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Private Sector Participation

Topic 4.4. Experiences in Renegotiation

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PT Paiton Energy
A Case Study in Renegotiation

Session on Private Sector Participation

Yong Hee Kong
PPP Resource & Research Centre, Kuala Lumpur

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PT Paiton During Construction

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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PT Paiton Energy (almost complete)

Pt Paiton Energy PE or the Project
is a US$ 2.7 billion
fully complete and
commissioned 1,230
MW (2 x 650 MW)
coal-fired base load
power plant, located
on the Northeast
coast of Java,
Indonesia.

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Background to IPP
1990, GOI introduced IPP policy (World Bank, etc.)
May 1991 - 6 (plus 2, later in Sept 1991) companies bid for
Units 7 & 8
Units 1 & 2 - PLN, Units 3, 4, 5 and 6 - future IPPs
June 1992 - Award to BMMG Consortium (BHP, Edison
Mission Energy, Mitsui, GE Capital)
1994 (after 21 months of negotiation) PT Paiton Energy and
PLN executed PPA
PLN advised by international advisers - Lazard, Warburg,
Lehman, Lahmeyer, USAID

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Background to IPP (continued)

Tariffs were in USD
COD (Commercial Operations Dates) - May and July 1999
Rp devalued during turmoil caused by fall of Suharto
Also, demand fell due to economic crisis
PLN declined to dispatch plant for several months
PE and PLN sued each other. President Habibie ordered
parties back to negotiating table in November 1999
New PPA agreed by PLN and PE in December 2001

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Original Tariff Structure

Four components
A

- capacity charge

- fixed op/maintenance charge

- coal fuel charge (pass-through)

- variable operation/ maintenance charge

Components C & D vary depending on electricity generated

Component A was scheduled to step-down over time as
senior long-term debt was amortized. It had common
facilities for sharing with future IPP on same site.

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Tariffs (continued)
Costs included building common infrastructure facilities
that would be shared with the other units eventually
Component A (of the Tariffs) is projected as follows:
Years 1-6
Rupiah eqv of 6.12 cents/kWh
Years 7-12
Rupiah eqv of 5.97 cents/kWh
Years 13-30 Rupiah eqv of 3.10 cents/kWh
GOI wanted a front-loaded tariff to lower the cost of
power in later years
Projected ave total tariff Rupiah eqv 6.3 cents/kWh

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FSA - Coal Supply Agreement

Lenders insisted on assurances on ample coal supply
1995 Coal-Supply Agreement signed with PT Adaro Indonesia,
a subsidiary of BHP - advised by international experts. Main
terms:
Single source coal supplier
Dedicated reserves for 15 years, at all times
Dedicated stockpile of 200,000 tonne at Kelanis bargeloading facility
Dedicated fleet of tugs and barges from Kelanis to
Indonesia Bulk Terminal (IBT) facility
2 dedicated Handymax vessels to transport from IBT to
Paiton site
Plant stockpile of 670,000 tonnes capacity

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Original Coal Supply Chain

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Why Renegotiation Was Necessary

Rp tumbled. (exchange rate dropped from 2450 to
7400 USD)
PLNs revenue was in Rp. (USD equivalent tariff
dropped from 7 cents to 2 cents per KWh)
PLNs demand collapse temporarily due to 1997
financial crisis
GOI was called to help but PLNs position because
untenable.

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Why Renegotiation Was Necessary (continued)

PLN refused to used Paiton for dispatching
Under the terms of Paitons financing documents,
PE was forced to go to court. PLN also sought to
declare Paiton PPA null and void.
When Habibie came into power in November 1999,
he sought an amicable solution to this problem.

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Group Discussion (10 minutes)

How would you advise on:
What

PLN and IPP should do? (Should IPP dispatch/

supply power during negotiation? Should GOI not
honour their Letter of Comfort? Should IPP
continue to sue PLN and GOI? Should PLN sue for
unfair PPA?)

The

tariff structure and rates?

The

fuel supply chain (and its rates)?

The

way to negotiate?

