Ciprel IV – Success, sometimes adversity

August 14 2013, 11.15pm, in an empty Paris except for a few late-night tourists, a group of sponsors, lenders, lawyers and government officials gathered at the Clifford Chance offices in Place Vendome. By Bertrand de la Borde, Nicolas Souche, Bendjin Kpeglo, Josiane Kwenda and Ted Boulou at the International Finance Corporation (IFC).

To see the digital version of this report, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

After marathon negotiations session during the preceding weeks, a group of lenders led by IFC has once again confirmed its commitment to improving power supply in Côte d’Ivoire by signing the financing of the €250m expansion of Ciprel (Ciprel IV combined cycle), which will provide an additional 111MW of power to the country, with no additional use of gas. Two ministers of the Government of Côte d’Ivoire (the Minister of Energy and the Minister of Finance) made the trip to Paris for the signing, a testimony to the strategic importance of this project for the country.

After the signing, senior representatives of all parties involved highlighted why Ciprel has been exceptional in many ways throughout its history, and why they believe the success story will continue:

* The existing Ciprel power plant (Phases I, II and III) commissioned respectively in 1995, 1998 and 2009 has been a success story on both operational and financial accounts, and has withstood 10 years of political turmoil in Côte d’Ivoire;

* When launched in 1994, Ciprel was a pioneer as it was the first IPP (independent power producer) in Sub-Saharan Africa, and is still recognised as one of the best run power plants in the region;

* Post completion of Ciprel IV, a substantial part of the Ciprel power plant will operate in combined cycle mode. With a total capacity of 532MW it will become the largest IPP in Sub-Saharan Africa;

* Through extensive work led by IFC to develop and implement sector reform measures since the arranging of the Azito project¹, the country should be able to restore the long-term financial sustainability of its power sector, though the road will be long and arduous.

This case study tells the story of Ciprel, and focuses on the challenges encountered and dealt with in structuring the Ciprel IV project since IFC was mandated in February 2012 as lead arranger and global co-ordinator of the financing.

Success, sometimes in the face of adversity

When a 19-year BOOT concession agreement was awarded to the French-listed conglomerate Bouygues in 1994 for the construction of a 99MW gas-fired power plant, it was the first IPP in Sub-Saharan Africa. The Ciprel project at the time was very innovative, illustrating work done by DFIs (IFC, PROPARCO, etc), and private sponsors (Bouygues). A second phase consisting in the construction of a 111MW gas turbine was added in 1998. The concession was extended until 2020 in May 2008, when a third phase consisting in the addition of another 111MW gas turbine was signed. The plant continued operating throughout the most difficult phases of political unrest in Côte d’Ivoire without any interruption, and timely serviced its debt during that period.

In 2009, the assets owned by Bouygues in Côte d’Ivoire through its subsidiary Finagestion² were acquired by ECP, a private equity firm focused on investments in Africa. Bouygues still keeps a minority participation in Finagestion.

Over the years, Ciprel succeeded in performing constantly at very satisfactory levels, in particular on the technical side, running its GE 9E gas turbines at high availability levels and performing most of the operations and maintenance (O&M) work itself, using a relatively wide range of subcontractors as and when needed rather than relying on a comprehensive O&M agreement or long-term supply agreement (LTSA) with a third party.

The Ciprel IV project

The fourth extension of Ciprel (Ciprel IV), which was agreed with the Ivorian authorities in December 2011, consists in (i) the addition of another 111MW gas turbine (Ciprel IV GT), and (ii) the conversion of its two latest 111MW gas turbines into combined cycle operation by adding a 111MW steam turbine (Ciprel IV Combined Cycle).

Diagram 1

IFC was mandated as lead arranger and global co-ordinator of the Ciprel IV project debt financing. This covered (i) raising the equivalent of €75m financing in the local market, with the help of a local arranger, Oragroup, for the gas turbine; (ii) raising €200m financing for the combined cycle; and (iii) structuring the intercreditor arrangements to ensure seamless interaction between Ciprel’s existing financiers, gas turbine and combined cycle financiers.

The company and government were keen to ensure that commissioning of the new gas turbine would take place as early as possible in order to meet the booming domestic demand for electricity in the country. As a result, the Ciprel IV GT financing was signed in May 2012 with local commercial banks and a regional DFI, enabling construction to begin with Cegelec as EPC contractor. The GT is expected to be commissioned in January 2014.

Structuring of the Ciprel IV combined cycle

* Contractual structure – Alongside the concession agreement, which incorporates the provisions of a standard PPA with take-or-pay obligations on the state, it is worth noting that the gas supply arrangements remain of a “tolling” nature, since the supply of gas is the responsibility of the government.

