On 15 June 2018, an ICSID Arbitral Tribunal ordered the Kingdom of Spain (Spain or the Respondent) to pay €112 million in compensation to Antin Infrastructure Services Luxembourg S.á.r.l. and Antin Energia Termosolar B.V. (the Claimants) for the loss of value of their investments in two concentrated solar power (CSP) plants.
In August 2011, the Claimants invested in two operational CSP plants in Spain (the Andasol plants) which had been built in 2008 and 2009. Under Spanish Royal Decree RD661/2007 and RD1614/2010, the energy produced by the plants benefited from the “Special Regime”, which enabled renewable energy producers to sell electricity to the grid for feed-in-tariffs (FIT) applicable for their entire operational lifetime. Spain introduced changes in 2012 and 2013, and on 20 June 2014 introduced a new remuneration regime. According to the Claimants, over 71% of the value of their investments was wiped out as a result.
The Claimants claimed compensation from Spain for unfair and inequitable treatment under the Energy Charter Treaty.
Position of the parties
The Claimants claimed €148 million, which included lost historical cash flows from December 2012 to 20 June 2014 and the loss of fair market value of their investment thereafter. The Claimants also claimed pre-award and post-award interest.
The Parties disagreed on the distinction between historical and future cash flows and the appropriate method to calculate the loss of fair market value. The Claimants used the discounted cash flow (DCF) method while the Respondent favoured a regulatory asset-based valuation.
On liability the Tribunal found in favour of the Claimants. This article considers the quantum aspects.
The Claimants calculated the loss of value of their investment as the difference between what they would have earned had they continued to receive the Special Regime FIT for the 40-year life of the plants (but-for scenario) and what they earned after the change in regulatory regime (actual scenario).
The Claimants used the DCF method as the Andasol plants had a history of operation, stable and predictable revenues for their lifetime, and a relatively simple business model. The Claimants also sought to gross-up any award for tax payable by the Claimants in Luxembourg.
The Claimants considered the valuation date to be 20 June 2014 when Spain enacted its new remuneration regime.
The Respondent considered that the DCF method was speculative and inappropriate in this case. Cash flows stemmed from volatile and unpredictable sources and were invalidated by the long timeframe of predictions (up to 37 years) as well as the lack of sufficient historical financial records to sustain a solid future forecast. In addition, the Respondent’s experts considered that the Plants had a maximum useful life of 25 years as shown by due diligence and other contemporaneous documents.
The Respondent suggested that the Claimants should only be entitled to the recovery of their investment costs together with a reasonable return on those costs. In the alternative, the Respondent’s expert calculated the financial impact of the regulatory change in accordance with the DCF model under two scenarios; the first rendered a positive impact of €11 million for the Claimants and the second scenario calculated a negative impact of only €(18) million. The difference compared to the Claimants’ calculation arising due to a lower useful life of the Plants, a greater risk/higher discount rate, and sensitising the debt ratio by the Respondent.
Approach taken by the Tribunal
The Tribunal concluded that the DCF method was the appropriate valuation method in this case as the Andasol plants had five years of operation and they were not a complex business. The Tribunal considered that there was not enough evidence to support a 40-year useful life as claimed and accepted that the useful life of the Andasol plants were 25 years.
The Tribunal deducted €36 million from the claim for the cash flows exceeding 25 years and awarded the balance of €112 million plus interest at a rate of 2.07% compounded monthly (based on the yield on Spanish 10-year bonds).
The Tribunal accepted that different methods may be appropriate depending on the specific circumstances of the case, while also noting that DCF is one of the most commonly used methods to value businesses. The Tribunal found that the DCF method is appropriate where businesses have an established operational record and where any variables may still be forecast appropriately, which they agreed was the case with the Andasol plants.
Claimant: Antin Infrastructure Services Luxembourg S.á.r.l. and Antin Energia Termosolar B.V.