Project Finance and Guarantees Resource Mobilization and Cofinancing Vice Presidency November 1997 Project Finance and Guarantees Department s Morocco’ Jorf Lasfar Power Station Project Overview The Jorf Lasfar Power Station is a 1,356 ply with World Bank standards for NOx and megawatt coal-fired power project located on SO2 air emissions. In addition, bottom and the Atlantic Coast of the Kingdom of Morocco. fly ash, which prior to financial closing were The first two units, 1 and 2, were built by the released into the ocean by ONE, will be used This project brings worlds-best Moroccan state electric utility, Office National as landfill initially on site and, subsequent to de l’ Electricité (ONE), and were placed in the operation of Unit 3, in an inactive quarry operational practices to Morocco. service in 1994 and 1995, respectively. The owned by the Moroccan Ministry of Public second stage, units 3 and 4, will be built by Works five kilometers away. The power sta- subsidiaries of ABB Asea Brown Boveri Ltd tion uses ocean water for cooling. of Zurich, Switzerland. CMS Morocco Oper- ating Co, a wholly owned subsidiary of CMS Energy Sector Background Energy Corporation of Dearborn, Michigan, will operate all four units as an “independent The Government of Morocco has embarked power producer.” on a program to reform the energy sector and to promote private investments in its in- All of the power produced by the generating frastructure. In the petroleum sub-sector, the station will be sold to ONE under a 30-year distribution companies were privatized dur- power sales agreement. The tariff includes ing 1994 and 1995. The majority shares of energy and capacity payments. All four units the two national refineries were sold to pri- of the power station are baseload units. vate investors during 1997. Jorf Lasfar Energy Company (JLEC) will In the power sub-sector, the Government purchase coal through competitive bidding has taken important steps to secure private from various sources overseas under me- investors. For example, in 1994 the elec- dium-term and spot purchase contracts. The tricity law was amended to permit the opera- operator will also operate a coal unloading tion of independent power producers. The terminal at the port of Jorf Lasfar, two kilome- Government is also reforming the sector’ s ters away from the power station. The project regulatory framework and practices. The also includes extension and refurbishment World Bank provides financial assistance to of the quay. Depending on the size of ves- the Government for these efforts. sels actually used, approximately 60 vessels per year will be unloaded at the quay for the s The World Bank’ country assistance strat- power station; in addition, the operator will egy for Morocco is to support policies and unload another 12 vessels per year for de- investments in four areas: s livery to ONE’ Mohammedia Power Station. • growth and competitiveness; The plant will use electrostatic precipitators • social development; to reduce particulate emissions to World • environment & natural resources man- Bank standards for coal-fired power stations. agement; and The plant design and the specifications in the • modernizing the public sector. fuel supply plan will allow the plant to com- ProjectFinance s The Bank’ partial risk guarantee for the Jorf In return, JLEC paid the lease payments as andGuarantees Lasfar Power Station is part of a series of a lump sum initial amount in present value projects being developed to improve terms at financial closing. Cash generated November 1997 s Morocco’ rate of growth and competitive- by units 1 and 2 will be an important com- ness. ponent in the financing of the construction of units 3 and 4. Project Background Units 3 and 4 have been financed by limited In October 1994, ONE, the state-owned elec- recourse project finance facilities consisting tric utility company, initiated an international of two types of debt: commercial bank fi- competitive bidding to bring world-best prac- nancing backed by political risk guarantees tices to Morocco by granting a concession and a US$200 million direct loan funded by to operate the two existing units at Jorf Lasfar Overseas Private Investment Corporation and to build and operate two new units adja- (OPIC) of the United States. The two rank cent to the existing units. As mentioned pari passu. The commercial bank financ- above, the law in Morocco was changed to ing has four tranches, as follows: permit a foreign operator, but ownership of the power station assets is to remain with • a DM62 million tranche guaranteed by ONE. The resulting structure is essentially Geschäftsstelle für die Exportrisikogarantie a 30-year lease by the project company of (ERG), the Swiss export credit agency; Five different multi-lateral and bi- the four units. • a DM456 million tranche guaranteed by Società per L’ Assicurazione dei Crediti lateral agencies combined efforts ONE selected the ABB/CMS consortium as Esportazione (SACE), the Italian export all’ to enable this financing to close. the winning bidder, and in April 1996 signed credit agency; a Protocol Agreement which outlined the • a US$237 million tranche guaranteed by responsibilities of the consortium, ONE, and the Export-Import Bank of the United the Government. As ONE completed units States, with take-out funding at commis- 1 and 2, contract negotiations were finalized. sioning; and The project reached financial closing in Sep- • a DM313 million tranche guaranteed the tember 1997. Units 3 and 4 are scheduled World Bank. to be placed in service before December 2000. The lead arrangers for the commercial bank financing are ABN AMRO Bank NV, Banque The equity investors in the project company, Nationale de Paris, and Credit Suisse First known as Jorf Lasfar Energy Company, are Boston. The project debt will be fully amor- as follows: tized over a 12-year period, commencing at completion. • JLEC Management AB, JLEC Capital GmbH, and JLEC Power Ventures GmbH, In addition to providing interest rate swaps for which are wholly owned subsidiaries of the ERG, USEXIM, and World Bank ABB Asea Brown Boveri Ltd, own 50% of tranches, the commercial banks will also the project. provide financing for other project costs, thereby