Kepco Engineering & Construction (Kepco E&C) was selected as EPC contractor under a 27-month turnkey, price and date-certain contract. Kepco E&C brings to the project extensive experience in combined cycle conversions, considerable know-how in building combined cycle plants in Asia and one under construction in Ghana, and enjoys a positive track record and reputation in the market.

Diagram 2

Financial Structure

While Ciprel’s recent expansions were financed on the basis of local currency corporate loans sourced from local commercial banks and regional DFIs, the combined cycle financing required a different approach since:

* At €200m, the amount of debt required exceeded the capacity of local commercial banks and regional DFIs;

* To keep the electricity tariff competitive, in light of a 20-plus year residual concession life, a tenor of 15 years was requested, beyond the maximum 10 years available in the local market.

Ciprel’s operational track record coupled with Finagestion’s excellent management of utilities in the region provided DFIs such as IFC, PROPARCO and AfDB with adequate comfort to lend on an 80:20 typical project finance basis.

Table 1

An 18-month hurdle race from start to finish

In the course of the structuring of the €200m senior debt facility, a number of challenging structural issues arose and required tailored solutions in order to ensure that the financing closed:

* Construction interface between Ciprel IV GT and combined cycle – Construction of the new 111MW GT by Cegelec, a French-based EPC contractor, started in May 2012 with COD expected in January 2014 while construction of the combined cycle by Kepco was due to start before that date. As a result, interface risk had to be dealt with carefully in the structure.

Lenders became comfortable with this risk as: (i) their technical due diligence confirmed limited (a few months) overlap between the two construction works; (ii) sufficient contingencies were included in the base case; and (iii) standby equity was available to cover cost overruns that may result from such interface.

* Meeting international standards for air emissions – Cirpel’s existing gas turbines failed to meet current international standards for air emissions, in particular for NOx. Since it was not economically feasible to bring up to current standard the oldest gas turbines, parties agreed to add an emission reduction technology to the project and a suitable Dry Low NOx combustor system was selected.

* Crafting intercreditor arrangements that work for all – As per the financing of the third extension, Ciprel raised debt in the local market (in CFA francs) on a corporate basis, with limited covenants and security on the back of its local “blue chip” status for the financing of Ciprel IV GT. However, given the amount involved and the maturity required, the €200m financing provided by international DFIs for the combined cycle needed to be structured on the basis of a typical project finance structure, with extensive covenants and a comprehensive security package.

Tailor-made intercreditor arrangements were agreed between lenders that detail securities available for the exclusive benefit of each class of lenders, and securities benefiting all lenders, and a detailed consultation process in case of potential exercise of securities.

* Ensuring the long-term sustainability of the Ivorian power sector – In the context of the Azito project³, which was signed in October 2012, and for which IFC also led the financing, specific measures had been agreed upon between financiers and government authorities to ensure that the financial equilibrium of the power sector, which had deteriorated during the political crisis, could be restored.

Since then, most such measures have been implemented, in particular:

Revision of tariff structure in 2013 resulting in a 3% augmentation of the sector revenues;

Reduction of commercial losses by 2.5% thanks to the utility’s anti-fraud campaign;

All arrears towards sector private actors cleared.

The Ivorian power sector financial condition has significantly improved since 2011 but progress remains to be made. To that effect, as part of the project, Ivorian authorities have committed to implementing further measures in order to strengthen sector finances.

A major result the country and the region

IFC, as lead arranger and global co-ordinator of the lenders pool, played a catalytic role in mobilising the financing to enable a major private sector investment in Côte d’Ivoire post crisis, less than a year after the signing of the Azito expansion.

This was once again done by delivering an efficient financial structure that tapped both local and international markets and optimised the conditions the company could access in each market, and in turn enables Ciprel to provide electricity at competitive rates.

Once the major investments currently being undertaken by Azito and Cirpel are completed, ie, by the end of 2015, they will together generate more than 60% of the country’s electricity. Thanks to the conversion to combined cycle, they will do so efficiently, thereby limiting the amount of air emissions and making the most of domestic gas reserves.

This is not only crucial for Côte d’Ivoire but also for the sub-region as, following major efforts to develop the West African Power Pool, a number of countries are interconnected with Côte d’Ivoire, and benefit from its exports. This is particularly beneficial to landlocked countries such as Burkina Faso and Mali that generate electricity locally by running expensive HFO and diesel plants.

Footnotes

1 – See Azito case study in Yearbook 2013 Project Finance International

2 – Besides Ciprel, Finagestion also owns CIE and SODECI in Côte d’Ivoire, and SDE in Senegal

3 – See Azito case study