Sutton Bridge Case
Sutton Bridge
1
March 16
Economic Issues in the Case
•
The case can be used to study a number of issues
 Risks and returns of merchant versus contract
• How can risks be evaluated in a model
• Covenants in contract and merchant operation
• Debt service reserves in alternative operation
 Costs and benefits of bond financing
 EPC contract
• LD for delay
• LD for plant performance
•
Evaluate Merchant versus Contract
 What is the long-run equilibrium price
 How can break-even be calculated
Sutton Bridge
2
March 16
Merchant Plant Activity
“…in the US, private companies that own merchant
plants have lost of more than $100 billion in market
capitalization.”
•
Banks are “now highly reluctant to take merchant
risk of any kind… and they are skeptical about
long-term purchase or tolling contracts that in any
way are considered to be out of the money.”
•
“Merchants will have to redesign their business
models. Those players that have 80-90 percent of
their capital in the form of debt won't survive. The
ratings agencies have said that such debt-tocapital ratios must be in the 50-50 range to earn
investment grade status so that the cost of
borrowing is reasonable.”
New Merchant Capacity in Database
35,000.00
The merchant plant activity has been very high.
23,942
25,000.00
20,000.00
13,924
15,000.00
9,783
10,000.00
5,000.00
•
29,513
30,000.00
MW
•
3,580
2,075
1,335
1,229
5,136
4,869
2,494
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Sutton Bridge
3
March 16
Argentina Example of Merchant Problems
• In Argentina, plant efficiency, over-capacity and increased hydro
generation caused financial problems with projects.
Sutton Bridge
4
March 16
Argentina Example – AES Panera
•
Combined Cycle Plant (830 MW)
•
Sponsors: AES and CEA; Plant Cost $448 Million
•
Financing

Equity
$154 Million: 34%

IDB – A Loan
$ 66 Million: 15%; 14.5 Year

IDB – B Loan
$ 66 Million: 15%: 12.5 Year

JEXM Direct
$ 81 Million: 19%

JEXM Comml
$ 81 Million: 19%
•
No long-term Contracts
•
Plant Operation – 1999

High DSCR’s – 2.31 in first 5 years

Trapped Cash

Cash Sweep Mechanisms

Forward Looking Financial Ratios

12 Month Debt Service Reserve
Sutton Bridge
5
March 16
Comparison of Construction Costs and Financing
Sutton Bridge
6
March 16
Commodity Prices Merchant Electricity Plant Financing in UK
• Before Financial Meltdown
 Leverage -- 75-80%
 Debt tenor -- 20 years
 Credit spread -- 150-200 basis points
 Equity IRR – 13%-15%
• After Meltdown
 Leverage 50%
 Debt tenor 10 Years
 Credit spread 250 basis points
 Equity IRR – 16%
Sutton Bridge
7
March 16
Directors in 1996
Sutton Bridge
8
March 16
Directors Responsibilities
Sutton Bridge
9
March 16
Directors in 1997
Sutton Bridge
10 March 16
Agreements
•
EPC Contract
 790 MW for 322 Million GPB
 Plant Cost -- 397/kW in GBP; 650/kW in USD
 Actual Fixed Cost Assets at COD 314 Million
•
Capacity and Tolling Agreement
 Terminates in 2014
•
O&M Agreement
 5 Million for 12 Years with Escalation
•
Administrative Expense Agreement for 25 Years
 Initially with Enron at 330,000
 Now at 200,000 with EDF
•
Exchange Rate Swap
Sutton Bridge
11 March 16
Actual Cost
Sutton Bridge
12 March 16
Debt Financing
•
Bonds
 Principal
• 195 Million GBP
• 150 Million USD (91.9 GBP)
• Total -- 287 GBP
 Rates
• UK 8.625%
• US 7.97%; After Swap Effective Rate is 8.45%
– Exchange Rate 1.6317
– Weighted Average Rate is 8.56%
 Term
• 25 Years
 Dates
• 30 June and 31 December
Sutton Bridge
13 March 16
Sutton Bridge Bond Financing and EPC
•
Sutton Bridge is a 790 MW combined cycle gas-fired power plant located 140 miles
north of London. By financing it via a capital markets issue sponsor Enron obtained
favorable fixed-rate debt at longer maturities and with greater flexibility than would
have been achieved had it used a more typical loan syndication. It used a variety of
financial engineering tools to obtain these attractive terms, including a shifting credit
structure, dual-currency tranches, and sharing risk between several groups within
the Enron family of companies.
•
The key to the structure was the three-phase life of the bonds.
