Project Finance andGuarantees November 1997 Resource Mobilization and Cofinancing Vice Presidency Project Finance and Guarantees Department Morocco's 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 operationalpracticestoMorocco. de l'Electricité (ONE), and were placed in the operation of Unit 3, in an inactive quarry 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 The World Bank's 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: livery to ONE's 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 The Bank's 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 Morocco's 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; Fivedifferentmulti-lateralandbi- the four units. · a DM456 million tranche guaranteed by lateralagenciescombinedefforts Società per L'Assicurazione dei Crediti ONE selected the ABB/CMS consortium as all'Esportazione (SACE), the Italian export toenablethisfinancingtoclose. 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 andGuarantees a default under the agreement. · Transfer of Possession Agreement, be- World Bank Guarantee would not cover events of default caused by operations or force ma- November 1997 tween ONE and Jorf Lasfar Energy Com- pany, transfers the right of use and quiet jeure events at the power station, but payment enjoyment of all four units to JLEC and under the World Bank Guarantee could be as provides for the completion of punch list a result of such events as: and warranty items on units 1 and 2. · Construction and Procurement Agree- · political force majeure events such as war, ment, between ONE and Jorf Lasfar En- invasion, blockade, or terrorist activity; ergy Company, provides for the · natural force majeure events such as earth- construction and subsequent transfer to quake or storm damage affecting ONE; ONE of units 3 and 4. · general strikes; · Construction Contracts and EPC Parent · expropriation or breach of "quiet enjoyment" Guarantee, among Jorf Lasfar Energy of the site; Company and various subsidiaries of · payment default by ONE under the power ABB Asea Brown Boveri Ltd, provides for sales agreement; or the turnkey construction of units 3 and 4. · breach of Government letters in support of · Coal Terminal Agreement, between Office currency convertibility and transferability. d'Exploitation des Ports (ODEP) and Jorf Lasfar Energy Company, establishes an The World Bank Guarantee is contained in a Thispowerstationwillbringstate- operating scheme for the coal terminal of Guarantee Agreement between the Interna- tional Bank for Reconstruction and Develop- of-the-art-technologytoMorocco. the port of Jorf Lasfar. · Operations and Maintenance Agreement, ment and ABN AMRO Bank NV, as agent for between CMS Morocco Operating Co the commercial lenders. It is capped at DM and Jorf Lasfar Energy Company, pro- 313,000,000 and declines over the 12-year vides for operations and maintenance of amortization period of the bank loans. In par- the power station and port facilities. allel, the Government of Morocco and the · Coal Supply Agreements, between JLEC Bank have entered into an Indemnity Agree- and various coal suppliers, provides for ment whereby the Government will reimburse coal through a tendering process with con- the Bank for any draws under the World Bank tract approval by ONE. Guarantee. · Loan documentation consisting of: Com- mon Agreement, Facility Agreements, Benefits of the World Bank Guarantee Intercreditor Agreement, etc, provide for debt facilities in an aggregate amount of The Bank Guarantee was a catalyst for mobi- about US$900 million. Borrowings are in lizing the financing for the Jorf Lasfar project, US Dollars and Deutsche Marks. by providing political risk coverage for a com- · Equity documentation consisting of Capi- mercial debt tranche. With this coverage, tal Contribution Agreements and Capital most of the project debt was covered against Contribution Guarantees between ABB political force majeure events in one form or and CMS entities and Jorf Lasfar Energy another. Company, provide for primary and con- tingent equity contributions. The Bank's guarantee has demonstrably at- tracted new sources of financing, reduced fi- World Bank Guarantee nancing costs, and provided the commercial lenders with the comfort necessary to extend The World Bank Guarantee supports the maturities to 12 years in a country that lacks commercial bank syndicate by protecting credit ratings on its sovereign indebtedness. against political events preventing payment This was possible because the World Bank of certain specified termination amounts that Guarantee covered risks that the market was would be payable upon termination of the not able to bear or adequately evaluate. 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 of Consortium Morocco Credit World Morocco Units 3 and 4 Operating Co Agencies Bank Guarantee Construction Agreements O&M World Bank Guarantee of Agreements Agreement Guarantee Termination Amount Project Agreement ONE Commercial Lenders Power Purchase Agreement Credit Transfer of Possession Agreement Jorf Lasfar Agreement Construction Construction & Procurement Agreement Energy Agreements Company Finance Agreement Construction Consortium Coal Terminal OPIC Units 1 and 2 Agreement Coal Supply Capital Agreements Contribution Agreements ODEP Coal Suppliers CMS ABB Sources and Uses of Funds (construction period) US$1,483 US$1,483 Cash Flow 88 192 Debt Reserve Units 1 & 2 35 ERG 200 OPIC 256 SACE Debt 1010 Units 3 & 4 237 US ExIm 176 World Bank Equity 387 385 Units 1 & 2 Sources Uses (US$ in millions) For more information on the Jorf Lasfar Power Project and the World Bank's 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 toAndres Londono, tel: (202) 473-2326.