EnPlus CCGT: Clever tolling

The financing for the 408MW EnPlus CCGT project in San Severo, Italy, demonstrates how critical the smallest jump in margins and timing are in the illiquid financial markets. Despite a six-year gestation, if EnPlus had taken just two weeks longer it would not have got done on the same terms, and maybe not at all.

As well as closing in the worst financial climate in living memory, the deal also stands out for its innovative tolling counterparty step-in mechanisms that provide lender comfort without more direct sponsor support.

Project company EnPlus is 60% owned by Swiss utility Atel (now Alpiq), 30% by Avelar Energy (a subsidiary of Russian oil and gas firm Renova) and 10% by En&En (an industrial association of a northern Italy province). The project is tolled for 15 years by the sponsors, through their local sales companies, pro rata according to their share of the project company.

The debt of Eu330 million ($452 million), has a leverage of between 74-76% depending on the use of contingencies. The debt splits into a Eu267 million, 18-year (15-year post construction) term loan with a gradual amortisation profile; an Eu60 million VAT facility with a six-year tenor; and an Eu3 million working capital and guarantee facility.

The main challenges for the sponsors were "achieving financial closing in a limited time, in order to avoid price escalation and delays under the construction contract," says Massimiliano Bignami, power generation services manager at Atel Produzione Italia. These challenges were compounded at the time by the banks' unwillingness to accept large ticket sizes and perform more extensive due diligence.

According to Bignami these issues were in part met by the appointment of an adviser – Intesa Sanpaolo – that could also lend into the project, and partly by approaching a club of banks and "going to the market with a set of project contracts almost ready to be signed, which included all minimum requirements expected by potential lenders."

The deal was closed by a club of seven to avoid going to the barren syndications market. Some banks committed before the summer, but the terms were slightly adjusted in the last two weeks before close. The targeted average and minimum DSCR is 1.3x and the LLCR is 1.1x. The usual suite of project covenants is present, such as a trigger on a cash-sweep mechanism when a DSCR threshold is breached.

All banks came in as mandated lead arrangers, but with varying ticket sizes: Intesa (Eu42 million), Unicredit (Eu42 million), Fortis (Eu33.9 million), Mediocreval (Eu28.3 million), WestLB (Eu42 million), Cassa Depositi e Prestiti (Eu42 million), BayernLB (Eu36.4 million).

The upfront fee is 90bp and pricing starts at 115bp over Euribor during construction dropping to 110bp in the first five years post-completion, rising to 115bp to year 10 and 130bp to year 15.

The project had a troubled birth, suffering from a raft of litigation from disgruntled local associations and public bodies – and overcoming every complaint.

The last legal challenge was an appeal by the City of San Severo challenging its legality based on a claim that authorisation had elapsed because the construction was not started on time. The appeal was rejected by the State Council in July 2008 and a pending legal challenge was shelved in September.

To make banks comfortable disbursing funds to the project, Allen & Overy, legal counsel for the lenders, conducted a wide-ranging review of the due diligence drafted by the borrower's legal counsel Legance, and concluded that all permits were correct and that subsequent avenues for legal recourse were limited.

Aside from the market conditions, and the protracted authorisation and permitting procedure, the most difficult aspect of the financing was to make lenders comfortable with each of the sponsors as tolling counterparties. The solution was to bundle each of the offtake contracts under the same tolling agreement and put in place step-in and cross step-in mechanisms, which stipulate that the other tolling counterparties must accept the spare capacity if one of the sponsors fall away.

"The project benefits from improved credit standing through a double step-in mechanism for the tolling agreements," says Bignami. "Parent companies step in, if a tolling counterparty defaults. Additionally the project benefits from cross support from the other tolling counterparties or their parent companies on default of another parent company."

The relatively low debt pricing is, in part, a benefit of the tolling agreement. In effect, the banks are taking counterparty risk on the strongest shareholder – the Swiss utility Atel. However, this structural feature replaces the need for stronger sponsor support such as a direct guarantee or letter of credit thus maintaining a non-recourse structure.

Banks are taking no merchant risk, were pre-committed, and have a robust turnkey EPC contract in place with Finmeccanica subsidiary Ansaldo Energia.

Atel signed two contracts in March with Ansaldo worth over Eu500 million for EPC contracts relating to two 400MW twin-unit combined-cycle power plants. The EnPlus plant at San Severo, Foggia, and the other in France at Bayet, Allier. The contract to build the plants is supplemented by two additional long-term service agreements worth Eu120 million. According to Bignami, "the project company is confident of achieving commercial operation on time by December 2010 and within construction budget."

EnPlus
Status: Financial close 26 September 2008
Description: Eu330 million 15-year debt backing 407.9MW tolled CCGT plant in Italy
Sponsors: Atel (60%); Avelar Energy Group (30%); En&En (10%)
Mandated lead arrangers: Intesa Sanpaolo (modelling); WestLB (coordination and documentation); Unicredit (technical); Cassa Depositi e Presiti (insurance); Bayerische; Fortis; Mediocreval
Financial adviser: Intesa Sanpaolo
Sponsors' legal counsel: Legance
Lenders' legal counsel: Allen & Overy
EPC contractor: Ansaldo Energia (Finmeccanica)