 In the first 19 months, the bonds carry construction risk, but it is mitigated
by the fixed-price engineering contact with Enron. This contract, however,
falls short of the standard turnkey EPC contract usually found in project
bonds, and that generally come at premium to sponsors. Liquidated
damages and other agreements with primary equipment supplier GE
mitigate most of the construction-related and plant-performance risks. The
cost overrun facility is also helpful in this regard.
Sutton Bridge
14 March 16
Sutton Bridge Bond Re-payment
Construction
Tolling Agreement
Merchant
Sutton Bridge
Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Payments
5.774
17.022
17.022
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
12.77
4.54
Sutton Bridge Bond
Percent
of
Repayment
Balance Percentage
Balance
286.93
100%
286.93
100%
286.93
100%
0%
281.16
98%
2.01%
264.13
92%
5.93%
247.11
86%
5.93%
234.35
82%
4.45%
221.58
77%
4.45%
208.81
73%
4.45%
196.05
68%
4.45%
183.28
64%
4.45%
170.51
59%
4.45%
157.74
55%
4.45%
144.98
51%
4.45%
132.21
46%
4.45%
119.44
42%
4.45%
106.68
37%
4.45%
93.91
33%
4.45%
81.14
28%
4.45%
68.38
24%
4.45%
55.61
19%
4.45%
42.84
15%
4.45%
30.08
10%
4.45%
17.31
6%
4.45%
4.54
2%
4.45%
0%
1.58%
15 March 16
Tolling Agreements and Risk (S&P)
• In an era of competitive power, when merchant generators are assuming
risks of price and dispatch (volume), tolling arrangements can materially
reduce the risk of revenue volatility for owners and operators of singleasset plants.
• The presence of electricity market risk in a project is often a constraint in
obtaining an investment-grade rating, especially for single-asset plants
that have no portfolio diversification.
• Having a tolling agreement can mitigate risk to the extent that a singleasset generator operating in a competitive electricity market can obtain an
investment-grade rating even with fairly high debt leverage and relatively
low debt-service coverage ratios.
Sutton Bridge
16 March 16
Financing During Tolling Agreement
•
The second phase runs from March 1, 1999 and runs until 2014. In this period
there are none of the usual fixed-price fuel supply and offtake contracts, which
protect downside risk but can end up hindering plants from operating at maximum
efficiency. "They may lock the project into gas purchase prices that run out to be
above market, or, conversely, force it to sell electricity at power sales prices that are
ultimately below market," according to a report on the project in the Journal of
Project Finance (Winter 1997). To offset these risks, the CTA with the Enron Capital
assumes most fuel supply and offtake responsibility. Enron Capital makes
monthly fixed payments related to the project's capacity that will be sufficient
to meet all debt service obligations, plus quarterly variable energy payments
based on the number of hours the gas turbines actually operate. The project
then makes generating capacity available to Enron Capital, which is also the
supplier of its natural gas.
•
Taking advantage of the deregulated EU gas markets, the plant will only operate in
this second period when pool prices are sufficiently high. It is expected to be
switched on and off several times a day.
Sutton Bridge
17 March 16
Merchant Period
• The third phase runs from 2014 to 2022. The project may operate as a
true merchant plant in this time, with no sales contracts at all and thus
subject to greater market and commodity price risk. By this time
approximately 70% of the debt will have been paid down, and a
higher debt service reserve will be created. Enron is expected to
reduce its ownership position substantially in this period, perhaps to as
little as 10%, although still manage the plant, and there is also the
possibility that new 'clean' coal gasification technology could drive down
the prices the plant could command in the UK markets.
• Independent consultants' projections, however, convinced the rating
agencies that the plant would still be highly competitive in this time.
"Ultimately Sutton Bridge Power's credit strength will rest with its ability to
maintain a high availability and to produce electricity in the most cost
effective and efficient way possible," argued S&P's credit report. "In
structuring this transaction, Enron has adequately mitigated this risk for
the project's rating level."
Sutton Bridge
18 March 16
Exchange Rate Risk
• There is also some exchange risk, since the project earns revenues in
sterling but has some dollar exposure. To mitigate this the issuer has a
dollar bond currency swap arrangement with Enron Capital over the life of
the dollar bonds that will provide it with fixed amounts of dollars in
exchange for sterling, plus other swap agreements that limit its exposure
to devaluation.
• Swap converts GBP to USD at fixed rate to Sutton Bridge so payments
are effectively in GBP. Loss on swap meant that USD increased relative
to GBP and new swap would increase interest payments in GBP.
• If interest rate swaps were sold or terminated, any gain or loss would be
deferred and amortised over the remaining life of the debt instrument
being hedged by the interest rate swap.
• If the debt instrument being hedged by interest rate swaps were to be
extinguished, any gain or loss attributable to the swaps would be
recognised in the period of the transaction.