providing more flexibility for the • Jorf Lasfar Handelsbolag, Jorf Lasfar sponsors and JLEC. Power Energy HB, and Jorf Lasfar I HB, which are entities wholly owned by CMS Contractual Framework Generation Co., own 50% of the project. The suite of project agreements is fashioned Jorf Lasfar Energy Company is incorporated without the benefit of direct ownership of the in Morocco as a société en commandite par power station assets. actions, a legal form similar to a limited part- nership. • Power Purchase Agreement, between ONE and Jorf Lasfar Energy Company, Financing Structure provides for the sale of energy and capac- ity from all four units. The Government of The project company has acquired the Morocco guarantees any termination pay- rights to operate Units 1 and 2 for 30 years. ment that ONE might owe in the event of ProjectFinance a default under the agreement. World Bank Guarantee would not cover events andGuarantees • Transfer of Possession Agreement, be- of default caused by operations or force ma- November 1997 tween ONE and Jorf Lasfar Energy Com- jeure events at the power station, but payment pany, transfers the right of use and quiet under the World Bank Guarantee could be as enjoyment of all four units to JLEC and a result of such events as: provides for the completion of punch list and warranty items on units 1 and 2. • political force majeure events such as war, • Construction and Procurement Agree- invasion, blockade, or terrorist activity; ment, between ONE and Jorf Lasfar En- • natural force majeure events such as earth- ergy Company, provides for the quake or storm damage affecting ONE; construction and subsequent transfer to • general strikes; ONE of units 3 and 4. • expropriation or breach of “quiet enjoyment” • Construction Contracts and EPC Parent of the site; Guarantee, among Jorf Lasfar Energy • payment default by ONE under the power Company and various subsidiaries of sales agreement; or ABB Asea Brown Boveri Ltd, provides for • breach of Government letters in support of the turnkey construction of units 3 and 4. currency convertibility and transferability. • Coal Terminal Agreement, between Office d’Exploitation des Ports (ODEP) and Jorf The World Bank Guarantee is contained in a Lasfar Energy Company, establishes an Guarantee Agreement between the Interna- This power station will bring state- operating scheme for the coal terminal of tional Bank for Reconstruction and Develop- the port of Jorf Lasfar. of- the -art -technology to Morocco. • Operations and Maintenance Agreement, ment and ABN AMRO Bank NV, as agent for the commercial lenders. It is capped at DM between CMS Morocco Operating Co 313,000,000 and declines over the 12-year and Jorf Lasfar Energy Company, pro- amortization period of the bank loans. In par- vides for operations and maintenance of allel, the Government of Morocco and the the power station and port facilities. Bank have entered into an Indemnity Agree- • Coal Supply Agreements, between JLEC ment whereby the Government will reimburse and various coal suppliers, provides for the Bank for any draws under the World Bank coal through a tendering process with con- Guarantee. tract approval by ONE. • Loan documentation consisting of: Com- Benefits of the World Bank Guarantee mon Agreement, Facility Agreements, Intercreditor Agreement, etc, provide for The Bank Guarantee was a catalyst for mobi- debt facilities in an aggregate amount of lizing the financing for the Jorf Lasfar project, about US$900 million. Borrowings are in by providing political risk coverage for a com- US Dollars and Deutsche Marks. mercial debt tranche. With this coverage, • Equity documentation consisting of Capi- most of the project debt was covered against tal Contribution Agreements and Capital political force majeure events in one form or Contribution Guarantees between ABB another. and CMS entities and Jorf Lasfar Energy Company, provide for primary and con- s The Bank’ guarantee has demonstrably at- tingent equity contributions. tracted new sources of financing, reduced fi- nancing costs, and provided the commercial World Bank Guarantee lenders with the comfort necessary to extend maturities to 12 years in a country that lacks The World Bank Guarantee supports the credit ratings on its sovereign indebtedness. commercial bank syndicate by protecting This was possible because the World Bank against political events preventing payment Guarantee covered risks that the market was of certain specified termination amounts that not able to bear or adequately evaluate. would be payable upon termination of the power sales agreement and wind-up of the project. As noted above, the Government of Morocco guarantees this payment, and it would be only if the Government failed to pay that the World Bank Guarantee would make payment to the commercial lenders. The ProjectFinance andGuarantees November 1997 Principal Contractual Relationships Government Construction CMS Export World of Consortium Morocco Credit Bank Morocco Units 3 and 4 Operating Co Agencies Guarantee Construction Agreements World Bank Agreements O&M Guarantee of Guarantee Agreement Project Termination Amount Agreement ONE Commercial Power Purchase Agreement Credit Lenders Transfer of Possession Agreement Jorf Lasfar Agreement Construction Construction & Procurement Agreement Energy Agreements Company Finance Agreement Construction Consortium Coal Terminal OPIC Agreement Units 1 and 2 Coal Supply Capital Agreements Contribution Agreements Coal ODEP CMS ABB Suppliers Sources and Uses of Funds (construction period) US$1,483 US$1,483 Cash Flow 88 Debt Reserve 192 Units 1 & 2 35 ERG 200 OPIC 256 SACE 1010 Debt Units 3 & 4 237 US ExIm 176 World Bank Equity 387 385 Units 1 & 2 Sources Uses (US$ in millions) s For more information on the Jorf Lasfar Power Project and the World Bank’ Partial Risk Guarantee, please contact Scott Sinclair (202-473-9157) or Pierre Vieillescazes (202-473-3781) of the Project Finance and Guarantees Department or Jorge Larrieu (202-473-0249) of the Middle East North Africa Department. To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows or the Guarantees Handbook, please call (202) 473-7594. Please direct editorial comments to Andres Londono, tel: (202) 473-2326.