Fortistar and the EQT Infrastructure Fund have completed their $1.1 billion acquisition of the Midland Cogeneration power plant. The buyers raised $515 million in debt to support the acquisition, in the second of three large US power deals to close in 2009. The deal is the largest debt-financed power acquisition to close in the US since IFM's acquisition of ConEd's unregulated portfolio in May 2008, and illustrates that even operational assets with solid offtake agreements need to work through a large club of commercial bank lenders.

The $515 million in debt consists of $275 million in seven-year amortizing term debt, a $140 million nine-year bullet tranche and $100 million in seven-year working capital debt. The lead arrangers for the term debt and working capital debt are WestLB and Union Bank of California. The bullet tranche's providers include some of the sellers of the Midland plant.

The seller is a consortium that includes Dow Chemical, the Blackstone-affiliated GSO Capital Partners fund and Rockland Capital. The plant was sold clear of any debt, but GSO and Rockland are believed to be among the partners in the provider of the bullet tranche, and the proceeds of this tranche were netted out of the sale proceeds.

The Midland plant had a troubled birth, required several financings and has a chequered regulatory record. 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 but 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 afterwards hired Credit Suisse to run an auction for the plant.

The timing of the sale was far from perfect – Credit Suisse first offered, then withdrew, a stapled financing. Bidders were not ultimately required to submit underwritten bids, only indicate a price and assemble a financing before a definitive agreement was signed. Despite market conditions, when a sale agreement was signed on 19 March 2009, EQT (with 65% of the equity) and Fortistar (35%) were able to offer roughly $1.1 billion and had commitments through the two lead arrangers for 80% of the debt on the project.

The leads 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 of 350bp over Libor and fees of roughly 300bp. The sellers, or at least some of them, stepped up to provide the nine-year bullet tranche.

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 cheered lenders.

Midland, like all the large conventional power deals that have come to market in 2009, should not have been a difficult sell. Nevertheless, its rich history provides an insight into how private power markets have developed in the US in the last 25 years. The plant would be a good candidate for a bond refinancing, although sources at the sponsors say they have no immediate plans to do this.

More likely, especially if Michigan continues to suffer from thin reserve margins, is some kind of expansion at the plant. The amended and restated PPA called for the installation of four additional boilers at the plant. CMS, meanwhile, wants regulators to approve new coal capacity.

Midland Cogeneration
Status: Closed 28 May 2009
Size: $1.1 billion
Location: Midland, Michigan
Description: 1,560MW gas-fired cogeneration plant
Sponsors: EQT Infrastructure Fund (64%), Fortistar (35%)
Debt: $515 million
Term and working capital debt lead arrangers: WestLB, Union Bank
Sponsor legal counsel: Shearman & Sterling
Lender legal counsel: Latham & Watkins
Independent engineer: Luminate