Sutton Bridge
19 March 16
Sutton Bridge Actual Income Statement
Sutton Bridge
20 March 16
Sutton Bridge Actual Cash Flow
Sutton Bridge
21 March 16
Sutton Bridge Balance Sheet
Sutton Bridge
22 March 16
Sutton Bridge Financial Ratios
Sutton Bridge
23 March 16
The problems for banks exposed the sector boil down to one thing: overcapacity. There is
calculated to be roughly 22% overcapacity and it is therefore not surprising that prices have
slumped so spectacularly. Prices are now around 17 to 18 per MWH, down 40% from levels
prior to NETA’s introduction.
•
The atomisation of the generation sector was a function of new entrants and forced sales and
pricing power was lost before NETA was introduced.
30000
30000
20000
20000
10000
•
.
10000
Sutton Bridge
Powergen
British Energy
National
Power
TXU
AES
Edison
Mission
Bnfl Magnox
EDF
NRG
Scottish Power
0
Scottish &
Southern
0
40000
40000
30000
30000
20000
20000
10000
10000
0
0
National
Power
40000
50000
PowerGen
40000
50000
60000
Nuclear
Electric
50000
60000
NGC
50000
70000
Own capacity
Cumulative
Max demand
Min demand
EDF
60000
70000
Scottish Power
60000
70000
Scottish Hydro
Electric
Own capacity
Cumulative
Max demand
Min demand
70000
Generation capacity (assuming 95% availability)
•
Other
Generation capacity (assuming 95% availability)
Market Concentration in UK 1990 and 2000
24 March 16
Electricity Prices
UK Annual Electricity Prices
30
29.0
28
27.0
26
GBP/MWH
24
22
20
18
16
23.0
24.0
26.0
24.0
21.0
25.0
22.0
20.0
19.0
17.0
15.5
14
12
10
1990 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003
Sutton Bridge
25 March 16
Case 1: Evaluate Risk Using Model
Objective
 Compute risk using model so that tools
to mitigate risk can be evaluated.
 Understand the theory of probability of
default and loss given default in the
context of project finance models.
Probability of Prices
1
0.9
Cummulative Probability
•
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
•
Compute break-even price for merchant period
0
10
15
20
25
30
35
GBP per MWH
 Use the DSCR to measure probability of
default
 Use loan outstanding to measure LGD
•
Compute break-even price in merchant case
 Determine alternative break-even price if
the financing is 40% equity.
 Check the IRR on Debt
Sutton Bridge
26 March 16
40
Case 2: Work with Construction
• Objective
 Evaluate effects of construction delay and construction over-run in
order to set-up LD analysis and to set-up Senior and Subordinated
Debt analysis.
• Step by Step Analysis
 Run with bank financing (20%) and find break-even price
 Increase the construction expenditures by 30%
 Change the construction profile
• Evaluate IRRs
• Evaluate DSCRs
Sutton Bridge
27 March 16
Case 3: Evaluate Construction Issues and Liquidated Damage
•
Objective
 How to use the model to compute liquidated damages, evaluate risk and
return tradeoffs in EPC contracts, evaluate waterfall effect of liquidated
damages,
•
Steps in LD analysis
 Run model with delay
 Compute required LD for project IRR, equity IRR, and DSCR
 Compute the LD per day
 Run with alternative delay scenarios
 Evaluate LD with shorter life
 Evaluate DSCR with alternative uses of LD (debt or debt and equity)
•
South Africa and Intergen examples
Sutton Bridge
28 March 16
Case 4: Evaluate DSCRA with Model
• Objective
 Understand the cost and benefits of a DSCRA as compared to
other tools.
• Step by step
 Compute the IRR and the DSCR with alternative levels of debt
service reserve
 Compute the break-even price with alternative DSCRAs
• Contract case
• Merchant case
– Alternative volatility
Sutton Bridge
29 March 16
Case 5: Evaluate DSCRs
• Objective
 Understand the logic of various DSCR issues in the context of how
the PD measures break-even price
• Step by Step
 Compute break-even price
 Compute break-even with DSCRA in the numerator
• Consider
 Cash flow injections to the debt service reserve
 Operating reserve accounts
 Gains and losses on unwinding swaps
 Interest income from reserves
Sutton Bridge
30 March 16
DSCR Exercise Continued
• Consider selected issues
 Unwinding Swap
• Unwinding swap if the interest rate increases results in gains, but the
new swap will have a higher rate.
– Do not include the swap gains in cash flow for debt service
– Projected DSCR will capture future increases
 Asset Sale
Sutton Bridge
31 March 16
Case 5: Cash Flow Restriction Exercise
• Objective
 Understand what covenants do to cash flow in alternative
circumstances
 What covenant matters most.
