Carlos Albarracín
Partner
Milbank
/
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Long-Term Financing Needed to Increase Capacity

Wed, 02/22/2017 - 10:49

Q: What are the main changes in your client portfolio since the Energy Reform?

A: We worked on many energy projects before the Energy Reform but after this structural reform was approved we decided to open an entire area fully dedicated to oil and gas and power generation. We have invested significant time and money in this area and it is now one of the firm’s main divisions. Before the reform we used to work mostly with banks interested in financing energy projects but now we have more energy companies coming for financial support to launch their projects. Project developers used to work by themselves in the past, looking for a buyer after their projects were completed. This has changed. Our clients now are increasingly interested in closing financing deals with off-takers before moving on with their projects. In projects where our clients already have an off- taker, we support them in the structuring of their PPAs. The situation is highly different when the contracts are done with a private or public off-taker. When the off-taker is a government institution, companies are sometimes concerned with the payment scheme because there are often complex requirements for companies to supply the public sector. For instance, some require approval from the local congress. More often, energy companies require certain assurances before entering a long-term agreement with any local government, such as collateral. It is, however, not an industry standard for the government to agree to collateral under these circumstances. Energy producers also need to have clear expectations of what they are going to get from such a contract.

Q: What are the main concerns that financial institutions have when sponsoring PPAs?

A: The duration for the financing has to be consistent with the PPA’s life span. It is not possible to have a PPA that is shorter than the financing period because no bank would accept that deal. To obtain support from a financial Nader, Hayaux & Goebel (NHG) is a market leader in M&A, banking and finance, securities and capital markets, It works in insurance and reinsurance, real estate, energy, infrastructure and telecommunications, among others.

institution, power suppliers often offer collateral that a bank can collect in case of default. In a PPA it is necessary to make clear what each individual party is getting. It is also necessary to determine a taker-pay, which is what happens in case of certain events such as blackouts where off-takers have to take the power under certain conditions. Furthermore, all PPAs have an exit provision. Banks prefer these conditions to be strict for off-takers. These conditions cannot be flexible because it would be undesirable for a power generator to find itself without a buyer while it receives financing, forcing it to find another under pressure and thus at a lower sale price. This would place the bank in an unfavorable position.

Q: What would you say is the biggest change the Reform needs to facilitate operations?

A: The current requirements are too cumbersome and often redundant. Energy regulations need to be greatly simplified. There are also other areas that need to be addressed, for instance, fostering investment in infrastructure for the transport of natural gas to supply existent and new combined cycle power plants. Once this infrastructure is in place it will be necessary to get more gas to flow through it.

Q: Do you expect to see a larger number of M&As in the sector?

A: We have seen a large number of M&As in the oil and gas sector and we recently participated in PEMEX’s sale of Gasoductos de Chihuahua to IEnova. But we do not expect many M&A for the energy sector with the exception of those involving large participants. I do not believe the industry is interested in that. What we expect are more sales of public infrastructure to the private sector.

Q: What will be at the core of your agenda for 2017?

A: We want to help power producers to participate in tenders. When participants bid in government tenders they often do not have the infrastructure ready to operate. We want to support them through the entire process of bidding, winning the tender and building the necessary infrastructure to comply with their obligations.