuel charge) - CIF cost at jetty

• Coal Supply Chain restructured

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Restructuring the Coal Supply Chain

• By 1999, Adaro’s coal was USD 10 per tonne higher due mainly to its supply chain

• Main coal-supply chain restructuring actions:Remove need for dedicated reservesRemove stockpile requirementRemove restrictions of dedicated tugs/barges Remove need for intermediate storage at IBTEliminate Handymax vesselsMulti-source supplies (Adaro now provides 60%-70%)


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Restructured Coal Supply Chain

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Lessons Learnt - Appropriate Risk Allocation for IPP Projects in Today's Environment

• Host government’s risks :Changes in currency risks (devaluing Rp)Demand and supply (crisis reduced demand)Changes in law (political decisions and contract-sanctity - honour all agreements)Force majeure (those in control of government)Inconvertibility (of currency USD/Rp)Transmission network

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Allocation of Risks - IPP’s Risks

• Construction (turnkey)

• Financing (answerable to financiers)

• Fuel supply (cost pass-through - any incentives to reduce costs?)

• O & M

• Capex Investment


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The Paiton Paradigm

• Historical: The original financing was a groundbreaking transaction, evidenced by over 15 awards.

• Complexity: The restructuring involves an extremely complex network of parties consisting of 3 key sponsors, PLN/Gov’t of Indonesia, 2 major export credit agencies, 2 bilateral agencies, 36 international commercial banks, bondholders and other project parties.

• Size: The US$ 2.7 billion project remains a benchmark for non-recourse transactions globally. Coming in the wake of the Indonesian macroeconomic crisis, so too is the project's restructuring;

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The Paiton Paradigm (continued)

• Management and Process: The project was exemplary in the management of the complex co-ordination process required to find consensus among an extremely diverse group of project stakeholders making full use of transparency, engagement and communication (i.e. the restructuring website);

• Approach: This restructuring represents a ground-breaking example of consensus-based restructuring of non-recourse project debt through equitable burden sharing among key project parties with the clear intention to achieve stakeholders' restructuring goals; and


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The Paiton Paradigm (continued)

• Results: The project achieved a sustainable long term restructuring solution for all parties: (1) no principle haircuts to debt or equity; and (2) a sustainable tariff for long-term contractual stability.

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Transaction Overview

• Background: The project is a 1,230 MW coal-fired base load power plant fully completed and commissioned on the Northeast coast of Java, Indonesia.

• The project is 40% owned by a subsidiary of Edison Mission Energy; 32.5% by a subsidiary of Mitsui & Co., Ltd.; 12.5% by a limited partnership affiliated with and managed by General Electric Capital Corporation, and 15% through a loan to PT Batu Hitam Perkasa(collectively the “sponsors").


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Transaction Overview (continued)

• History: The financing of the project was closed in 1995 with a total debt package of US$ 1.8 billion. A bondtranche was subsequently added in 1996. Lenders and guarantors/insurers include USEXIM, JBIC, OPIC and NEXI (the “agencies"), a syndicate of 36 international commercial banks and a syndicate of bondholders.

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Transaction Overview (continued)

• Restructuring: Principal was originally scheduled to commence amortizing in November 1999. However, due to the Indonesian macroeconomic crisis and its effects on power demand in Indonesia, cashflow was below the original projections. Hence, the project and its stakeholders entered into restructuring negotiations. During this period, interest was kept current through a combination of interim payments from PLN and in large part to the sponsors' contribution of US $ 240 million of contingent equity in 1999-2001.


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Restructuring Overview

• No haircut of debt or equityPrinciples: The debt restructuring process for the USD 1.8 billion of non-recourse project debt formally began in October 2001 and was based on the key principle that there would be no haircut to debt or equity.

The project's proposal to the lenders, agreed to in principle by the agencies on 24 September 2002 was for a 2-year extension of the original maturity date of the agencies' tranches and a re-setting by the agencies of their interest rates to current benchmark levels.

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Restructuring Overview (continued)

• No haircut of debt or equity (2)Outcome: All the agencies agreed to the commercial

terms of the debt restructuring and the deal was then presented to the commercial banks on 8 October 2002. The approval of all commercial banks was received. The restructuring documentation was signed in December 2002, CP's were then met and the restructuring closed on 14 February 2003 with the entry of USEXIM.


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• USEXIM dept participationUSEXIM commitment: A key element and major achievement, of the debt restructuring was USEXIM'sability to apply a "risk-sharing" concept to the commercial banks. The result was a USEXIM "take-out" of 75% or US$ 381 million (USEXIM A tranche) of the US$ 508 million USEXIM construction facility, leaving the commercial banks with a residual exposure of US$ 127 million (USEXIM B tranche). This was a one hundred cents on the dollar takeout for 75% of the exposure.

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• No back-ending of amortization for commercial banksCommercial bank amortization: The commercial bank residual exposure was divided on a pro-rata basis among the 36 banks in the syndicate and has a straight line amortization (therefore no principal back-ending) with a maturity matching the JBIC B tranche.

Agency amortization: Agencies agreed to a back-ended amortization profile enabling the commercial banks to retain their original amortization profile.


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What Caused the Paiton Restructuring ?

• The original debt profile: OECD consensus agreement requirements delivered a tariff that was not politically defensible;

• The lenders’ requirement for certainty in the fuel chain: created an expensive fuel cost;

• Public tariff of PLN was heavily subsidized creating a politically sensitive gap with private power tariffs;

• Debt profile was based on projections of demand, not actuals;

• The US$ debt/ Rp. Cashflow mismatch with a mitigation structure based on legal mitigation rather than project logic.

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Original Coal Supply Chain


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Restructured Coal Supply Chain

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Paiton was needed to be operational by the government -


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Debt Structure Pre-Restructuring

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Debt Structure Post-Restructuring


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Burden-Sharing and Win-Win Are Important Principles

• Burden sharing was allocated equitably among the stakeholders, creating a win-win scenario:

Sponsors injected US $ 240 million of contingent equity to keep interest current and cover project costs; Sponsors agreed to accept a lower return;PLN agreed to pay for arrears payments with no change to risk allocations under the PPA;Coal supply chain counter-parties agreed to terminate/renegotiate their contracts;

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Burden-Sharing & Win-Win Are Important (continued)

• Burden sharing was allocated equitably among the stakeholders, creating a win-win scenario: (continued)

EPC contractor agreed to release care, custody and control of the plant to allow the project to dispatch electricity, to reduce its claims and paid over time;Agencies agreed to reduce interest rates and to back-end their debt USEXIM agreed to participate in the debt;Commercial banks agreed to an interim principal deferral and then accept risk sharing with USEXIM; and The project accepted the expense, in time and effort, to execute a sustainable restructuring platform to a professional "best practices" standard.


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Debt Restructuring Process• The restructuring process entailed satisfying the interests of all

Project parties, often times in parallel with each other.C

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Advisors to the Project

• Significant advisorsFinancial Advisor: ABN AMROLenders' Engineer: Mott MacDonaldLenders' Fuel Advisor: JTBoydLawyers: Skadden Arps (counsel to the project), Latham & Watkins (counsel to the lenders)

pt paiton energy a case study in renegotiation cross-border...

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