 What covenants should be used in different circumstances
 What level of covenant is best
• Step by Step
 Compute break-even with no covenant
• No volatility, high volatility
 Compute break-even with alternative covenants
Sutton Bridge
32 March 16
Evaluate the Debt Structure of the Project
• Assuming Contract
• Assuming Merchant
 Alternative Leverage
 Alternative Debt Tenor
 Alternative Debt Structure
 Alternative Interest Rate
Sutton Bridge
33 March 16
UK Plants
Sutton Bridge
34 March 16
Moody’s Comments on Sutton Bridge
• GBP 195 Million/US$ 150 Million Guaranteed Secured Bonds due 2022
• Rating: Baa3 May 1997
• Rating Factors:
 Low Marginal Cost 790 Megawatt Gas-Fired Combined Cycle Plant
 Involvement of Enron Corp. and Subsidiaries
 15-Year Capacity and Tolling Agreement (CTA)
 Two-Thirds of Principal Repaid During CTA Term
 Eight Year Merchant Risk Period
 Transparency of UK Pool Price Setting Mechanism
Sutton Bridge
35 March 16
Moody’s Comments on Sutton Bridge Tolling Agreement
•
Sutton Bridge is an Enron Corp owned and sponsored 790-megawatt combined
cycle plant now under construction in the UK. It is also an excellent example of how
market risks associated with sales into a competitive power market can be
mitigated to a level which supports an investment grade rating.
•
The principal method by which the project did so was through its 15-year Capacity
and Tolling Agreement with Enron Capital & Trade (ECT), under which ECT has
agreed to purchase generating capacity from the plant, as well as supply natural
gas which will be converted by Sutton Bridge into electricity for sale into the UK
pool.
•
In return for making itself “available” to ECT, Sutton Bridge will receive a fixed
monthly capacity payment designed to cover, among other things, projected debt
service on the notes.
•
Moreover, the level and price at which Sutton Bridge will offer its power into the
market will be determined solely by ECT, which would then receive the
corresponding pool payments associated with a successful bid. As a result, Sutton
Bridge has, during the term of the tolling arrangement, no economic exposure to
changes in the market price of electricity. What’s more, since ECT is also
responsible for delivering natural gas to the project, Sutton Bridge is similarly
unaffected by changes in the price of its fuel.
Sutton Bridge
36 March 16
Moody’s Comment on Merchant Risk
• Following expiration of the tolling agreement, however — and assuming
that new hedging arrangements are not secured — Sutton Bridge’s ability
to generate cash flow and service its debt will be exclusively
dependent upon its production costs relative to those of other
facilities competing in the pool. As a result, the transaction is exposed
to pure “merchant” risk for the remaining term of the financing, or roughly
eight years.
• A structure such as this presents a particular challenge from an analytical
perspective, because it relies heavily on forecasts of supply and demand
in the UK beginning in year 2014, and through to the bonds maturity in
2022.
Sutton Bridge
37 March 16
Moody’s Merchant Scenarios
•
During this period, the Sutton Bridge market forecast (prepared by Ilex Associates) assumes, for the sake of
conservatism, that the plant will not be dispatched, and that all project revenues are exclusively derived
from the pool’s reliability premiums. While an unlikely scenario, the model implicitly recognizes that, by that
point, most, if not all of the system’s relatively inefficient generation will have been displaced, and that Sutton
Bridge’s profitability will be primarily derived from the value of its capacity. For this reason, the analysis focused
on which specific plant would be setting the capacity prices on the system.
•
Under the most likely assumption, which is that capacity prices would be set by a baseloaded combined cycle
plant, debt service coverage ratios average 2.5 times during the merchant period, and remain at
sufficiently robust levels under a wide range of forecast gas prices. In fact, the only scenario where Sutton
Bridge’s economics are materially threatened is under what is called the “retention” case, which refers to an
environment where the value of capacity is determined by the cost of retaining the most costly plant on the
system (the Net Avoidable Cost, or NAC).

This could occur under either of two scenarios, one of which is that new power stations are so cost
effective that there would be an economic incentive to build them ahead of an immediate need for
new capacity — a situation which would require unrealistically high gas prices, in order for the NAC to
exceed the cost of a new station.

The second scenario in which the NAC could set the value of capacity is where large-scale
government or regulatory intervention in support of “low carbon” environmental policies leads to the
construction of new capacity ahead of need, but even if it is uneconomic to do so. The probability of
occurrence for either of these cases — which would imply, based on what we know today, something
less than rational market behavior or regulatory policy — is regarded as sufficiently remote to support
the final Baa3 rating.
Sutton Bridge
38 March 16
S&P Comments on Sutton Bridge
• Enron’s Sutton Bridge Power project in the U.K. is an example of a tolling
plant. The other version of a tolling plant entails a tolling agreement with
the power purchaser; the power purchaser decides when to pull gas
through the plant, how much electricity to generate, and what market price
to accept.
