It was the first true US power project finance syndication since the Lehman collapse, but the $515 million two-tier senior secured facility supporting Fortistar and EQT Infrastructure Fund's acquisition of the 1,560MW Midland Cogeneration power plant was also one of the first examples of a back-to-basics power project financing.

For Glen Matsumoto, managing director at EQT Partners, "the issue was raising the debt at a reasonable price, with terms and conditions that would not interfere with our ability to improve operations, upgrade the project and maximise its value. And in those aspects we have been very successful in the nine months since financial close."

In short, and although the majority owner is a fund and therefore likely to be a temporary owner, the Midland Cogen deal is an old fashioned example of maximising asset returns through operational and management improvements rather than short-term financial engineering.
Nevertheless, the deal was a struggle to structure given the lending climate, which had already forced Credit Suisse to withdraw the offer of stapled financing for the acquisition.

The lead arrangers – WestLB and Union Bank – had originally planned to raise half of the purchase price for the acquisition with seven-year term debt, but were unable to get the required commitments, even with pricing at 350bp and fees of 75bp for commitments of $50 million.

Consequently, some of the sellers – Dow Chemical, Blackstone-affiliated GSO Capital Partners fund and Rockland Capital – offered to provide an additional nine-year bullet tranche. Given GSO and Rockland owned 80% of the plant and the bullet tranche was netted out of the sale proceeds, they were the most likely lenders and some of the bullet debt has since been sold on.

The final debt package comprises a $275 million seven-year amortizing A loan priced at 350bp over Libor and a $140 million nine-year bullet B tranche priced at 400bp over Libor. The deal also includes $100 million in seven-year working capital facilities ($50 million in the form of a project letter of credit, a $25 million SEPA L/C facility and a $25 million revolving credit).

Term loan A amortises in quarterly instalments while maintaining a 1.4x DSCR on contracted cashflows. In addition, a target debt balance was structured to fully sweep the loan within the seven-year tenor. Term loan B had no mandatory amortisation but had 50% cash sweeps after term loan A target balances were achieved.

The seven-year fully-amortising term debt and working capital facility attracted a varied group of participants. Credit Suisse (the seller's financial adviser), GE Energy Financial Services (an affiliate holds the long-term services agreement for the plant), SEB (an EQT relationship bank), US Bank, CoBank, BES, CIT and Caixanova all committed. The low level of leverage, lack of construction risk, and power purchase agreement running to 2025 also gave lenders comfort.

The Midland plant had a troubled birth, required several financings and has a chequered regulatory record – all of which lends insight to EQT and Fortistar's acquisition.

Midland was planned as a nuclear plant and was reconfigured as a gas-fired facility after cost-overruns, delays and poor geology made the project unfeasible. The sponsors were Consumers Power (now CMS Energy), Dow Chemical and, later, El Paso Corporation. The plant sells 1,200MW of its electrical capacity to CMS' utility subsidiary and steam and power to Dow Chemical. The project, which was funded on the balance sheet of the developers, was later refinanced with a mix of taxable and tax-exempt debt, on top of a sale-leaseback structure.

The plant has a nameplate capacity of 1,560MW, equivalent to roughly 5% of the state of Michigan's generating capacity. Its size gives its owners enormous leverage over regulators. But Michigan's Public Service Commission was wary from the outset of allowing the project to pass its full costs onto Consumers' customers. The plant's power purchase agreement was structured with a combination of a high capacity payment and an energy payment that indexed the gas-fired plant's revenues to the price of coal.

The plant is configured with 12 separate ABB-produced units. This gives an owner unusual operational flexibility, although Midland suffers from a higher-than-normal heat rate. Midland, according to an observer familiar with the plant's economics, managed to produce strong amounts of free cashflow, but was prevented by dividend traps in the bonds' indenture from distributing cash to its shareholders: At one point the plant had cash on hand sufficient to prepay 65% of the bonds outstanding principal.

This was, however, before the increase in gas prices in the last decade. The increase meant that the plant, with its coal-indexed contract, was being dispatched more but selling power at a loss and it began to eat into this cash stockpile. In the fourth quarter of 2005, CMS took a $385 million charge against its 49% stake in the plant. The owners, torn between waiting for a chance to renegotiate the contract and facing the possibility of losing the plant to bondholders, opted to sell.

On 25 July 2006, CMS, advised by JP Morgan, sold the stake to GSO Capital Partners and Rockland Capital for $60.5 million. The new owners had one important bargaining chip – the imminent ability to cancel the power purchase agreement with CMS. Following a cancellation, Midland would be dispatched onto the spot market, and might sell power to out-of-state buyers. While a merchant plant would be difficult for the new owners to refinance or sell, the threat of cancellation concentrated the minds of the offtaker and regulator.

In June 2008, the Michigan PSC, the project company and Consumers Energy, the CMS-owned utility, announced a deal that provided for a lower capacity payment of $10.14 per MWh in return for a pass-through of fuel costs to Consumers and its customers. At the prices that the GSO- and Rockland-led group of buyers paid, the settlement was more than fair. The owners shortly afterward hired Credit Suisse to run an auction for the plant with EQT and Fortistar signing a definitive agreement to buy in March 2009.

Midland Cogeneration
Status: Financial close 28 May 2009
Location: Midland, Michigan
Description: 1,560MW gas-fired cogeneration plant acquisition
Sponsors: EQT Infrastructure Fund (64%), Fortistar (35%)
Debt: $515 million
Bookrunners: WestLB, Union Bank
Lead arrangers: Banco Espirito Santo, CoBank, US Bank, GE Capital, Skandinaviska Enskilda Banken, Credit Suisse
Sponsor legal counsel: Shearman & Sterling
Lender legal counsel: Latham & Watkins
Independent engineer: Luminate
Market consultant: RW Beck