Giddy: Don Pedro Hydroelectric case study

Case study
Don Pedro Hydroelectric Plant

by Prof. Ian H. Giddy, New York University

Don Pedro Hydroelectric Plant
Sarapiqui Province, Costa Rica
The Don Pedro Hydroelectric Plant, which began operation in November 1996, is located on the Caribbean coast of Costa Rica in the town of San Miguel de Sarapiqui. This high-head facility produces 14 megawatts of electricity by dropping a small volume of water 1,400 feet. Because there is no large dam required for this type of facility, and thus no flooding of the river valley, the Don Pedro facility has minimal impact on the environment. Indeed the hydroelectric company, Energía Global de Costa Rica S.A., pays upstream landowners to protect the rainforest and watershed. A subsidiary of Covanta, an American company, operates the facility.

Details:

Cost: $25.3 million

Sector: Power generation

Status: Closed June 1995; went on-line in late 1996

Sponsors/Lead Manager: PH Don Pedro SA, a Costa Rican special purpose corporation; the US firm Energia Global Inc. (EGI) is the lead equity investor in PH Don Pedro along with Energy Investors Funds and Energia Global de Costa Rica.

Purchaser: ICE, the national electrical utility of Costa Rica, under a 15-year power purchase agreement.

Financing Package: This project is structured as a B00 with no government guarantee and an 81/19 debt-equity ratio. It carries about $4.7 million in sponsor equity and $20.6 million in 12-year hard currency debt from GE Capital, of which $17.3 million is senior, and $3.3 million is subordinated. GE Capital is financing both construction and the take-out facility to replace it. OPIC insurance covers political violence, expropriation on total project costs and foreign exchange availability on the cash flow.

Innovation: This is the first foreign-financed independent power project in Costa Rica, yet was closed without multilateral support. It is also the first closed by lead sponsor EGI, a firm incorporated in Massachusetts in 1991 solely to pursue independent power development opportunities in Latin America at a time when few, if any, had been successfully done. Despite its lack of track record as a corporation, EGI was able to attract several million dollars of equity from both major US corporations (Ogden Corp. and Thermal Electron Co.) and institutional investors.

For its first project, EGI had to maximize rates of return to its investors, which required using as little of their equity as possible. It thus sought at least an 80% debt burden, which is considered unusually high for emerging markets projects. To make potential lenders comfortable at that level, it had to develop a project with especially high net revenue potential. For this it relied on strong local partners, who were able to help them develop a remote high rainfall site well suited to a 1400-foot high-head hydro project and convince utility ICE that it would make a good location for new power generation.

The project is incurring hard currency obligations during construction, but has local currency revenue streams. The sponsors were able to convince near-investment grade ICE to assume currency risk by indexing local tariffs 85% to the dollar to keep up with possible exchange rate fluctuations.

Brief: Independent power projects became possible in Costa Rica in 1990 with the passage of Law 7200, which set aside 160MW of generation capacity to be developed by private investors at published tariffs. Contracts for that full amount have now been awarded, primarily to local developers and in some cases with support of the IFC or Inter-American Investment Corp. Because of the precedent set in this transaction, EGI now expects to close financing for a second similarly sized power plant in Costa Rica by the end of the year under a signed power purchase agreement which it obtained under the first 160MW set-aside.

Assignment: Explain how it is possible for a project such as this to be financed with an 81/19 debt-equity ratio , even though the debt is in dollars and the revenues are in local currency.

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