• Enron’s Sutton Bridge Power project uses the GE F9A+ turbine, which has
had various technology problems. Hence, the project carries
technology insurance, although General Electric will pay the
premium surcharge cost.
• Sutton Bridge Power and LS Batesville projects feature tolling agreements
that remove market risk until the merchant period begins. In Australia, the
large brown coal plants that the state sold as part of the privatization
scheme are now single asset generating facilities structured as projects,
relying on vesting contracts in part to mitigate demand-side risk.
Sutton Bridge
39 March 16
Recent Comments by S&P
• Sutton Bridge Financing Ltd. (U.K.) BBB- Stable
• Availability of the plant over the summer has been good and in line with
expectations.
• Generation levels have been above budget.
• Next annual maintenance is planned for March 2005. The plant has been
running well as a base-load plant since commercial operations began.
• The capacity and tolling agreement with EDF Energy PLC continues to
result in a stable financial performance as no price or volumes risk is
taken.
Sutton Bridge
40 March 16
Sutton Bridge Award
•
ENRON EUROPE WINS 1997 JAMES H. McGRAW AWARD FOR SUTTON
BRIDGE BOND FINANCING Friday, November 7, 1997
•
LONDON - Enron Europe Limited has been awarded a 1997 James H. McGraw
Award for Business Excellence from Electrical World Magazine for the bond
financing of the Sutton Bridge power station.
•
In honouring Enron Europe for the financing of the £337 million project, the editors
noted that the bond issue "highlights the project's innovative structure and financing
arrangements, in particular its precedent-setting power sales agreement and risk
management components.
•
"Sutton Bridge's BBB bond rating reflects Enron's carefully crafted financial features
that successfully mesh innovation and sound economics by balancing contractual
commitment, merchant risk and ties to natural gas sales."
•
The Sutton Bridge power station project, which is set to begin commercial operation
in March 1999, is a 790 MW combined-cycle gas turbine plant in Lincolnshire, UK.
•
Jeffrey McMahon, vice president and chief financial officer of Enron Europe Limited,
accepted the award at a ceremony in Washington, D.C.
Sutton Bridge
41 March 16
US Utility Enron puts Sutton Bridge Power Plant up for Sale
•
Enron, the Texas-based utility which owns Wessex Water, has put its Sutton Bridge gas-fired
power plant up for sale it emerged yesterday, less than a year after the station supplied its first
electricity to the Grid.
•
The American firm, which has invested £370m in the plant, has retained investment bank
Dresdner Kleinwort Benson to handle the auction after receiving a number of unsolicited
approaches. An Enron official said the group had decided to divest the 790 megawatt plant
near Kings Lynn in Lincolnshire because of the clear demand in an increasingly competitive
market. The price will include a premium because of the current moratorium on building new
gas-fired plant. Potential buyers could include British Energy, Scottish & Southern Energy,
Electricité de France, Centrica and a clutch of American power groups.
•
"There have been some major changes in the UK market and we had become aware that there
was some interest in Sutton Bridge," the official said. "We are very much committed to owning
and generating capacity in the UK but always keep assets under review to see if capital could
not be better deployed elsewhere."
•
Enron has another older plant in Teeside and has a planning application lodged for a 1,200
megawatt plant in Kent. The demand for assets was sharply illustrated by the sale of Drax, the
National Power coal-fired power station which sold two weeks ago to US producer AES for a
higher than expected £1.87bn. The sale reduced National Power's market share to just 12%
from 46% at privatisation.
•
PowerGen had earlier disposed of two plants generating a similar 4,000 megawatts to Mission
Energy of the US for £1.25bn. The power supply map is being rewritten by demands from the
government to increase competition through forced sell-offs.
Sutton Bridge
42 March 16
Tolling Agreements
• In terms of risk allocation, tolling arrangements are similar to power
purchase agreements in that they provide a stable stream of cash flow in
the form of contractually based revenues. In many tolling arrangements
that Standard & Poor's has reviewed, the risks that remain with the plant
owner and operator are less severe than those remaining under a power
purchase agreement with a utility. A typical tolling arrangement clearly
delineates risk-sharing between the plant owner and the tolling party. In
many such agreements, the risks assumed by the plant owner are
reduced to availability of plant and plant efficiency. For greenfield projects,
the owner often accepts construction risk, which can also be effectively
mitigated under turnkey construction contracts.