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Restructuring the PPA

November 1999 - PLN and PE began negotiation.
February 2000 - First interim agreement. (PLN agrees to pay
for actual cost of energy dispatched plus a small amount for
capacity charge) (insufficient)
January 2001 - Second Interim Agreement (increased amount
for capacity charge) (sufficient to cover opex and interest)
December 2001 - Commercial Agreement on pricing,
arrearages and related provisions of PPA. Binding Term Sheet
(BTS) prepared.

BTS - Four Parts to It

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(Both parties agree to abide)

1. Standstill of all legal proceedings
2. Confidentiality of ongoing discussions
3. Agreed-upon commercial issues (including changes

to PPA)
4. BTS implementation plan (deadline - 31 March 2002)

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Broad Re-Structured Terms

Terms extended from 30 to 40 years
Component A (capacity charge) - no longer step-down,
now constant.
Resultant tariff 30% lower
Component C (coal fuel charge) - CIF cost at jetty
Coal Supply Chain restructured

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Restructuring the Coal Supply Chain

By 1999, Adaros coal was USD 10 per tonne higher due
mainly to its supply chain
Main coal-supply chain restructuring actions:
Remove need for dedicated reserves
Remove stockpile requirement
Remove restrictions of dedicated tugs/barges
Remove need for intermediate storage at IBT
Eliminate Handymax vessels
Multi-source supplies (Adaro now provides 60%-70%)

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Restructured Coal Supply Chain

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
Private Sector Participation
Topic 4.4. Experiences in Renegotiation

Cross-Border Infrastructure: A Toolkit

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Lessons Learnt - Appropriate Risk Allocation

for IPP Projects in Today's Environment
Host governments risks :
Changes

in currency risks (devaluing Rp)

Demand

and supply (crisis reduced demand)

Changes

in law (political decisions and contractsanctity - honour all agreements)

Force

majeure (those in control of government)

Inconvertibility
Transmission

(of currency USD/Rp)

network

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Allocation of Risks - IPPs Risks

Construction (turnkey)
Financing (answerable to financiers)
Fuel supply (cost pass-through - any incentives to
reduce costs?)
O&M
Capex Investment

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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The Paiton Paradigm

Historical: The original financing was a groundbreaking
transaction, evidenced by over 15 awards.
Complexity: The restructuring involves an extremely complex
network of parties consisting of 3 key sponsors, PLN/Govt of
Indonesia, 2 major export credit agencies, 2 bilateral
agencies, 36 international commercial banks, bondholders
and other project parties.
Size: The US$ 2.7 billion project remains a benchmark for
non-recourse transactions globally. Coming in the wake of
the Indonesian macroeconomic crisis, so too is the project's
restructuring;

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The Paiton Paradigm (continued)

Management and Process: The project was exemplary in
the management of the complex co-ordination process
required to find consensus among an extremely diverse
group of project stakeholders making full use of
transparency, engagement and communication (i.e. the
restructuring website);
Approach: This restructuring represents a ground-breaking
example of consensus-based restructuring of non-recourse
project debt through equitable burden sharing among key
project parties with the clear intention to achieve
stakeholders' restructuring goals; and

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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The Paiton Paradigm (continued)

Results: The project achieved a sustainable long term
restructuring solution for all parties: (1) no principle haircuts
to debt or equity; and (2) a sustainable tariff for long-term
contractual stability.

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Transaction Overview
Background: The project is a 1,230 MW coal-fired base
load power plant fully completed and commissioned on
the Northeast coast of Java, Indonesia.
The project is 40% owned by a subsidiary of Edison
Mission Energy; 32.5% by a subsidiary of Mitsui & Co.,
Ltd.; 12.5% by a limited partnership affiliated with and
managed by General Electric Capital Corporation, and
15% through a loan to PT Batu Hitam Perkasa
(collectively the sponsors").

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Transaction Overview (continued)

History: The financing of the project was closed in 1995
with a total debt package of US$ 1.8 billion. A bond
tranche was subsequently added in 1996. Lenders and
guarantors/insurers include USEXIM, JBIC, OPIC and
NEXI (the agencies"), a syndicate of 36 international
commercial banks and a syndicate of bondholders.

