WORKSHOP ON TRANSMISSION SUPPORT AGREEMENTS

Transcription

1 WORKSHOP ON TRANSMISSION SUPPORT AGREEMENTS Indo-Nepal Transmission Interconnection Project Kathmandu, Nepal July 2009 John W. Gulliver

2 John W. Gulliver Pierce Atwood LLP One Monument Square Portland, ME USA Tel: Fax: Cell:

3 Table of Contents I. Understanding the Deal (Transmission Lines Are Never Built Alone) II. Transmission Line Building Blocks (Required Preparatory Work) III. Transaction Team in Support (You Can t Do It Alone) IV. Typical TSA Terms and Risk Points (The TSA and its Associated Agreements) V. Observations and Conclusions (Next Steps) 3

4 I. Understanding the Deal (We Don t Build Transmission Alone) Transmission line is means to end Not end itself Transmission lines exist to flow electricity from producer (generation) to customer Absent generation, no need for line Absent customers, no need for line 4

5 I. Understanding the Deal (We Don t Build Transmission Alone) What is overall deal here? Can you diagram it? What is the glue that holds entire project together? 5

6 I. Understanding the Deal (We Don t Build Transmission Alone) Project description for Indo-Nepal cross-border transmission line: 400 kv double circuit transmission line Alternating current 145 kilometers from Muzaffarpur, India to Dhalkebar, Nepal 6

7 I. Understanding the Deal (We Don t Build Transmission Alone) Substation expansions at each terminus For first 5 years, Nepal will import 250 MW from India For next 20 years, 500 MW will flow from Nepal to India from new hydro generation sites (to be built) 25 year term total 7

8 Nepal Parties Nepal Electric Authority Owned by Government of Nepal Transmission customer for entire line Power Transmission Company Nepal Limited (PTCN) Joint venture of NEA and IL & FS Development Corporation Public private ownership Will own and implement 45 kilometers of line in Nepal from Dhalkebar to Bathanah 8

9 India Parties Cross-Border Power Transmission Co. (CTPC) Also joint venture of NEA and IL & FS Will own and implement approximately 100 kilometers of line in India from Musaffapur substation to Sursand 9

10 Nepal and India Parties Rationale for two companies, two contracts Ownership ratios between NEA and IL & FS for PTCN and CTPC Governance Cross-liabilities/guarantors Is risk allocated to party best able to manage, mitigate or insure it? 10

11 What is the Underlying Power Deal? Who is power generator in India for export sales to Nepal? Does this generation currently exist? Power Purchase Agreement between Nepal customer and Indian generation? Who is Nepal customer? Creditworthy counterparties in Nepal and India? 11

12 What is the Underlying Power Deal? Same questions for Nepal to India sale Who is generator in Nepal How advanced is generation planning Indicative PPA between Nepal generators and Indian customers Creditworthy counterparties 12

13 Key Deal Flow Points Power flows Cash flows Loan obligations Guarantee flows Risk allocations 13

14 Overview of Three Transactions

15 Middle East

16 Multilateral, Bilateral, and Export Credit Agencies Mid-East Loan Guarantee Agreement Non-recourse Debt Common Terms Agreement Commercial Bank Syndicate Loan Agreements Sponsor Sponsor Sponsor Equity Shareholder Agreement Board of Directors Gas Transmission Transmission, Support & Interconnection Agreement Labor MORTGAGE AND SECURITY AGREEMENT Gas Supply SPV (Power Plant) Power Purchase Agreement Land Lease Letters of Credit Water Supply EPC Contract Major Equipment Contract (turbines) Operating & Maintenance Contract IMPLEMENTATION AGREEMENT 16

17 Middle East 17

18 Georgia

19 Georgia Generation in Russia and Azerbaijan (transit use only until new hydro is built) Third Country New Georgian Hydro-electric Generation (investor owned) New 500 kv/400 kv Transmission Line ( state owned) Turkish Electricity Consumers (eligible customers) (seasonal flow: during winter peak period only, until new hydro is built) Turkish Generation Georgian Distribution Utilities (investor owned) Money flow Electricity flow 19

20 Nepal and India

21 Indo-Nepal Transmission Project Can we diagram this deal? Who pays for line? Need for private sponsors? IFI loans? Equity investment? 21

22 Indo-Nepal Project Nepal-India Border First Five Years Nepal Electricity Authority (state owned) Power Transmission Company Nepal, Ltd. (joint venture) Cross Border Power Transmission Co. (joint venture) Power Grid (India) Money flow Electricity flow 22

