Reaching a peak in South Africa

On August 23 2013, the six lenders to the DOE Peakers project made the first advances, marking the beginning of the construction of the two OCGT Peaking Power Plants, Avon and Dedisa, with a combined capacity of 1,005MW. By Vincent Perrot, vice-president, acquisition, investment and financial advisory, GDF Suez Energy Southern Africa and Cedric Girod, director, acquisition, investment and financial advisory, GDF Suez Asia.

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This also marked the culmination of the development phase of the Peakers project; a development started in 2004 when the Department of Energy of the Government of South Africa initiated the procurement of the project through a request for qualification. When the project was awarded to AES after the bid was submitted in June 2007, the GDF SUEZ Consortium did not expect that, six years later, it would be closing the project and commencing construction. After the negotiations with the AES Consortium were terminated in May 2008, the Department of Energy and Eskom decided to engage in negotiations with the GDF Suez consortium with a view to closing the project

A book could well be written one day about this project. That book would certainly reveal a big part to what it takes to establish the first IPP in a country. As part of the ingredients for success, vision would be immediately followed by confidence and patience. Equally high would be the strength of the sponsors gained in international markets, combined with a necessary local presence in the country, allowing strong partnership with the project’s stakeholders. The book would also explore how, in many respects, the success of the renewable energy IPP programme, which now attracts an impressive number of international developers, stems from the Peakers experience.

However, this is neither the place nor the time for this book to be written. This article rather intends to look back at some of the key milestones in the project development that took it to a bankable stage and to closing, and provide an overview of its financing structure.

The project – Unique structuring

A key feature of DOE Peakers transaction is its “two projects in one” nature, being composed of two greenfield OCGT plants of 335MW and 670MW located respectively in Port Elizabeth and the Durban area.

Each project is owned by a dedicated project company and benefits from a standalone 15-year PPA with Eskom on a BOO basis and from a fully ring-fenced project financing package. Synergies have been maximised between both plants through the use of a common EPC contractor, the Italian consortium Ansaldo-Fata, a common operating company owned by GDF Suez, and common fuel supplier, Total South Africa and transporter. However, the project maintains a fully duplicated structure, which added to the challenges faced during the development phase.

Another important structuring element is the substantial shareholding participation of a BEE partner, Legend Power Solution with 27%, and a BBBEE partner, Peaker Trust with a 10% equity interest, which was a condition of the initial RFP and required structuring a unique equity financing mechanism for these two entities as part of the overall funding plan.

Taking the project to financial close

In light of the complexity of the project and its recent history, it proved necessary to mandate commercial banks early on to support the financial structuring and overcome key bankability challenges in the initial project documentation.

Four co-ordinating MLAs were mandated in the course of 2009 to lead the lenders’ due diligence and support the structuring of the project, representing about half of the total debt required: Investec Bank Ltd, as documentation and modelling bank, ABSA as technical and insurance bank, DBSA as BEE funding co-ordinator, and IDC formed the club of mandated banks.

A lot of work on the commercial front had to be done, which occupied most of 2009 and 2010, during which the efforts were focused on the selection of the most competitive EPC contractor, fuel supplier (Total South Africa), introducing a new international shareholder in the consortium (Mitsui & Co), and bringing the project documents to a bankability stage in close co-ordination with the MLA club.

It was in the beginning of 2011 that the project documents became sufficiently mature for GDF Suez to be in a position to raise the remainder of the required debt financing through a competitive book-building exercise. Backed by strong support from all the government stakeholders (Eskom, DOE, National Treasury, and the National Energy Regulator of South Africa), GDF Suez sought firm offers for approximately R8bn of non-recourse ran-denominated debt from the local and international project finance market. This exercise attracted an important capacity appetite and saw the debt facilities more than twice oversubscribed.

Investec, ABSA and DBSA were confirmed as co-ordinating MLAs, and Standard Bank, Nedbank and Sanlam Capital Markets joined the club as mandated lead arrangers. In addition to providing a R1.4bn commitment of senior funding to the project companies, DBSA also provided the full equity financing commitment for the Black Economic Empowerment (Legend Power Solutions) and Broad Based Black Empowerment (Peaker Trust) shareholders.

