Jawa 1 LNG-to-power completes its voyage
The Jawa 1 integrated LNG-to-power project (Jawa 1), which comprises the integrated financing of a 1,760MW (net) greenfield IPP and a new-build FSRU, secured its project financing in October 2018. By Ginanjar Sofyan of PT Pertamina Power Indonesia, Akira Suda, Takeshi Minowa, Victor Choi of Marubeni Corporation,Yohei Oishi of the Japan Bank for International Cooperation, Mineto Inoue ofNippon Export & Investment Insurance, Yuichiro Yoi of the Asian Development Bank, Adrian Lian and Ron Leonardo of ING Bank NV and Bill McCormack, Lachlan Clancy, Jean-Louis Neves Mandelli of Shearman & Sterling LLP.
LNG to power projects have been a major focus of the energy industry in the past few years. A combination of LNG market conditions, environmental concerns and the rise of the FSRU have led a number of countries worldwide to look at integrated LNG to power schemes as a means of meeting their power needs. However, due to their high complexity, very few have achieved financial close.
The Jawa 1 integrated LNG-to-power project (Jawa 1), which comprises the integrated financing of a 1,760MW (net) greenfield IPP and a new-build FSRU, secured its project financing in October 2018. It is the first ever LNG-to-power project to do so in the Asia-Pacific region, and paves the way for others to attempt to follow suit.
Jawa 1 required the development of an innovative and highly bespoke commercial and financing structure, including a PPA with PT PLN Persero (PLN), the Indonesian state offtaker. This project is all the more remarkable because of the speed with which it was completed, and that it is one of the first major projects to close without a direct guarantee from the Government of Indonesia.
Jawa 1 is an integrated project comprising a new-build 170,000m3 floating storage regasification unit (FSRU) and a two-unit 1,760MW greenfield gas-fired independent power producer (IPP) located in West Java Province, Indonesia.
* Sponsors– The IPP project is developed by a top-tier sponsor group led by PT Pertamina Power Indonesia (PPI) (40%), Marubeni Corporation (Marubeni) (40%), and Sojitz Corporation (Sojitz) (20%) (together the IPP sponsors).
i) PPI is a subsidiary of PT Pertamina (Persero), an Indonesian state-owned energy company and the country’s largest corporation.
ii) Marubeni is a major Japanese trading house and a premier IPP developer with extensive experience developing IPP projects globally, including four other IPPs in Indonesia.
iii) Sojitz is also a major Japanese trading house, with interests in LNG and power projects, including the Tangguh LNG project in Indonesia.
The IPP sponsors will own the onshore infrastructure, including the power plant via an SPV called PT Jawa Satu Power (JSP).
A separate company, PT Jawa Satu Regas (JSR), has been established to own the FSRU due to, among other things, FSRU operator experience and Indonesian cabotage laws. The IPP sponsors partnered with Mitsui O.S.K. Lines (MOL) (together the Jawa 1 sponsors) to develop the FSRU via JSR. JSR’s shareholding composition is different from JSP but substantially aligned.
* Project structure – The project is structured on a BOOT basis. PLN and JSP are party to a 25-year power purchase agreement (PPA), which is the sole source of revenue for the integrated project. PLN will take ownership of both the onshore infrastructure and the FSRU at expiry of the term.
The project is also structured on an energy tolling basis. PLN is responsible for procuring LNG and delivering it to the FSRU. LNG delivered by PLN to the FSRU is stored, regasified and delivered by JSR as natural gas to JSP, and JSP converts the gas received from JSR to power. See Figure 1 for an overview of the contractual structure.
* Technical details – The project involves the construction of:
i) A 2 x 880MW combined-cycle gas turbine power plant;
ii) A transmission line and subsea gas pipeline and mooring facilities for the FSRU; and
iii) A 170,000m3 FSRU that will be permanently moored offshore from the project site in Cilamaya, West Java.
General Electric (GE), Samsung C&T and PT Meindo Elang Indah (the EPC consortium) are responsible for the construction of power plant and onshore facilities.
GE is also supplying the combined-cycle gas turbines, which are among the most efficient machines in the world. Samsung Heavy Industries (SHI) is the shipbuilding contractor, which will be responsible for constructing the FSRU in its shipyard in Geoje Island. GE will provide operating and maintenance services for the IPP under a long-term services agreement. MOL will be engaged as the FSRU ship manager.
Financing structure and process
Total project costs for the Jawa 1 project are in excess of US$1.5bn, with senior project finance lenders providing the bulk of the financing.
The senior project finance includes a direct loan from Japan Bank for International Cooperation (JBIC) and the Asian Development Bank (ADB), and commercial loans provided by the mandated lead arrangers (MLAs), which benefit from insurance provided by Nippon Export & Investment Insurance (NEXI). The MLAs comprise Credit Agricole, Mizuho Bank, MUFG Bank, OCBC Bank and Societe Generale.