23 Indo-Nepal Project Generation Facilities in Nepal (investor owned?) Nepa-Indial Border Subsequent Twenty Years Nepal Electricity Authority (state owned) Power Transmission Company Nepal, Ltd. (joint venture) Cross Border Power Transmission Co. (joint venture) Power Grid (India) Money flow Electricity flow Electricity Consumers in India? 23

24 II. Transmission Line Building Blocks (Required Preparatory Work) Feasibility studies to date By whom When Covering what Relatively short line Engineering studies Need for converter stations 24

25 II. Transmission Line Building Blocks (Required Preparatory Work) Environmental risk assessment on Nepal side Environmental risk assessment on India side Economic risk assessment for financing line if Nepal generation is not built Is line economic for only five years of sales India to Nepal? 25

26 II. Transmission Line Building Blocks (Risks for International TSA) Site location, permitting and real estate Archaeological Native peoples/cultural Land use, air, water issues Real estate Ownership? Insure title? Labor and social impacts Contractual obligations to hire local labor Other local social issues 26

27 II. Transmission Line Building Blocks (Construction and Operating Risks) Technology risk Does it work? Who can fix it? 27

28 II. Transmission Line Building Blocks (Construction and Operating Risks) Construction cost Fixed price Cost overruns Construction schedule Who bears cost of delay? Contract damages 28

29 II. Transmission Line Building Blocks (Construction and Operating Risks) Who bears risk of power flow interruption along line? Who bears risk of ancient archaeological discoveries that preconstruction testing failed to find at site? Project delayed, costs go up, power supply constrained 29

30 II. Transmission Line Building Blocks (Financing Risks) Source of cash equity Risk of change in laws Debt finance risk of interest rate spread change, interest rate volatility Risk of change in loan tenor Securitization/mortgaging of all assets risk of prior liens/encumbrances 30

31 II. Transmission Line Building Blocks (Financing Risks) Requirements for preconstruction Letters of Credit and funding Political risk insurance Credit default insurance Agreement for investor reserves, maintenance agreement for debt service coverage ratios and reserves, similar finance agreements 31

32 II. Transmission Line Building Blocks (Required Preparatory Work India Market) Is overall deal premised on new hydro generation in Nepal to serve India market? If so, what feasibility studies have been conducted on new hydro Environmental factors Social disruption Engineering issues 32

33 II. Transmission Line Building Blocks (Required Preparatory Work India Market) Safe guards on social, economic, cultural values Location of new hydros in relation to existing Nepal transmission network Transmission and interconnection fees and charges Line congestion and stability Who has access? 33

34 II. Transmission Line Building Blocks (Required Preparatory Work India Market) Evaluation of market in India Seasonal availability match: Does available hydro generation in Nepal fit market demand in India 34

35 II. Transmission Line Building Blocks (Required Preparatory Work India Market) Transmission capacity within India Transmission access and pricing regimes within India Who determines? How? 35

36 II. Transmission Line Building Blocks (Required Preparatory Work India Market) Transmission build out required to support import from Nepal? Who is responsible, how it is paid? Confirm creditworthy Indian counterparty before executing and negotiating TSA 36

37 II. Transmission Line Building Blocks (Operating and Power Sale Risks) Risk of change in power market design during term of PPA Alignment between start date under PPA, Engineering Procurement and Construction (EPC) contract schedule for TSA, liquidated damages under each contract, Letters of Credit 37

38 II. Transmission Line Building Blocks (Required Preparatory Work) Get foundation stones in place, get building blocks done 38

39 III. Transaction Team in Support (You Can t Do It Alone) Complex transactions are multidisciplinary effort This is a significant transaction You will need top-tier team with proper skills and experts Consistency 39

40 III. Transaction Team in Support (You Can t Do It Alone) Senior government official as team champion Demonstrates commitment of government Focal point, go to person for investors, counterparties 40

41 III. Transaction Team in Support (You Can t Do It Alone) Other technical advisors: Engineering/transmission Legal Finance Environmental Regulatory Typically both local and international 41

42 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Parties to TSA Commercial entities Guarantors Role of lenders Term of TSA Commencement date Duration of TSA Extension for Force Majeure Scheduled dates Termination date 42

43 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Obligations of Transmission Company Operation and maintenance Availability requirement Outages scheduled, unscheduled Timing Obligations of Purchaser(s) Payment Security 43

