The document discusses Inter Gen's Quezon Power Project in the Philippines. Some key points: 1) Inter Gen built the 440-megawatt Quezon coal power plant in the Philippines, taking on most construction and operating risks. 2) Project financing of $808.9 million used a 75% debt to 25% equity structure. Inter Gen had majority ownership. 3) A new opportunity arose where another company offered to buy half of Inter Gen's remaining equity in the project. This presented Inter Gen with a dilemma on whether to sell or retain their ownership stake.

1. Inter Gen and the Quezon Power Project:
Building Infrastructure in Emerging Markets
BY:-
GROUP 7
PRASHANT CHAUBEY (M17-19)
SAUBHIK MONDAL (M17-24)
UJJWAL RAO (M17-34)
YOGESH KUMAR (M17-39)
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2. Contents
1. Philippines
2. About Inter Gen
3. INTERGEN-QUEZON PROJECT
4. Global energy industry
5. Challenges involved in attracting foreign investment
6. Obsolescing Bargain
7. Risk Classification & Risk Management
8. Project Financing
9. A New Opportunity
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3. PHILIPPINES
 Philippines is an archipelago of 7000 islands about 500 miles off
the south-eastern coast of Asia.
 Total land area of 300000 square kilometre.
 Philippines consists of three major island groups.
 Faced political turmoil from 1972-1986.
 Considered for long the sick man of Asia experienced rapid growth
in the mid 1990’s.
 Under president Aquino and Ramos initiated a series of economic
reforms like import and foreign exchange liberalization, tariff
restructuring ,tax reform and privatisation.
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4. Map of PHILIPPINES
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5. ABOUT INTERGEN
 Intergen built, finance and operate international power projects.
 Had its root in j. makowski corporation.
 Makowski was founded in 1972 as a developer of small scale hydroelectric plant.
 Over the next 20 years became a major power company in the United states.
 Intergen was formed in 1995 after Bechtel enterprise and PG&E Enterprise acquired the
company for $300 million
 PG&E later sold their share to Royal Dutch shell.
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6. Continued…
 It managed 30 projects in 18 countries accounting for 7000 mw and $5.6
billion in capital commitment.
 Possess superior skills in green field project development and in fuel
handling and storage.
 In 1997’s the company targeted 15 countries for green field power project
development.
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7. INTERGEN-QUEZON PROJECT
 Quezon was a 440-megawatt coal powered electric generating power plant
located on the island of Luzon.
 Intergen had a ownership of 71.875%, Ogden energy 26.125% ,PMR energy
2%.
 Quezon was the first private power plant in Philippines without sovereign
debt guarantee the first to sell directly to distributor company .
 Construction started in December 1994 and was projected to complete on
January 2000.
 Project cost totalled $808.9 million financed by 75% debt 25% equity.
 Had a 25 years take or pay contract with Meralco.
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8. Global energy industry
 Global energy demand has been growing since 1970’s
 The growth rate has been 25% led by developing countries in 1991.
 Per capital energy consumption was closely tied to per capital income.
 World bank development fund invested $12billion to $15billion annually in the
power sector.
 The Asian share of world electricity consumption grew from 18% in 1985 to 29%
in 1995
 Growing energy demand required $35billion annual investment in asia.
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9. Challenges involved in attracting foreign investment
 To make the infrastructure “greenfield development” attractive to foreign investors.
 Political turmoil(s) in history of Philippines scared off potential foreign investors.
 Lack of sovereign guarantee.
 Power Projects were being financed by national governments or WB so foreign
investment is a new thing.
 Obsolescing Bargain also is a hurdle in attracting FDI.
 Regulatory approvals take time.
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10.  Asian Financial Crisis
 PSUs operating in same industry can be a challenge.
 Time gap between commencement of construction and generation of cash is a
discouraging factor.
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11. Obsolescing Bargain
 A model of interaction between MNE and HC
 Initially bargain favours the MNE.
 Over time as the MNE's fixed assets in the country increase, the
bargaining power shifts to the government.
 Business deals payback terms are restructured to favour “a host
government”.