In addition to the senior loans, the sponsors have arranged equity bridge loans from commercial banks to fund the sponsors’ equity contributions initially; an increasingly prevalent feature for Indonesian IPPs.
Indonesian IPPs have sometimes followed a meandering path to financial close, as land, environmental and other bankability issues are sorted out in parallel. However, for the Jawa 1 project, the sponsors engaged very early on with JBIC, NEXI and ADB (together the development financing institutions or DFIs) to identify and address potential bankability issues.
The pro-active and consultative approach adopted by the DFIs enabled the sponsors to accelerate the negotiation and execution of the key project documents, such as the PPA.
Throughout the financing process, the DFIs demonstrated leadership and took a collaborative approach to tackling the tough issues that were encountered in such a complex project. This was ultimately key to being able to achieve financial close more or less on time, a major achievement for an Indonesian IPP project.
Challenges to be unlocked
When the Jawa 1 project was first initiated by PLN in late 2015 as an LNG-to-power project, there was no regional point of reference nor any established structure that could guide the sponsors to develop a bankable project and yet offer an extremely competitive tariff to win the tender run by PLN.
The sponsors had to work with their partners and advisers to forge a bespoke risk allocation, which sought to anticipate the bankability and project issues that could arise and address these issues as early as possible.
It would be safe to say that this project had more than its fair share of ups and downs, issues and problems to solve; arguably to be expected given the technical complexity, large number of stakeholders and numerous inter-dependencies.
* Contract structure – Developing a contractual structure for a greenfield integrated LNG-to-power project that is capable of supporting an integrated limited recourse project financing was very challenging. Some key issues that sponsors faced in this respect included:
i) Project-on-project risk. An LNG receiving terminal and IPP project are traditionally independent projects in terms of ownership, construction and contractual arrangements and financing. The Jawa 1 project brings both together into a single project, with the FSRU and IPP wholly dependent on each other for their commissioning, operation and ultimate success.
A key principle of the project structure is that the success of each project is dependent on the success of the other project, creating a strong alignment of interest between JSP and JSR and their respective owners/financiers.
During construction, the FSRU’s primary construction activities will occur in South Korea at SHI’s shipyard while the EPC consortium constructs the IPP on site. Project-on-project risk arises with respect to the construction schedule and commissioning activities. The IPP project is dependent on the FSRU arriving at the mooring facility on time in order to receive LNG for IPP commissioning activities and achieve commercial operations (COD) as required under the PPA.
The sponsors adopted a number of risk management strategies to minimise the interface risk between the FSRU project and the IPP project, including taking a novel approach to scheduling under the construction contracts. The DFIs were satisfied with the sponsors’ approach to project-on-project risk and, as a result, the financing does not include a completion guarantee.
During operations, the FSRU and IPP will both need to be operating in order for JSP to earn revenues under the availability-based PPA. The IPP will need the FSRU to be able to receive, store and regasify the LNG in order to supply fuel for the gas turbines. JSR will need the IPP to be available in order for JSP to earn revenues under the PPA and make corresponding payments to it under the FSRU service agreement.
The arrangements between JSP and JSR have been developed on a highly bespoke basis to ensure that JSR is able to generate sufficient revenue from the services provided to JSP, while maintaining sufficient flexibility to avoid constraining the power project it depends on for revenue.
The project financing was also developed to mitigate project-on-project risk, with an integrated financing structure designed to align each borrower and their shareholders’ interests in the integrated project, including through cross-guarantees from each borrower and cash pooling between each borrower’s revenue accounts.
ii) Alignment of interests. The equity interests across JSP and JSR are not identical due to regulatory requirements and the need to ensure the relevant technical and commercial expertise is appropriately sourced. However, in order to ensure that JSP and JSR would function as a single project, the IPP sponsors needed to retain majority and control across both entities. As noted above, the inter-dependency of the two projects also ensures a high degree of commercial alignment between JSP and JSR.
iii) Integration of oil & gas and power financing worlds. Integrated LNG-to-power projects are unique in that, quite unusually, they bring together sponsor groups that would normally operate in related but different spheres of specialisation. For example, Jawa 1 represents the first foray by Pertamina’s PPI into conventional power generation, while it is Marubeni’s first FSRU project.
The practical effect of this was having to develop a project financing structure that could accommodate the historically different project financing approach of IPPs vis-à-vis FSRUs (eg completion guarantees are relative common in the offshore financing world but seldom seen in IPP financings).
iv) PPA arrangements. Both JSP and JSR are ultimately reliant on the PPA for their revenues. However, the traditional PLN PPA template was designed to address the relationship between PLN and the power generator, and did not look beyond the power generation assets.
