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Trans Alaska Pipeline System (TAPS) Project

Amerada Hess Corporation ("Hess")
Atlantic Richfield Company ("Arco")
British Petroleum Company ("BP")
Chevron Oil ("Chevron")
Exxon Corporation ("Exxon")
Getty Oil Company ("Getty")
Mobil Oil Corporation ("Mobil")
Phillips Petroleum Company ("Phillips")
Standard Oil Company (Ohio)("Sohio")
Union Oil Company ("Unocal")

Trans Alaska Pipeline System (TAPS) project involved the construction of an 800-mile pipeline, at a cost of US$7.7 billion, to transport crude oil and natural gas liquids from the North Slope of Alaska to the port of Valdez in southern Alaska. The project commenced in 1969, and the first Alaskan crude oil was shipped via TAPS in the summer of 1977. TAPS involved a greater capital commitment than all the other pipelines previously built in the continental United States combined.

Hess, Arco, BP, Chevron, Exxon, Getty, Mobil, Phillips, Sohio (now wholly owned by BP), and Unocal owned undivided joint interests in TAPS.

BP, Exxon, Mobil, and Sohio sold over US$5.6 billion of debt securities to fund their respective portions of project capital cost, including a U.S. private placement in 1975 for Sohio/BP Trans Alaska Pipeline Capital, Inc. that raised US$1.75 billion from 76 (one of which was GSI 50% owners of UGC) lenders, representing the largest public or private financing ever accomplished for a corporate entity up to that point in time.

Sohio/BP Trans Alaska Pipeline Capital, Inc., pledged, as security for its TAPS-related borrowings, a combination of (1) a portion of BP's and Sohio's oil reserves in the North Slope and (2) a portion of future revenues to be received from the sale of crude oil produced from the North Slope.

1. The joint venture structure permitted the sponsors to finance their respective ownership interests separately, which enabled certain sponsors to achieve the lowest possible cost of debt for their investments in TAPS because of their triple-A credit ratings.
2. The project is noteworthy because of its huge capital cost and the technical challenges that were caused by the hostile terrain and climate.

Standard Oil of Ohio (Sohio) was a relatively small marketer and refiner within the petroleum industry until 1969, when it became involved in the development of the Alaskan pipeline and the Alaskan oilfields. Between 1969 and 1978 Sohio raised more than $6 billion to fund its expansion capabilities, with Phillips, Groth and Richards (1979) referring to this $6 billion as "particularly significant because of the size of the project relative to the size of the firm". In that time period Sohio's assets grew from $773 million to $7.77 billion. As one can see, the $6 billion of financing, $5 billion of which came from external sources, was the major thrust of the growth in assets Sohio's percentage of ownership of the Prudhoe Bay project was 53.16% and their ownership of the Trans-Alaska pipeline was 33.34%. In each project, Sohio was the largest shareholder at the time of completion. Atlantic Richfield and Exxon both had over 20% ownership in Prudhoe Bay and the pipeline, while British Petroleum owned nearly 16% of the pipeline, but did not have any ownership in the Prudhoe Bay fields.

In the early stages of the development of the fields in the 1960s, Sohio's projected share of its capital requirements was estimated to be $575 million. However, by November 1973, when the Trans-Alaska Pipeline Authorization became law, Sohio's share had escalated to more than $2.2 billion, and by 1977 their estimated share had grown to over $6 billion. British Petroleum was looking to diversify its reserves, and the two companies agreed to a delicate merger in 1977 in which Sohio received virtually all of BP's mineral rights in the United States and all BP interests in US offshore territorial waters. BP received 25% of Sohio, which, depending on production in the Prudhoe Bay project, could increase up to a maximum of 54%.

At first everything looked prosperous for Sohio. As the oil began to flow from the Prudhoe Bay fields, the revenue flowed as well. While saddled with enormous debt, the venture was successful. The problems for Sohio arose later with the "problem" of what to do with the oil revenue. Rather than pay down the $6 billion debt, the executives at Sohio decided at first to go on a spending spree of oil exploration in the Mukluk field in Alaska (which proved fruitless), fields in Oklahoma, and the Rocky Mountains, and other acquisitions of mineral mining operations, such as Kennecott Corporation (which was a coal producer) and other companies that were copper producers. Note that Sohio was an oil refinery whose management lacked experience in exploration and these other areas of business.

