The 194MW Stage 1 of the Bridge Power project will bring much-needed generation capacity and fuel mix diversification to Ghana and will be one of the world's largest LPG power plants. The structuring of the limited-recourse vendor financing for the project, which reached financial close in December 2018, presented some unique challenges. This article outlines the key features of the transaction structure, some of these challenges and how they were overcome. The DLA Piper team provided legal advice to the EPC contractor and its parent, which provided the vendor financing.
The vendor financing for this project won the Best Financial Structure Silver award and Best Utilities Project Gold award at the Partnerships Awards 2019.
Electricity shortage in Ghana
For more than a decade, Ghana has been experiencing a severe electricity shortage. This is despite a significant increase in the installed generation capacity during the same period. One reason for this is that much of Ghana's generation capacity consists of hydro facilities and thermal facilities running on natural gas as the primary fuel source. Low water levels at the Akosombo dam and the chronic natural gas shortages in Ghana mean that a significant portion of such capacity is not available for generation.
Significance of the project
Located in Tema, the Bridge Power project is designed to address these challenges and will be developed in two stages. Stage 1 will use five gas turbines and a steam turbine operating in a combined cycled gas turbine (CCGT) configuration with an aggregate capacity of 194MW. Stage 2 will bring the total capacity of the project to 400MW through four additional gas turbines and one additional steam turbine, also in a CCGT configuration.
Stage 1 of the Bridge Power project will initially run on liquefied petroleum gas (LPG), with the ability to switch to natural gas as the primary fuel source once natural gas becomes available in the Tema region. Once LPG becomes the back-up fuel of the project, the LPG facilities constructed as part of the project can be used to supply environmentally friendly LPG for domestic use.
Construction of Stage 1 is expected to be completed within 24 months, although the project will start generating power in ten months initially, with the gas turbines operating in simple cycled configuration. To further shorten the time for project deployment, construction of Stage 1 will first be financed through vendor financing to be replaced subsequently by long-term project financing. This will allow construction to commence while a permanent financing solution is being put in place.
As such, the Bridge Power project is expected to add much-needed generation capacity to the country while helping to diversify its generation fuel mix. It will also be one of the largest LPG power plants in the world.
The Bridge Power project is being developed by Early Power Limited (EPL), sponsored by Endeavor Energy, a leading independent power development and generation company focused on Africa; Sage, a leading independent energy trading firm in Ghana; and GE, which will also supply the gas and steam turbines for the project. Construction of the project will be undertaken by Power Projects Sanayi İnşaat Ticaret Limited Şirketi (EPC contractor) under an engineering procurement and construction (EPC) contract.
EPL entered into a Power Purchase Agreement (PPA) with the Electricity Company of Ghana (ECG) with a term of 20 years. Government support is provided in the form of a Put and Call Option Agreement (PCOA) – a structure increasingly common in energy and infrastructure projects in Sub-Saharan Africa and beyond. The PCOA allows EPL to "put" the project (or its shares) to the government where the PPA is terminated early. The purchase price will vary depending on the circumstances in which the PPA is terminated but will, at a minimum, cover the outstanding project debt.
Vendor financing – structuring challenges
The vendor financing for Stage 1 of the Bridge Power project consists of a main tranche of USD264 million provided by the parent company of the EPC Contractor, Mytilineos S.A. (Mytilineos), and a second tranche of USD50 million provided by way of a deferral of part of the EPC contract price to be paid through a guarantee issued by GuarantCo, a development finance institution that forms part of the Private Infrastructure Develoment Group (PIDG) and is sponsored by five G12 governments. The main tranche may be increased by USD50 million in the event that GuarantCo's guarantee is not drawn. Both tranches are structured on a pari passu limited recourse basis.
Unlike most vendor financing solutions for projects of this nature in the market which typically have short-to-medium loan tenors and require access to the project sponsors' balance sheets, the vendor financing for Stage 1 of the Bridge Power project is structured on a true limited recourse basis with a long tenor. This gives the project sponsors the flexibility to keep the vendor financing in place for as long as required and avoids the "cliff-edge" re-financing risk associated with the traditional approach to vendor financing.
Such a structure does, however, bring into focus the challenge around the interplay between the proper allocation of risks and responsibilities between the project company and the EPC contractor, the inter-creditor arrangement between the lenders of the two financing tranches and the range of project control, approval rights and remedies available to Mytilineos in its capacity as vendor financier.
Another challenge is to ensure that the financing structure complies with the requirements set out in the PPA in order to benefit from the protection afforded by the PCOA. In particular, the PPA envisages that the main tranche of the vendor financing will be provided by one (or more) of the project sponsors.
How these challenges are overcome
The successful closing of this vendor financing transaction is the result of the commitment of all parties, including the project sponsors, the EPC contractor and the providers of vendor finance to overcoming the unique challenges of this project with innovative, bespoke structuring solutions. The bespoke vendor financing structure offers a new solution to long-term local energy requirements and is one that can be applied to many future projects in the Sub-Saharan Africa region.
Tailor-made decision-making regime and lender disenfranchisement
To balance the interests of the various parties and address the concerns of any perceived conflict of interest, a bespoke lender decision-making regime has been painstakingly negotiated and put together for the vendor financing. Broadly speaking, it operates to disenfranchise Mytilineos from lenders' decision-making in relation to enforcement actions arising from certain types of default attributable to the EPC contractor and the control over the exercise by EPL of certain reserved discretions connected with the EPC contract or the conduct of the EPC contractor.
Application of enforcement proceeds
Application of enforcement proceeds (e.g. liquidated damages from the EPC contractor or pay-out under the PCOA) was another area of intense negotiation. This is a reflection of the fact that Mytilineos is both a vendor financier and an affiliate of the EPC contractor, which would be expected to take some responsibilities for project failure if caused by a breach by the EPC contractor. In general, a mechanism was agreed that linked the disfranchisement of Mytilineos from its enforcement rights to the amount received by the project sponsors out of the enforcement proceeds. In some cases, EPL would have the flexibility to direct enforcement proceeds to project reinstatement, which had to be balanced by Mytilineos' need to limit its overall exposure to the project by reference to the liability cap agreed under the EPC contract, taking into account any outstanding vendor financing debt in the interim.
Recourse under PCOA
In further recognition of the principle of risk-sharing, it was agreed that in some cases, the PPA was terminated due to a buyer (ECG) default and for a certain period of time, Mytilineos' primary means of enforcement would be through the government support regime under the PCOA. Provisions were introduced to safeguard the sponsors' equity interest during this process.
As explained, the PPA envisages that the main tranche of the vendor financing will be provided by one of the project sponsors. To comply with this requirement, the main tranche of the vendor financing is provided through a GE entity as lender of record, with Mytilineos as a sub-participant. Unlike the typical sub-participation arrangement, however, whereby the loan sub-participant is expected to sit passively behind the lender of record, it was clear from the beginning that it is Mytlineos' requirement that it will play an active role in the exercise of lenders' decision-making, enforcement and other rights. A bespoke sub-participation document was therefore required to give effect to this arrangement and also manage GE's exposure in this respect. Further provisions were included to ensure that Mytilineos would benefit from the usual yield protection and indemnities for lenders under the vendor financing documents.
A further complication was introduced by the fact that the turbine supplier (another GE entity) required the right to convert certain payments under the turbine supply agreement with the EPC contractor into a share of participation into the main tranche of the vendor financing. This resulted in the need for a self-adjustment mechanism to the participation percentage in the sub-participation agreement, tied to the status of the turbine supply payment from time to time.
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