 The resources or assets can be held hostage by HC
 The BOT project given by government of Phillippens was on good terms.
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12.  Meralco (a DISCOM) leased its interest in property but only till PPA duration. What after
2003??
 In later part, newer approvals were given to Intergen but at a higher rate than expected
which increased bargain power of HC.
 However, since the project is still not online, we can only guess about HC’s role in
bargain in future.
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13. Risk Classification
 The categories of risk as decided by company were: -
1. Approval and construction risks
2. Financing risks
3. Contractual and Operating risks
4. Currency /Country risks.
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14. Risk Management
 Approval & Construction Risks: -
1. The risk of opposition from official authorities reduced.
2. The official approval process was moving rapidly.
3. PMR’s contacts at the DOE would help manage any future regulatory
conflict.
4. Inter Gen put significant effort into winning local support for the plant.
5. Inter gen presumed construction risk to be minimal due to experience of
Bechtel.
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15.  Financing Risk: -
1. Considerably higher than approval and construction risk.
2. Equity contributions from Inter Gen and OEI were assured, but debt
financing would be complicated by country risk.
3. Inter Gen believed it was well placed to handle the financing risk. It led
the industry in aggressive and innovative financing structures and its
close ties to Bechtel and the Royal Dutch Shell Group would help calm
investors’ fears about project risk
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16.  Operating & Contractual risks: -
1. If plant operated in projected way there would be minimal operating risk.
2. Standard and tested generation technology and expertise of Bechtel
further minimised operating risk.
3. The take-or-pay power purchase agreement obligated Meralco to cover
both fixed and variable operating costs, as well as the full cost of fuel.
4. Coal supply was ensured.
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17.  Currency & Country Risk: -
1. To minimize currency risk all debt and Meralco contract were
denominated in us dollars.
2. Country risk: hard to forecast. Increasing in Philippines.
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18. Project Financing
 “Project finance is the financing of long-term infrastructure,
industrial projects and public services based upon a non-recourse
or limited recourse financial structure, in which project debt and
equity used to finance the project are paid back from the cash flow
generated by the project”
1. Inter Gen used the concept of project financing in Quezon Project and
debts were to be paid from the cash flow generated after the project
comes online.
2. A BOT (Build Operate Transfer) approach was used here.
3. The total debt to equity ratio was 3:1
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20.  Project financing was smooth.
 The Exim bank approved a 60-month US $417 million construction loan
in November 1996.
 It also committed to refinance the loan upon satisfaction of a set of
specified conditions and the successful completion of the project.
 Investors also proved receptive to the public portion of the debt. Initially
targeted at US $180 million.
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21. A New Opportunity
 In December 1997, Inter Gen was approached by Roger McPeek, a
representative from Power Investments Limited (PIL).
 PIL proposed to buy half of Inter Gen’s remaining equity (22.9 percent of
project equity) for US $85 million. Inter Gen’s carrying cost on the
position was only US $46.4 million, and Inter Gen valued the position at
US $72.5 million.
 Inter Gen in a dilemma to what to do?
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22. Recommendations
 Most of the project risks have been minimized which why he should feel
comfortable with his discount rate of 14% in 2000 and estimated equity
value of $179.4 million.
 Minimize operating risk, DOE’s approval could impact the NPV of the
project, the economic growth in the Philippine’s has been a strong 5 – 6
% which should provide strong enough demand to offset and growth in
supply in the region.
 Further demand for power was expected to growth more than 7 percent
annually through 2010. Further, it is estimated that more than 24,000
megawatts (MW) of power will needed to be built to handle this demand.
Quezon was only going to provide 440 MW which is only 1.8% of this
demand, therefore, the impact of other suppliers entering the market
should be minimal
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24.  In regards to the Asian financial crisis, this could provide a negative
short-term impact on the value of the project, but the growing demand for
power will offset any potential short-term slowing in economic growth.
 Inter Gen has protected itself by setting up contracts in U.S. dollars.
Therefore, Inter Gen should hold onto the project of its 47.875% equity in
the Quezon project.
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