Sohio's management finally began to reduce their debt in 1984 and began a share repurchase program. Cooper and Richards (1988) found that while the company's balance sheet had improved, "problems on the income statement continued to exist". Net income was fairly steady in 1980, 1981 and 1982, averaging about $1.8 billion; however, in 1983 income fell by 20%, another 2% in1984, and a drastic 79% in 1985. Finally, in 1986, Sohio suffered a net loss of $345 million. Their stock price, which had been as high as $92 per share in 1980, fell and hovered between $40 and $52 in 1986. At that point BP replaced the management of Sohio, and in March of 1987 BP purchased the remaining 46% of Sohio that it did not already own, thus ending the story of Sohio. Ironically BP may have made the same mistake Sohio did in overpaying for its acquisitions. BP could probably have purchased the remaining shares of Sohio for "around $50 a share". By waiting until the rumours had started about BP's interest and other takeover speculation, BP's final price was $72.70 a share.

While there is evidence that Sohio was making similar mistakes as other oil firms with its cash flow. Richards and Cooper (1988) state, "Men of apparent integrity and competence pursued courses of action that led to abysmal results, but the record shows that the financial markets foresaw consequence long before these managers recognized their failures".

Quezon Power Project

International Generating Company ("InterGen")
Pacific Manufacturing Resource ("PMR")
Ogden Energy, Inc. ("OEI")
Manila Electric Company ("Meralco")
Global Power Investments ("GPI")

The Quezon Power Project is comprised of a 460-megawatt (MW) coal fired electric generating facility and a 31 kilometer transmission line in Mauban, Philippines. The plant commenced commercial operations in May 2000 and provides stable and reliable electricity to the Luzon grid under a 25-year power sales agreement with the Manila Electric Company (Meralco).

Under Philippine law, only Philippine citizens or Philippine controlled corporations can own land or real property.

The Quezon Project was the first private project financed without a sovereign guarantee from the Philippine Government.

The origins of the Quezon project could be traced to a decade old relationship between Meralco and Pacific Manufacturing Resource (PMR), a consulting firm. Meralco had contracted with PMR to conduct a total-quality management program. During the course of this program, PMP was exposed to the power crisis in the Philippines. PMP saw an opportunity to develop an Independent Power Project. After recruiting several senior management resources "Management Team," PMR concluded an Agreement of Understanding ("AOU") with Meralco.

In February of 1994, PMR and the new Management Team set up PMP Power, which acquired the services of Ogden Energy, Inc. ("OEI"), a leading U. S. operator of independent power facilities, was selected as a co-development partner.

During August of 1994, OEI concluded a 25-year "take or pay" power purchase agreement ("PPA") with Meralco. This PPA committed Meralco to cover both fixed and variable expenses for the plant, subject to timely construction and plant out-put performance.

InterGen builds, finances, and operates international power projects. Bechtel Enterprises and the Royal Dutch/Shell Group jointly owned it.

InterGen's experienced Management Team came from the J. Makowski Corporation ("JMC"), which established itself in 1972 as a developer of small-scale hydroelectric plants. By 1992, JMC evolved into a leading developer of independent power projects. By the early 1990's, JMC was generating more than 1,300 megawatts of power in the United States.

InterGen's essential management and leadership competencies include:
(1) Identifying opportunities for private power projects;
(2) Attracting and motivating equity investors;
(3) Negotiating power purchase agreements and operating contracts;
(4) Managing the construction and operation of project assets; and
(5) Structuring the project to mitigate risks and support non-recourse financing on attractive terms.

Following the PPA negotiations, OEI completed a co-development AOU with InterGen on September 7, 1994. InterGen's initial investment contributed 72% of project equity. In late 1996, InterGen arranged to sell a 26% stake in the project to Global Power Investments (GPI) for US $59 million. GPI's acquisition of a 26% equity in the Quezon Project mitigated InterGen's ownership risk from 72% to 46% in the Project.

GPI is an investment fund formed by GE Capital, Soros Fund Management ("SFM") and the International Finance Corporation to focus on private power projects in emerging markets, particularly Asia and Latin America.

GSI ("Global Savings & Investments") which owns 60% of UGC has a substantial portfolio position with SFM.

InterGen's managerial responsibilities were to:
(1) jointly arrange project finance with OEI;
(2) to oversee the Engineering, Procurement, & Construction Management ("EPCM") contractors while the plant is being built; and
(3) to provide the Project administration after the plant became operational

OEI, which owns 26% of the Project, is responsible for operating and maintaining the generating plant in compliance with environmental and standard industrial practices.

