Carlyle/Riverstone closed the debt financing for its $1.2 billion Topaz Power portfolio repowering project on 14 May. The project is an extremely nimble response to the shifting fundamentals of the Texas power market. Its financing was a little less lucky, and was tweaked in the face of demands from newly-ascendant commercial bank lenders.

Topaz Power was formed in 2004 when a joint venture of Carlyle/Riverstone Global Power Fund II and Sempra Energy Partners bought a portfolio of coal and gas-fired plants from AEP. Only one of these assets – Coleto Creek – had much value, and this coal-fired plant was first financed, then, sold in 2006, and then refinanced.

What was left, a collection of mothballed plants and sites, can politely be referred to as dregs. Topaz sold several of the projects for small sums, with one 6MW hydro project bringing in $3.9 million, a 234MW inactive project bringing in $15 million, while another brought in $50,000. Sempra sold its 50% share in the venture to its partner in 2006.

The remaining gaggle of gas-fired assets, one of which had a reliability-must-run contract with the Electric Reliability Council of Texas (ERCOT), looked unappealing, especially when local utility TXU announced plans for 6GW in coal-fired capacity in the region. Gas sets power prices in Texas, but a fleet of coal-fired plants would probably have doomed the prospects for older gas-fired projects.

But TXU's plans were dropped as part of the $43 billion deal to take it private, a sop to environmental groups that opposed the plants and promised to complicate the buyout. Carlyle/Riverstone's Global Power Fund III, the new sole owner, then looked at repowering the remaining Topaz plants using petcoke as a fuel. That plan died when TXU's opponents turned their sights on Topaz.

Topaz moved fast, submitting permits in April 2007 to repower the assets as gas-fired generators, lining up turbines and contractors for the plants, and starting work on construction with equity from its parents. It mandated Morgan Stanley as lead arranger for a B loan, split into operating and holding company tranches, with high levels of merchant exposure.

Topaz, which paid $430 million for the whole portfolio when it bought it from AEP, made $1.14 billion from selling Coleto Creek alone. But its owners still think that by hedging out so much of Coleto's output to get it financed they were not able to make as much as they could have from the sale.

With the death of the TXU coal plant plan, the sponsor predicts a looming capacity shortage in Texas, followed by spikes in the price of electricity, and wanted to be in a position to capture as much revenue from these possible. Commercial banks, however, would rather a hedge provider capture these, in return for providing the project and its lenders with more predictable revenues.

As the credit markets turned, this view began to predominate. Morgan Stanley brought in Dexia, ING and Natixis as mandated lead arrangers, but lost Calyon, under circumstances that neither the sponsor or the other arrangers would like to discuss. But the banks' insistence on hedging allowed Morgan Stanley Capital Group to come in as hedge provider.

Topaz consists of five power plants. Two of them, Laredo 4 and 5, are located close to Texas' border with Mexico, are new simple-cycle peaking units, located on the site of an existing plant. The two units, with a total 204MW in capacity, use GE's LMS 100 gas turbine. Two projects, Barney Davis 2 and Nueces Bay 7, involve the conversion of existing plants to a combined-cycle configuration, giving each a capacity of 680MW. Barney Davis 1, an operational simple-cycle 335MW turbine, is also part of the portfolio, and like the two combined-cycle plants is located at Corpus Christi.

Morgan Stanley's hedge covers roughly 70% of the portfolio's capacity, or all of the combined cycle plants and half of the peaking capacity, providing banks with an average debt service coverage ratio of 2.6x. The combined-cycle plants, in turn, have a much more robust construction risk management package, since they are subject to a full engineering procurement and construction contract with Zachry, which features liquidated damages provisions. The peakers have a slightly more bespoke arrangement, since the GE turbines have a slightly shorter operating history, though they have been project financed before.

The financing consists of a $615 million construction term facility with a six-year tenor, a $75 million revolving letter of credit with a five-year maturity, and a $50 million construction letter of credit that runs for two years. Carlyle/Riverstone is also contributing $591 million in equity, a high level designed to compensate for the sponsor's inability to raise holding company debt at an attractive enough price.

The final tweak came in the pricing. The four leads had committed to a pricing level of 300bp over Libor. At the urging of GE Energy Financial Services, which offered a $100 million sub-underwriting commitment to support its manufacturing affiliate, the leads increased this to 325bp. The pricing, while high by the standards of contracted deals, stands up well next to deals such as Arcapita's $412 million Bosque financing, which priced at nearer 450bp.

Coming in alongside GE as sub-underwriters and agents were WestLB, with $120 million, and Calyon, which slunk back in with $90 million. Union Bank of California spent $35 million for an agent title. Syndication closed six weeks after financial close on Friday 27 June, a comparatively leisurely process next to the go-go 2006 B loan market. The financing was rated Ba3/BB- (Moody's/S&P), and this rating was a necessary part of syndicating $740 million in debt.

The Topaz repowering is not the first time the bank market has been asked to look at brownfield assets. It isn't even the first time the bank market has been asked to look at the repowering of the old AEP assets, since Calyon closed a roughly $100 million deal for NuCoastal's repowering of the 491MW Victoria power project earlier this year.

Construction costs are pushing the replacement values for power projects up to $1,200 per kW, and brownfield sites like those in the Topaz portfolio can be upgraded for roughly $750 per kW. Sponsors sitting on sites in areas with promising fundamentals will be looking anew at assets they put to one side in the post-Enron crash.

Topaz Power Holdings
Status: Closed 14 May, syndicated 27 June
Size: $1.33 billion
Location: South Texas
Description: Repowering of gas turbine portfolio
Sponsor: Carlyle/Riverstone Global Power Fund III
Market consultant: PA Consulting
Independent engineer: Stone & Webster
Lender and hedge provider legal counsel: Shearman & Sterling
Sponsor legal counsel: Dewey LeBoeuf