There were key elements for an integrated project that needed to be addressed in the PPA, including incorporating the FSRU into the PPA so that certain of the PPA benefits extend to the FSRU, eg direct agreements.
v) Fuel supply arrangements. Fuel supply for a thermal power plant is the single largest cost component over its project life. It is imperative that the risk allocation for fuel supply is appropriately allocated from a bankability perspective as cost fluctuations arising from fuel supply would have the potential to very quickly erode cashflows and threaten debt service cover ratios. In the case of Jawa 1, the question was who would be responsible for volume and price risk for the LNG.
The structure of the fuel supply arrangements changed during the course of the bidding process, from a model contemplating that the project would be responsible for procuring LNG, to the revised model, which contemplated that PLN took the LNG procurement risk.
The challenge with the first approach would have been a potential mismatch with the PPA if, on the one hand the LNG arrangements included a minimum take commitment, whereas on the other the PPA did not include a minimum dispatch commitment from PLN. This issue was resolved by PLN stepping in and taking responsibility.
As part of its fuel mix diversification strategy, PLN entered into a long-term LNG sales and purchase agreement (LNG SPA) with the Tangguh LNG plant. The LNG SPA is the most likely source of LNG for Jawa 1. Securing long-term LNG supply was key to mitigating the risk of Jawa 1 becoming a stranded asset in the event that the IPP would have no source of gas to generate electricity.
In addition to the structuring issues specific to the development and financing of an integrated LNG to power project, the sponsors had to address other issues affecting the Indonesian IPP sector due to recent regulatory and policy changes by PLN.
* Jurisdiction-specific issues – These include:
i) No direct government guarantee. Jawa 1 is the first large-scale Indonesian IPP financed by this group of DFIs without a Business Viability Guarantee Letter (BVGL) from the Indonesian Ministry of Finance.
ii) Local laws and regulations. A large number of regulatory changes were introduced by the Ministry of Energy and Mineral Resources of Indonesia in 2017 while the Jawa 1 PPA was being negotiated. These included MEMR Regulations No 10, 48 and 49 of 2017. These added further complexity to the PPA negotiations, as Regulations No 10 and 49 introduced some modifications to the risk allocation under PLN’s PPAs, and Regulation No 48 imposed additional share transfer restrictions.
For example, under Regulation No 48, it is only possible to transfer shares in the project company pre-COD to a 90%-owned affiliate of the transferring shareholder. There is no carve-out for share transfers by lenders in case of enforcement or in case of transfer of shares to PLN in the event of a termination of the PPA. The sponsors and lenders therefore had to develop alternative structures to allow the lenders to benefit from a security package comparable to the one they would have benefited from in the absence of the share transfer restrictions.
Keys to success
Many of the challenges faced by the Jawa 1 sponsors and lenders were unprecedented, with a limited or not proven road map to follow. Fundamentally, it required tremendous effort and perseverance from each sponsor, a large dose of collaboration, and frequently finding creative solutions among sponsors and lenders to overcome the hurdles.
Looking back at how the project unfolded since inception, some key elements to achieving financial close include the following
* Strong sponsors – While having a strong balance sheet is definitely a key determinant, the success of Jawa 1 would not have been possible without the unique expertise and technical capabilities contributed by each sponsor – eg Pertamina’s PPI with gas and LNG business experience along the value chain, Marubeni with IPP and project finance experience, Sojitz with LNG experience, and MOL with FSRU experience. Arguably, a gas-to-power project would be a difficult proposition without a special sponsor mix-
* Bankable project agreements – Once the sponsors had developed an appropriate technical solution, this all had to be knit together by the project agreements – eg PPA, EPC contract, shipbuilding contract, FSRU service agreement – that would reflect a bankable risk allocation. Aligning the interests of each sponsor, PLN, the EPC consortium/SHI and lenders was a continuing juggling act that often reminded one of playing the whack-a-mole game at the funfair.
* Aligned intercreditor interests/security package – In addition to aligned sponsors, having a senior lender group with aligned interests was key as there were two borrowers involved within the single project. The different technical risk profile and funding requirements, combined with the inter-dependence of each borrower to the other meant that the security package and cashflow waterfall had to be specially designed to ensure that the lenders were protected and had priority regardless of whether an adverse event occurred at one borrower or the other.
As noted above, the project also benefited from strong support from the development financing institutions, which worked in close collaboration with the sponsors from day one to solve difficult issues and to structure a successful deal.
Shearman & Sterling and Widyawan & Partners acted as international and local counsel respectively for the sponsors. Allen & Overy and Ginting & Reksodiputro acted as international and local counsel respectively for the senior lenders. Credit Agricole acted as insurance and technical bank, Mizuho Bank as DFI coordinator and documentation bank, OCBC Bank as modelling bank and Societe Generale as E&S bank. ING Bank acted as financial adviser to the sponsors.