PMR's active role in the development process, brought valuable local expertise to the Project team for which it earned a 2% percent carried interest.

InterGen is a global power generation firm with twelve power plants representing a total generation capacity of 8,146 MW (6,312 net equity MW). InterGen's plants are located in the UK, the Netherlands, Mexico, the Philippines and Australia.

The Ontario Teachers' Pension Plan and China Huaneng Group jointly own InterGen. These two owners acquired controlling interest in InterGen, as follows.

Ontario Teachers' Pension ("OTP") together with AIG Highstar Capital acquired a 100% ownership in 2005 from the Shell Group and the Bechtel Group for C$2.1 Billion. OTP invested through AIG because the OTP is prohibited from owning a direct 100% position in any Company.

The China Huaneng Group acquired 50% ownership in 2012 from the Ontario Teachers' Pension. Having CHG as a 50% owner will open doors in China and other Asian markets.

InterGen successfully mitigated the following risks:
(1) approval and construction risks, which included design and equipment;
(2) financing risks;
(3) contractual and operating risks; and
(4) currency and country risks.

The rate of return based on (cash on cash) investing (net cash flow divided by total investment capital) ranges from 16% to 20% annually.

Project costs totaled US $808.9 million, and were financed with 75% debt (US $606.7 million) and 25 percent equity (US $202.2 million). These project costs included US $35 million in budgeted contingency costs.

They do not include an additional US $50 million in overrun commitments (a US $30 million debt facility and US $20 million in contingent equity commitments).

The major uses of funds were: US $465 million in EPCM costs, US $46 million in development costs and fees, US $50 million in startup and other owner costs, US $75 million in financing costs during construction, and US $68 million in other financing costs.

Project financing the Debt portion proceeded as anticipated. The Eximbank (US) approved a 60-month US $417 million construction loan in November 1996. The Bank also agreed to refinance the loan on the Project's compliance with their conditions and the successful completion of the project.

The public portion of the senior-secured debt was oversubscribed at US $215 million. The SEC public bond issue was registered on July 1, 1997.

1) Being the first privately owned and financed electric generation facility opened the Philippine energy industry to a market oriented private sector willing to provide innovated technology and cost effective operations. In general, the private sector is more inclined to be efficient in meeting the energy needs of a developing economy.
2) The Quezon Project financing structure permitted all the investors to realize a significant return on Project assets while mitigating its risks.
3) The 25 year "take or pay" Power Purchase Agreement ("PPA") with Meralco provided a viable cash flow to not only service debt payments but also to provide a rate of return on equity capital in the range go 22% to 28%.
4) InterGen's long-term strategy is to create a chain of special national energy companies that control power and feed-stock assets, energy related services and trading activities. By utilizing the following tactics InterGen will:
a) establish a tradition of trust and partner with local communities and countries;
b) use its proven management skills in greenfield project development and in fuels handling and storage;
c) apply its extensive management competencies and leadership skills in project development, technology, construction, and operations; and
d) use its acquired EPCM skills in unstructured environments without risk mitigation and/or lack of construction expertise.
5) Quezon signed long-term coal supply agreements with two Indonesian firms-Adaro and Kaltim Prima-that would supply 67% and 33%, respectively, of the fuel for the plant. In the event that suppliers failed to fulfill their obligations, the plant is geographically well situated to receive coal shipment from other sources.

Trans Alaska Pipeline System (TAPS) Project-3

Amerada Hess Corporation ("Hess")
Atlantic Richfield Company ("Arco")
British Petroleum Company ("BP")
Chevron Oil ("Chevron")
Exxon Corporation ("Exxon")
Getty Oil Company ("Getty")
Mobil Oil Corporation ("Mobil")
Phillips Petroleum Company ("Phillips")
Standard Oil Company (Ohio)("Sohio")
Union Oil Company ("Unocal")

Trans Alaska Pipeline System (TAPS) project involved the construction of an 800-mile pipeline, at a cost of US$7.7 billion, to transport crude oil and natural gas liquids from the North Slope of Alaska to the port of Valdez in southern Alaska. The project commenced in 1969, and the first Alaskan crude oil was shipped via TAPS in the summer of 1977. TAPS involved a greater capital commitment than all the other pipelines previously built in the continental United States combined.

Hess, Arco, BP, Chevron, Exxon, Getty, Mobil, Phillips, Sohio (now wholly owned by BP), and Unocal owned undivided joint interests in TAPS.