Sutton Bridge
43 March 16
Modeling Issues in the Case
• How can the contract be computed using goal seek and solver
• How should break-even analysis be performed
• How should the leverage be computed with and without the contract
Sutton Bridge
44 March 16
Example of LD for Delay in Completion
•
Should Contractor fail to achieve Commercial Operation of a Unit by the
Scheduled Date of Commercial Operation for such Unit,
 Contractor shall be subject to liquidated damages in the amount of FORTY
THOUSAND DOLLARS ($40,000) per Unit for each full Day or part thereof
by which Commercial Operation of such Unit occurs later than the
Scheduled Date of Commercial Operation for such Unit up to and including
the fourteenth (14th) Day after the Scheduled Date of Commercial
Operation for such Unit.
 For each full Day or part thereof by which Commercial Operation of a Unit
occurs later than the fourteenth (14th) Day after the Scheduled Date of
Commercial Operation for such Unit up to and including the thirtieth (30th)
Day after the Scheduled Date of Commercial Operation for such Unit,
Contractor shall be subject to liquidated damages in the amount of SIXTY
FIVE THOUSAND DOLLARS ($65,000) per Unit.
 For each full Day or part thereof by which Commercial Operation of a Unit
occurs later than the thirtieth(30th) Day after the Scheduled Date of
Commercial Operation for such Unit, Contractor shall be subject to
liquidated damages in the amount of EIGHTY TWO THOUSAND DOLLARS
($82,000) per Unit.
Sutton Bridge
45 March 16
LD for Completion Continued
•
Such liquidated damages shall continue to accrue until Commercial Operation for
such Unit is achieved or the limit set forth in Section 14.1 is reached, whichever is
earlier; provided that, if Contractor has not previously achieved Commercial
Operation of a Unit under this Agreement,
 Contractor shall be deemed to have achieved Commercial Operation of a
Unit (but only for purpose of determining liquidated damages under this
Section) on the date on which Owner achieves Commercial Operation of
such Unit under the Power Purchase Agreement,
 but only if net power output for such Unit is at least 148,590 KW of
electricity
 and the net heat rate for such Unit is not greater than 11,217 BTU/KW-HR
(HHV) on natural gas and 11,362 BTU/KW-HR (HHV) on fuel oil as
measured in the most recent Performance Test for such Unit.
Sutton Bridge
46 March 16
LD and Retainage
•
With respect to the amount of liquidated damages which is a reduction to the
Guaranteed Lump Sum Price,
 Owner shall have the right to deduct the amount(s) of such liquidated
damages from the next payment(s) due to Contractor after the due date of
the liquidated damages and from Owner's Security, until the total amount of
the liquidated damages has been deducted;
• provided however, Contractor shall, within fifteen (15) Days after written demand,
refund to Owner the payments made by Owner on the Guaranteed Lump Sum
Price to the extent the payments made to Contractor exceed the Guaranteed
Lump Sum Price reduced pursuant to this Section 13.6 and the Owner's Security
which is not needed to satisfy other claims against Owner's Security as provided
herein. If the aggregate liquidated damages paid by Contractor on a Unit by Unit
basis exceeds the final liquidated damages determined as set forth in Sections
13.3 and 13.4,
 Owner shall pay to Contractor such excess amount within fifteen (15) days
of the final determination of such liquidated damages. That portion of any
payment or refund of liquidated damages which is not paid when due, as
provided in Section 12.3(c), 13.6 and 13.7, shall bear interest at the prime
rate as determined by the annual prime rate of The Chase Manhattan Bank
as of the date due, plus one percent (1%), but not in excess of the lawful
maximum rate.
Sutton Bridge
47 March 16
Timing of LD
• The amount of liquidated damages Contractor is subject to, or is liable for
pursuant to the terms of this Agreement, except for liquidated damages
under Section 13.7, shall be a reduction to the Guaranteed Lump Sum
Price.
 Except as otherwise provided in Sections 12.3(c) and 13.7,
liquidated damages which accrue pursuant to Sections 13.3, 13.4
and 13.5 for each Unit shall become due to Owner on the later of
the fifth (5th) Business Day after (i) the conclusion of Performance
Testing for such Unit,
 and (ii) the date of Commercial Operations for such Unit,
 subject to final adjustment pursuant to Sections 13.3 and 13.4
following Commercial Operation of the last Unit. Liquidated
damages payable pursuant to Section 13.7
Sutton Bridge
48 March 16
Timing of LD Payments
•
Liquidated Damages under this Section 13.1 shall be calculated and become due to Owner
fifteen (15) days after the scheduled Date of Commercial Operation for such Unit and shall
continue to accrue and be subject to recalculation on the same day of each succeeding month
until Commercial Operation is achieved for such Unit or the limit set forth in Section 14.1 is
reached.
 Any liquidated damages due from Contractor pursuant to this Section 13.1 with respect
to a Unit shall be offset by Net Revenue, if any, received by Owner from the operation
of such Unit prior to the Commercial Operation of such Unit or the deemed Commercial
Operation of the Unit under Section 12.3(c).
