Project Zorro: InterGen's Mexican coup

InterGen's acquisition of two Mexican independent power projects (IPPs) from TransAlta closed not only at a time of severe market distress, but also at a time when the sponsor's ownership structure was in flux. Its financing featured senior bank debt, a working capital facility from a number of international lenders, as well as a subordinated loan from one of InterGen's major stakeholders, Ontario Teachers' Pension Plan (OTPP). The assets are the Campeche and Chihuahua power plants, and constitute TransAlta's entire Mexican portfolio. At a time when leveraged acquisition financings had fallen out of vogue in US power, the structure made a, possibly brief, appearance in Mexico.

The OTPP loan was the first use of institutional subordinated debt for a Mexican IPP. The project was also the first of the independent power projects awarded by the Comisión Federal de Electricidad (CFE), the Mexican national utility, to be refinanced with an extension of its original contract, and with changes to the planned amortization schedule originally registered with CFE.

The deal closed in October 2008, for a cash price of $303.5 million. The financing features three tranches; a $181 million, 14-year senior bank facility provided by Calyon, Export Development Canada (EDC), WestLB, Sumitomo Mitsui Banking Corporation and DekaBank; an $80 million five-year senior working capital loan and letter of credit facility, provided initially by the EDC and Calyon; and a $27 million, 14-year subordinated debt tranche from OTPP Fixed Income. The deal also featured 29% in equity.

The proceeds were used to pay down the existing debt on the assets, which had been in operation for around five years, and to purchase TransAlta's shares in the project companies. The senior working capital facility and LC were used to support commercial obligations under the projects' power purchase and fuel supply agreements.

WestLB and Calyon were mandated first, and were joined by EDC, SMBC and Deka in August 2008 when the financing was repackaged as a club deal. Martin Rees, chief financial officer at InterGen, says that the original intention was to syndicate the debt after financial close, but given the recent slow-down in debt markets, a club deal was more feasible. The debt providers are each committing to roughly equal portions of the facilities. According to a source at one of the lenders, the pricing on the debt is competitive, in the high 100s, or low 200s, in basis points over Libor.

The financing closed in the weeks following the Lehman Brothers crash, and almost simultaneously with AIG Highstar's sale of its 50% stake in InterGen to India's GMR, which was executed the day after the deal closed. OTPP retains the remaining 50% interest in the company. GMR bought the stake from AIG Highstar for $1.1 billion, or $360,000 per MW. GMR funded the acquisition with a bridge loan provided by five Indian banks, and intends to have a long-term financing in place by the end of the year.

TransAlta had decided to sell its Mexican assets following pressure from LS Power, which asked, in a 16 January letter, for the US and Canadian developer to divest its non-core assets, including the Mexican portfolio. The sale to InterGen was announced on 20 February. LS, together with Global Infrastructure Partners (GIP), submitted a joint takeover bid for TransAlta in July. The TransAlta board rejected the takeover bid in August, as its members felt that the offer of $39 per TransAlta share (around $7.8 billion in total) undervalued the company's worth. LS abandoned its bid on the day after the closing of the Mexican asset sale.

Campeche is a 252MW combined cycle gas-fired plant located in the state of Campeche on the Yucatan peninsular. Chihuahua is a 259MW combined-cycle gas plant located near the Mexican border with the US at Ciudad de Juarez. Both plants have full power purchase agreements (PPAs) with the Mexican national utility Comisión Federal de Electricidad (CFE) under 25-year contracts, and began operations in 2003, Campeche in May, and Chihuahua in September. They were both developed under the CFE's IPP programme, which has awarded 22 PPAs since 1997. InterGen also runs the La Rosita and Bajío projects, which were also awarded under the same programme.

InterGen has a total generating capacity is 8,086MW internationally (6,231MW net, of which 428MW is under construction). After an unsettled year, InterGen's settled ownership means it can step up its development efforts. It closed on the acquisition of the Libramiento natural gas compression facility and 65-kilometer natural gas pipeline, in Bajio, northern Mexico, from Conduit Capital for $89.2 million, plus some outstanding debt obligations on the asset. The purchase was funded with InterGen equity and limited-recourse debt provided by Nord/LB and EDC.

Rees notes that the Libramiento acquisition complements the company's existing Mexican power portfolio, which includes the neighbouring Bajio plant, also served by the Libramiento pipeline. He also believes that the TransAlta and Conduit assets both have long term appeal to InterGen given the existing and expanded suite of agreements. The Libramiento plant is also fully contracted under a 20-year agreement with PEMEX Gas y Petroquimica Basica.

The GMR input, together with the continued and creative support from OTPP, has also given the company the leeway to look to different markets and project types, and it is said to be focusing its attentions on the Latin American and western European markets.

Energia Campeche/Energia Chihuahua
Status: Closed 8 October 2008
Size: $303.5 million
Location: Campeche and Chihuahua, Mexico
Description: Acquisition of TransAlta's Mexican portfolio, of two gas-fired power plants
Sponsor: InterGen
Debt: $288 million
Leverage: 71%
Mandated lead arrangers: Calyon, Export Development Canada, WestLB, Sumitomo Mitsui Banking Corporation, DekaBank
Subordinate debt lender: Ontario Teachers' Pension Plan
Lender legal: Shearman & Sterling
Sponsor legal: Paul Hastings
Sponsor financial adviser: JPMorgan