BP, Exxon, Mobil, and Sohio sold over US$5.6 billion of debt securities to fund their respective portions of project capital cost, including a U.S. private placement in 1975 for Sohio/BP Trans Alaska Pipeline Capital, Inc. that raised US$1.75 billion from 76 (one of which was GSI 50% owners of UGC) lenders, representing the largest public or private financing ever accomplished for a corporate entity up to that point in time.

Sohio/BP Trans Alaska Pipeline Capital, Inc., pledged, as security for its TAPS-related borrowings, a combination of (1) a portion of BP's and Sohio's oil reserves in the North Slope and (2) a portion of future revenues to be received from the sale of crude oil produced from the North Slope.

1. The joint venture structure permitted the sponsors to finance their respective ownership interests separately, which enabled certain sponsors to achieve the lowest possible cost of debt for their investments in TAPS because of their triple-A credit ratings.
2. The project is noteworthy because of its huge capital cost and the technical challenges that were caused by the hostile terrain and climate.

Standard Oil of Ohio (Sohio) was a relatively small marketer and refiner within the petroleum industry until 1969, when it became involved in the development of the Alaskan pipeline and the Alaskan oilfields. Between 1969 and 1978 Sohio raised more than $6 billion to fund its expansion capabilities, with Phillips, Groth and Richards (1979) referring to this $6 billion as "particularly significant because of the size of the project relative to the size of the firm". In that time period Sohio's assets grew from $773 million to $7.77 billion. As one can see, the $6 billion of financing, $5 billion of which came from external sources, was the major thrust of the growth in assets Sohio's percentage of ownership of the Prudhoe Bay project was 53.16% and their ownership of the Trans-Alaska pipeline was 33.34%. In each project, Sohio was the largest shareholder at the time of completion. Atlantic Richfield and Exxon both had over 20% ownership in Prudhoe Bay and the pipeline, while British Petroleum owned nearly 16% of the pipeline, but did not have any ownership in the Prudhoe Bay fields.

In the early stages of the development of the fields in the 1960s, Sohio's projected share of its capital requirements was estimated to be $575 million. However, by November 1973, when the Trans-Alaska Pipeline Authorization became law, Sohio's share had escalated to more than $2.2 billion, and by 1977 their estimated share had grown to over $6 billion. British Petroleum was looking to diversify its reserves, and the two companies agreed to a delicate merger in 1977 in which Sohio received virtually all of BP's mineral rights in the United States and all BP interests in US offshore territorial waters. BP received 25% of Sohio, which, depending on production in the Prudhoe Bay project, could increase up to a maximum of 54%.

At first everything looked prosperous for Sohio. As the oil began to flow from the Prudhoe Bay fields, the revenue flowed as well. While saddled with enormous debt, the venture was successful. The problems for Sohio arose later with the "problem" of what to do with the oil revenue. Rather than pay down the $6 billion debt, the executives at Sohio decided at first to go on a spending spree of oil exploration in the Mukluk field in Alaska (which proved fruitless), fields in Oklahoma, and the Rocky Mountains, and other acquisitions of mineral mining operations, such as Kennecott Corporation (which was a coal producer) and other companies that were copper producers. Note that Sohio was an oil refinery whose management lacked experience in exploration and these other areas of business.

Sohio's management finally began to reduce their debt in 1984 and began a share repurchase program. Cooper and Richards (1988) found that while the company's balance sheet had improved, "problems on the income statement continued to exist". Net income was fairly steady in 1980, 1981 and 1982, averaging about $1.8 billion; however, in 1983 income fell by 20%, another 2% in1984, and a drastic 79% in 1985. Finally, in 1986, Sohio suffered a net loss of $345 million. Their stock price, which had been as high as $92 per share in 1980, fell and hovered between $40 and $52 in 1986. At that point BP replaced the management of Sohio, and in March of 1987 BP purchased the remaining 46% of Sohio that it did not already own, thus ending the story of Sohio. Ironically BP may have made the same mistake Sohio did in overpaying for its acquisitions. BP could probably have purchased the remaining shares of Sohio for "around $50 a share". By waiting until the rumours had started about BP's interest and other takeover speculation, BP's final price was $72.70 a share.

While there is evidence that Sohio was making similar mistakes as other oil firms with its cash flow. Richards and Cooper (1988) state, "Men of apparent integrity and competence pursued courses of action that led to abysmal results, but the record shows that the financial markets foresaw consequence long before these managers recognized their failures".

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