 Net Revenue for such purpose shall mean an amount equal to gross revenue (less any
taxes payable on the receipt of such revenue) received or accrued by Owner for such
Days from the sale of power, to the extent properly allocable to such Days in
accordance with generally accepted accounting principles, consistently applied, less
the sum of all costs incurred or accrued by Owner in generating such revenue,
including costs of labor, fuel (including transportation), maintenance, consumables, and
supplies (but not including any financing costs or charges), to the extent properly
allocable to such Days in accordance with generally accepted accounting principles,
consistently applied and less any liquidated damages paid by Owner under the Power
Purchase Agreement as a result of the delay in Commercial Operation of such Unit.
Sutton Bridge
49 March 16
Aggregate LD Limits
• Contractor's total aggregate liability for liquidated damages under this
Section 13.1shall not exceed twenty two and one half percent (22 1/2%) of
the Guaranteed Lump Sum Price.
• The aggregate liability of Contractor for liquidated damages under this
Agreement shall not exceed an amount equal to thirty percent (30%) of
the Guaranteed Lump Sum Price, as amended pursuant to this
Agreement, excluding any reduction in the Guaranteed Lump Sum Price
made for liquidated damages pursuant to Section 13.6.
Sutton Bridge
50 March 16
Liquidate Damage for Output
•
Contractor represents, covenants and warrants that the Plant shall produce and
deliver for sale a net power output ("Commercial Operation Output") of at least
938,460 KW of electricity when measured in Performance Tests in accordance with
Exhibit D.
•
Contractor shall be subject to liquidated damages of THREE HUNDRED DOLLARS
($300) per KW for each KW that Commercial Operation Output is less than 938,460
KW as measured in the most recent Performance Tests;
 provided that for the purpose of finally determining liquidated damages
related to Commercial Operation Output, Commercial Operation Output
shall be aggregated for the six Units (based upon the final Performance Test
for each Unit) as adjusted for transformer losses, auxiliary loads and
balance of plant restrictions determined during the tests for Plant
Commercial Operation set forth in Section 2.1.4 and 2.4.2 of Exhibit D,
 and liquidated damages, if any, shall be computed based upon the
aggregate Commercial Operation Output.
•
Contractor's total aggregate liability for liquidated damages under this Section 13.3
shall not exceed twenty two and one half percent (22 1/2%) of the Guaranteed
Lump Sum Price.
Sutton Bridge
51 March 16
LD for Heat Rate
• Contractor represents, covenants and warrants that the Units shall
operate at a net heat rate ("Commercial Operation Net Heat Rates") Ten
Thousand Six Hundred
• Eighty Three (10,683) BTU/KW-HR (HHV) or less per Unit when operated
on natural gas and Ten Thousand Eight Hundred Twenty One (10,821)
BTU/KW-HR (HHV) or less per Unit when operated on fuel oil when
measured in Performance Tests in accordance with Exhibit "D.“
• Contractor shall be subject to liquidated damages of FIVE THOUSAND
EIGHT HUNDRED SIXTY DOLLARS ($5,860) per BTU/KW-HR for each
BTU/KW-HR that Commercial Net Heat Rate exceeds Ten Thousand Six
Hundred Eighty Three (10,683) BTU/KW-HR (HHV) per Unit when
operated on natural gas plus NINE HUNDRED FIFTY DOLLARS ($950)
per BTU/KW-HR for each BTU/KW-HR that Commercial Net Heat Rate
exceeds Ten Thousand Eight Hundred Twenty One (10,821) BTU/KW-HR
(HHV) per Unit when operated on fuel oil as measured in the most recent
Performance Tests;
Sutton Bridge
52 March 16
LD on Heat Rate
•
provided that for the purpose of finally determining any liquidated damages related to
Commercial Net Heat Rate, Commercial Net Heat Rate shall be averaged (with separate
averages for natural gas and fuel oil) for the six Units (based upon the final Performance Tests
for each Unit) as adjusted for transformer losses, auxiliary loads and balance of plant
restrictions determined during the tests for Plant Commercial Operation set forth in Section
2.1.4 and 2.4.2 of Exhibit D, and liquidated damages, if any, shall be computed based upon the
per Unit average Commercial Net Heat Rate for natural gas and fuel oil. Prior to the
computation of liquidated damages for net heat rate of the entire Plant as set forth above in this
Section 13.4, Contractor shall, at such times as are provided in this Agreement, pay to Owner
liquidated damages of FIVE THOUSAND EIGHT HUNDRED SIXTY DOLLARS ($5,860) per
BTU/KW-HR for each BTU/KW-HR that the net heat rate of a Unit exceeds Ten Thousand Six
Hundred Eighty Three (10,683) BTU/KW-HR (HHV) when operated on natural gas, plus NINE
HUNDRED FIFTY DOLLARS ($950) per BTU/KW-HR for each BTU/KW-HR that the net heat
rate of a Unit exceeds Ten Thousand Eight Hundred Twenty One (10,821) BTU/KW-HR (HHV)
("Unit Heat Rate Requirements") when operated on fuel oil, as measured in the most recent
Performance Tests for such Unit, with such amounts of liquidated damages being subject to
adjustment as set forth above based upon the net heat rate of all of the Units in the Plant when
operated on natural gas and fuel oil. Contractor shall have the right to retest as set forth in
Section 12.3(b), (c) and (d). Contractor's total aggregate liability for liquidated damages under
this Section 13.4 shall not exceed twenty two and one half percent (22 1/2%) of the Guaranteed
Lump Sum Price.
