TECO Power-Panda energy joint venture, United States

Introduction

TECO power and Panda energy entered into a joint venture to construct 2 natural-gas-fired power
plants. First was Union Power Plant at Arkansas. When built, it was the largest independent power
plant in US serving over two million houses. Second was Gila River power station, located in Gila
Bend of Arizona.
Capacity of both the plant was around 2,200 Mega Watt. Construction of plant at Arkansas began in
the summer of 2001 and the facility was fully operational in summer of 2003.It provided electricity
to the wholesale customer in Arkansas and Louisiana and some portion of Texas and Mississippi.
Site preparation and initial construction Of Gila River plant started in May 2001 and project was
fully operational in summer of 2003.The project was situated in two different and separate power
market with negligible price correlation

Sponsors

The main sponsors of the project are TECO Power Services (TPS) and Panda energy. TPS is wholly
owned subsidiary of TECO Energy. Panda Energy is privately held electricity generation company
focus on development and ownership of low cost power plant.
TECO Power and Panda developed the power station on 50-50 basis. Panda Energy had given
development assets to the partnership and TECO Power contributed long-term equity capital and all
equipment support during the construction phase of both the project. The partnership of the two
companies will own both the power plants and will manage their construction, development and
operation.
Two SPV was formed to carry put both project separately. First was Union Power Partners (UPP) to
construct, operate and maintain Union Power project. And second was Panda Gila River(PGR) to
construct, operate and maintain Gila River project. PGR and UPP guarantee the obligation of one
another under the credit facilities.

Financing

The cost of construction of two power plants was US$ 3.3 billion in 2001.A 500 million USD full
recourse loan to TECO was taken. It was equity bridge loan priced at 87.5 bps over the LIBOR. It
has been paid on quarterly basis as the units of power station enter service. Also 1.7 billion USD
five-year nonrecourse loan, syndicated among 40 banks was made available. Loan was priced at
162.5 bps over LIBOR at starting and increased to 175 bps over LIBOR in first year of operation
and 200 bps for year 2 and year 3.
Lead arranger for the financing was Citi Group and Societe Generale. 18 banks were underwriters
and 40 participated.40 banks had their participation in the general syndication. The success of
syndication was attributed to market-based pricing, straightforward structure and very aggressive
marketing by sponsors. It was expected that the project will secure an investment grade credit ration
by the end of construction phase, to which pricing was expected to fall by 12.5 basis points. One of
the terms of equity bridge loan was ‘rating trigger’. According to which if credit rating of TECO
Energy fell below investment grade then it have to post a letter of credit of amount equal to the
loan.

Financial Projections
A financial model was developed by the partnership for each project incorporating assumption
about plant performance and future conditions in the local markets. Fuel price forecast from Pace
Global Energy and power forecast from R.W Beck was used for base case and sensitivity analysis.
Average and minimum debt-service coverage ration of 3.24 and 2.24 respectively was estimated in
base case based on 18-year amortization period. Sensitivity analysis helped to gauge the impact of
certain condition on projects financial performance which included low fuel price case, higher O&M
expense case, market overbuild case and 25-year bond financing case.

Risk profile and Risk Mitigation

 Construction Risk: NEPCO was replaced by SNC-Lavalin as EPC contactor. SNC-

Lavalin was full-service engineering and Construction Company with 60 years
experience. LDs provided SNC-Lavalin and their sub-contractors incentive to achieve
guaranteed level of performance on timely basis. TECO Energy provides LD provision
equal to 25 % of contract price for each project. EPC contact also provides warranty
for equipment, design, engineering and construction work.
 Fuel Price Risk: For Union project 27 % of maximum daily fuel requirement was under
the contract at index-based price. But Gila River project had not made any contact to
buy natural gas due to high prevailing natural gas prices in its market area. And it was
expected that price would drop by 0.5 % annually during the life of project.
 Fuel supply risk: In order to mitigate the fuel supply risk a long-term firm transport for
fuel was contracted for 52 percent of Union power station project‘s maximum daily
requirement. Gila River power station project had not signed any contact for fuel
supply arrangement, which was considered best due to project’s access to abundant gas
supplies.
 Operator risk: O&M services were provided by a subsidiary of TPS, which had more
than 100 years of experience. TPS has acquired experience with many technologies
over the year and it own and operate many project using GE 7F technology.
 Electricity price risk: The projects tend to have a portfolio sales approach. For this they
negotiated contracts with several pricing structure and terms. This included a mix of
short-term, medium term and long sales agreement and also had a mixture of fixed-
energy and fuel-indexed pricing. This was to make project adaptable to changes in fuel
and electricity markets.
 Equity funding risk: Sponsors who were guaranteed by TECO energy was committed
to make cash contribution in the construction phase in order to supplement the equity
bridge facility to maintain a 60-40 debt-to-equity ratio.
 Technology risk: Advance model of GE 7F turbine technology was used by both
projects. GE had evolutionary technique to develop its combustion turbine generation
focusing on making incremental improvement from one model to next one. Further,
long-term service agreement and warranty agreement was used to mitigate part failure
and risk of unplanned part replacement.

Environmental safeguards:

Union power project and Gila River project both had a combined-cycle configuration. In order
to reduce NOX emission combustion turbines used low-nitrogen-oxide combustors and also
had selective catalytic reduction process. To minimize the emission of sulphur-dioxide,
sulphuric acid and particulate matter in the air low-sulphur natural gas was used in combustion
turbines.
Extra space was give in heat recovery steam generator for any further installation of an
oxidation catalyst which may be capable of reducing carbon monoxide emission by about 80%.
The air permit for both the project had certain short term and annual emission limits for duct
burners, combustion turbines. Testing, monitoring and record keeping was also made
mandatory.