44 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Transmission charges Calculation Abatement Increased EPC costs Increased operating costs Change in law costs, timing 44

45 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Upgrades Right to propose Pricing and awarding of contracts Disagreement as to need Disagreement as to cost Adjustment of transmission charge 45

46 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Payments Currency Invoice Bank transfers Invoice disputes 46

47 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Technical Arrangements Communications systems Metering Scheduling of maintenance outages Notices Third party certifications 47

48 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Defaults and Remedies Notice Cure right Damages Suspension of service Liquidated damages Cross defaults Implementation Agreement, EPC, PPA, Loan Agreements, Equity Agreements 48

49 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Insurance and Finance Required coverages Political risk Force Majeure Third party liability Financing conditions precedent Loan covenants and hedging Foreign exchange risks 49

50 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Force Majeure Definition Effect Limitations Notice Extension of term Increased costs due to Force Majeure Environmental Force Majeure 50

51 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Transfer of Interest Assignment of rights and obligations Involuntary transfers Creation of security interests Monetization of intangibles 51

52 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Termination Termination date Early termination Early termination payments Exclusive rights to terminate in TSA Extensions 52

53 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Dispute Resolution Mediation Expert resolution Arbitration Courts 53

54 IV. Typical TSA Terms and Risk Points (The TSA and Its Associated Agreements) Legal Arrangements Governing law Submission to jurisdiction Change in law Waiver of sovereign immunity Location and language of dispute resolution Schedules and Exhibits 54

55 Examples of Agreements from Cross-Border Power Deal with TSA Power Purchase Agreement Guarantee for Power Purchase Agreement Implementation Agreement (Project Development Agreement between Sponsors and Host Governments) 55

56 Examples of Agreements from Cross-Border Power Deal with TSA Engineering, Procurement and Construction Contracts EPC Guarantee Agreements EPC subcontracts for major equipment (e.g., transmission towers) 56

57 Examples of Agreements from Cross-Border Power Deal with TSA Performance Bonds Irrevocable Letters of Credit to support preconstruction activities by vendors Interconnection Agreement between Grid and Generation Project Transmission Support Agreement Operation and Maintenance Agreements Transmission and Generation 57

58 Examples of Agreements from Cross-Border Power Deal with TSA Guarantee Agreements for Operation and Maintenance Agreement Long-Term Maintenance Services Contracts Fuel Supply Agreements Fuel Transport Agreement (if applicable) Water Supply Agreement 58

59 Examples of Agreements from Cross-Border Power Deal with TSA Land Lease Agreements Technical Support Agreements Project Company Agreements (establishing Project Company SPVs among Sponsors) Shareholders Agreements for Project Companies 59

60 Examples of Agreements from Cross-Border Power Deal with TSA Pledge Agreements among Shareholders of Project Companies Common Terms Agreement among Lenders Facility Agreement among Lenders Guarantee Agreements for Financings (from international financial institutions guaranteeing commercial bank debt) 60

61 Examples of Agreements from Cross-Border Power Deal with TSA Direct Agreements for each of TSA, PPA, Implementation Agreement, EPC Contract, etc. Mortgage and Security Agreement covering all project assets and related agreements; including transmission assets 61

62 Examples of Agreements from Cross-Border Power Deal with TSA Equity Subscription and Retention Agreement Insurance and Reinsurance Agreements Interest Rate Swap Agreements and Hedging Agreements Fuel Price Hedging Agreement (if applicable) Equity Letter of Credit 62

63 Examples of Agreements from Cross-Border Power Deal with TSA Debt Service Reserve Account Agreement and Letters of Credit Reinsurance Assignment Deed Permitting Hedging Agreement Fee Letter (important to banks how they get paid!) 63

64 Examples of Agreements from Cross-Border Power Deal with TSA Flow of Funds Agreement/Waterfall Agreement (important to Sponsors how they get their money out!) Due Diligence and Engineering Opinions and Reports Legal Opinions 64

65 V. Observations and Conclusions (Next Steps) Care, diligence, detailed negotiations, and painstaking drafting upfront pay dividends down the line If complex cross-border projects have trouble, all parties benefit when obligations, options and responsibilities clearly spelled out in project agreements Your next steps? 65

66 Final Thoughts In complex projects, Murphy s Law reigns: If it can go wrong, it will go wrong. As does O Toole s Corollary: Murphy was an optimist. 66

67 Thank You