Sutton Bridge
53 March 16
Heat Rate Covenant
• In addition to the guarantees for Commercial Operation Output and
Commercial Operation Net Heat Rate set forth in Sections 13.3 and 13.4,
which shall be applicable for the purpose of determining liquidated
damages, Contractor warrants and represents that the net power output of
all Units (as finally determined pursuant to Section 13.3) shall be at least
891,540 KW of electricity and the net heat rate for all Units (as finally
determined pursuant to Section 13.4) shall be not greater than 11,217
BTU/KW-HR (HHV) per Unit when operated on natural gas and than
11,362 BTU/KW-HR (HHV) per Unit when operated on fuel oil
("Performance Minimums"). If Commercial Operation Output and
Commercial Operation Net Heat Rate for all of the Units as determined by
the most recent Performance Tests achieve the Performance Minimums,
then subject to compliance with Section 12.3 (d), liquidated damages as
provided in Sections 13.3 and 13.4 shall relieve Contractor of further
liability for failure to comply with the performance requirements for
Commercial Operation Output and Commercial Operation Net Heat Rate
for such Units.
Sutton Bridge
54 March 16
Termination of EPC
• Subject to the right of Owner to terminate this Agreement pursuant to
Section 18.1(c), if Contractor achieves the Performance Minimums for all
Units, liquidated damages as provided in Section13.3 and Section 13.4
shall be the sole remedy of Owner for failure of Contractor to meet the
Section 13.3 and Section 13.4 guarantees. Upon reduction of the
Guaranteed Lump Price or payment in accordance with Section 13.6 for
final liquidated damages under Section 13.3 and/or Section 13.4, the
guarantees set forth in Section 13.3 and Section 13.4 for Commercial
Operation Output and Commercial Operation Net Heat Rate shall be
satisfied, and Contractor shall have no further liability for such guarantees.
Sutton Bridge
55 March 16
Example of Financial Covenants
•
6.1 Financial Condition Covenant. Permit the ratio of Consolidated
Indebtedness to Consolidated Capitalization as at the last day of any
fiscal quarter to exceed 0.64:1.0.
Sutton Bridge
56 March 16
Restrictions on Distributions
•
•
SECTION 6.14 Distributions. The Borrower will not declare or make any Distribution if (a) a
Default, Event of Default or Downgrade Event has occurred and is continuing or shall occur
after giving effect to such Distribution, (b) the Ratio of Cash Flow to Fixed Charges of the
Borrower determined as of the end of the immediately preceding fiscal quarter was not at least
2.0:1.0 or (c) the Borrower fails to satisfy the requirements of the test set forth in
Section 6.15(b), or the Borrower fails to have a Consolidated Net Worth of at least $2.15 billion,
in each case calculated on a pro forma basis as of the end of the most recent fiscal period with
respect to which financial statements of the Borrower are available (assuming such Distribution
and all material events with respect to the Borrower and its Subsidiaries which occurred after
the end of such fiscal period had occurred on the last day of such fiscal period); provided that
the Borrower may declare and make Distributions of assets of or equity ownership interests in
any Unrestricted Subsidiary at any time without complying with the foregoing.
SECTION 6.15 Financial Covenants.
•
(a) The Borrower shall not, as of the end of each fiscal quarter, permit the Ratio of Cash
Flow to Fixed Charges to be less than 1.5:1.0.
•
(b) The Borrower shall not, as of the end of each fiscal quarter, permit the Ratio of Debt to
Capitalization to be greater than 0.6:1.0.
•
(c) The Borrower shall not, at the end of each fiscal quarter, permit (i) Consolidated Net
Worth to be less than the Minimum Consolidated Net Worth and (ii) Non-Trading Consolidated
Net Worth to be less than the Minimum Non-Trading Consolidated Net Worth.
Sutton Bridge
57 March 16