It was interesting to note that despite their more limited rand-based funding capacity, international banks were able to put up competitive financing offers with a limited pricing gap compared with the most competitive local commercial banks, which demonstrated their high level of commitment to the sponsors group and the strength of the project economic fundamentals and contractual structure. Initially expecting closure of the project in the third quarter of 2011, the project came to a halt at the end of 2011.

Last year turned out to be a challenging year for the banks, which were requested to maintain their commitments to the project. During this period, one of the key lenders stepped out. To compensate for the shortfall, the consortium managed to bring RMB into the lending club, with one of the co-ordinating MLAs stepping up its initial commitment.

The project was revived in the second quarter of 2013, when the two power purchase agreements and the two implementation agreements were signed on June 3 between Eskom, the Department of Energy, and the two project companies, Avon Peaking Power and Dedisa Peaking Power, in the middle of the closing of many Renewable Energy IPP Round II projects, and with Round III bid submissions due in August 2013.

Meanwhile, a funding gap had arisen following the sharp depreciation of the rand (part of the EPC costs being euro-denominated), which lost more than 10% in just the month of May, and the sharp increase in long-term interest rates both triggered by the Bernanke announcement of a tapering of quantitative easing, which affected most emerging markets, and compounded by some specific challenges impacting investors’ confidence in the economic growth story of South Africa (labour unrest, negative rating outlook). The gap was bridged by increased commitments of ABSA and Investec, which also secured a sufficient manoeuvring margin for the project’s debt requirements, had the conditions further worsened closer to the time of financial close.

In spite of the high level of activity in the renewables sector resulting in highly constrained human resources capacities of the banks and their advisers (let alone GDF Suez, which closed the West Coast One project on June 6 and participated in the REIPP Round III bid with pretty much the same development team), the GDF Suez consortium led the two projects to financial close within two months after the PPA signature, on August 5 2013, after the execution of rand-euro forward contracts in excess of €380m, interest rate swap rates in excess of R7bn, and gasoil hedges in particularly challenging conditions.

A few weeks later, the proceeds from the first debt drawdown were brought to use by making the first milestone payments to the EPC contractor, marking the commencement of construction of the Avon and Dedisa peaking power plants, whose commercial operations are scheduled for 2016 and 2015 respectively.

Figure 1

Financing structure

The project benefits from an optimised financing package and gearing, with 85% of the R9.7bn project costs funded by senior rand-denominated debt, the remainder being funded by equity. The R8.3bn term facilities (including standby facility) fully amortise over the PPA term of 15 years post commercial operation date. Margins on the debt are highly competitive in comparison with the renewable power projects recently closed in South Africa, but also with the latest international IPP transactions, demonstrating the appetite of local commercial banks for the transaction.

In light of the PPA requirements to be fully funded in South African rand, and the adequate level of liquidity in the South African market for a project of this size, there was no requirement for ECA financing.

The BB-BEE equity facilities are provided by the Development Bank of Southern Africa. DBSA’s total exposure on the equity funding represents not less than R560m, including a guarantee facility backing 27% of the PPA performance bond in favour of Legend Power Solutions. Note-worthily, a cross-guarantee mechanism has been structured so that the empowerment shareholding SPVs support each other across both projects (akin to a cash pooling structure), which allowed an optimised credit risk profile for these equity facilities.

Figure 2

Future of IPPs in South Africa

With three sites under construction (including the West Coast One project), South Africa is a key growth market for GDF Suez. By 2016 it will have 1,100MW of capacity in operation, and certainly other projects at various stages of development under the REIPP programme and the expected base-load IPP programme. It is, however, important to remember that this is the outcome of many years of development, started in the mid-2000s, and spearheaded in 2008 when GDF Suez reinforced its presence in South Africa through a fully staffed development office. With the Peakers project and the REIPP programme, the Department of Energy and National Treasury of South Africa have established very solid grounds for future IPP developments.

Table 1