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Transaction Overview (continued)

Restructuring: Principal was originally scheduled to
commence amortizing in November 1999. However,
due to the Indonesian macroeconomic crisis and its
effects on power demand in Indonesia, cashflow was
below the original projections. Hence, the project and
its stakeholders entered into restructuring negotiations.
During this period, interest was kept current through a
combination of interim payments from PLN and in large
part to the sponsors' contribution of US $ 240 million of
contingent equity in 1999-2001.

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Restructuring Overview
No haircut of debt or equity

Principles: The debt restructuring process for the USD

1.8 billion of non-recourse project debt formally began in
October 2001 and was based on the key principle that
there would be no haircut to debt or equity.

The project's proposal to the lenders, agreed to in

principle by the agencies on 24 September 2002 was for
a 2-year extension of the original maturity date of the
agencies' tranches and a re-setting by the agencies of
their interest rates to current benchmark levels.

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Restructuring Overview (continued)

No haircut of debt or equity (2)

Outcome: All the agencies agreed to the commercial

terms of the debt restructuring and the deal was then
presented to the commercial banks on 8 October 2002.
The approval of all commercial banks was received.
The restructuring documentation was signed in
December 2002, CP's were then met and the
restructuring closed on 14 February 2003 with the entry
of USEXIM.

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Restructuring Overview (continued)

USEXIM dept participation

USEXIM commitment: A key element and major

achievement, of the debt restructuring was USEXIM's
ability to apply a "risk-sharing" concept to the
commercial banks. The result was a USEXIM "take-out"
of 75% or US$ 381 million (USEXIM A tranche) of the
US$ 508 million USEXIM construction facility, leaving
the commercial banks with a residual exposure of US$
127 million (USEXIM B tranche). This was a one
hundred cents on the dollar takeout for 75% of the
exposure.

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Restructuring Overview (continued)

No back-ending of amortization for commercial banks

Commercial bank amortization: The commercial bank

residual exposure was divided on a pro-rata basis
among the 36 banks in the syndicate and has a straight
line amortization (therefore no principal back-ending)
with a maturity matching the JBIC B tranche.

Agency amortization: Agencies agreed to a back-ended

amortization profile enabling the commercial banks to
retain their original amortization profile.

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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What Caused the Paiton Restructuring ?

The original debt profile: OECD consensus agreement
requirements delivered a tariff that was not politically defensible;
The lenders requirement for certainty in the fuel chain: created
an expensive fuel cost;
Public tariff of PLN was heavily subsidized creating a politically
sensitive gap with private power tariffs;
Debt profile was based on projections of demand, not actuals;
The US$ debt/ Rp. Cashflow mismatch with a mitigation
structure based on legal mitigation rather than project logic.

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Original Coal Supply Chain

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Restructured Coal Supply Chain

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Paiton was needed to be operational by the government -

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Debt Structure Pre-Restructuring

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Debt Structure Post-Restructuring

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Topic 4.4. Experiences in Renegotiation

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Burden-Sharing and Win-Win

Are Important Principles
Burden sharing was allocated equitably among the
stakeholders, creating a win-win scenario:

Sponsors injected US $ 240 million of contingent equity

to keep interest current and cover project costs;

Sponsors agreed to accept a lower return;

PLN agreed to pay for arrears payments with no change

to risk allocations under the PPA;

Coal supply chain counter-parties agreed to

terminate/renegotiate their contracts;

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Burden-Sharing & Win-Win Are Important (continued)

Burden sharing was allocated equitably among the
stakeholders, creating a win-win scenario: (continued)

EPC contractor agreed to release care, custody and

control of the plant to allow the project to dispatch
electricity, to reduce its claims and paid over time;

Agencies agreed to reduce interest rates and to backend their debt USEXIM agreed to participate in the debt;

Commercial banks agreed to an interim principal

deferral and then accept risk sharing with USEXIM; and

The project accepted the expense, in time and effort, to

execute a sustainable restructuring platform to a
professional "best practices" standard.

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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The restructuring process entailed satisfying the interests of all

Project parties, often times in parallel with each other.

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Debt Restructuring Process

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
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Session:
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Advisors to the Project

Significant advisors
Financial Advisor: ABN AMRO
Lenders' Engineer: Mott MacDonald
Lenders' Fuel Advisor: JTBoyd
Lawyers: Skadden Arps (counsel to the project), Latham
& Watkins (counsel to the lenders)

The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
21