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Quezon Power expansion plans

04/19/2008

Plans by coal power plant operator Quezon Power Philippines Ltd. Co. (Quezon Power) to develop a new 500 megawatt (MW) coal-fired power plant are still preliminary and there remains a substantial way to go before having a committed investment plan, thus, Standard & Poor’s (S&P) Ratings Services said the plan does not have any impact yet on the firm’srating.

S&P said its representatives recently held discussions with management of Quezon Power, owner of a 460-MW net base load, pulverized coal-fired power plant and a 31-kilometer transmission line in Quezon province.

“There is no impact on the ‘B-’ project finance rating at this time, while the company has obtained an environmental compliance certificate from the Department of Environment and Natural Resources (DENR) and secured a final grid system impact study of the development from National Power Corp.,QuezonPower has not finalized the main operational and commercial aspects of the project, namely the technology, financing, construction and power purchase related agreements,” S&P said in a press statement.

In addition, the investment structure of any new development including the project owner remains undecided, it added.

”We would separately assess in detail the various contractual arrangements surrounding a new development, including whether such development would affect the debt-servicing ability on Quezon Power’s $215-million senior secured bonds,” S&P credit analyst Andrew Wong said.

“Measures such as the dilution or sharing of existing cash flows that service Quezon’s bonds and the inclusion of cross-default and cross-acceleration provisions between new and existing lenders is likely to erode Quezon Power’s existing credit metrics,” he said.

“Whether this would lead to downward pressure on the ’B-’ rating on the bonds depends heavily on the contractual framework for the off-take of any new development, given the current oversupply of electricity in the Philippines and ongoing industry restructuring,” Wong added.

The existing bond rating reflects persistent concerns on Manila Electric Co., the sole off-taker. Quezon Power’s current credit metrics are much better compared with its peers in the “B” category, according to S&P.

The off-taker commits to purchase the project output under a long-term contract.

There is no firm timeline for this development. S&P, however, believes the company would have an incentive to finalize the structural and commercial aspects of any new project toward the end of 2008, it said.