Lea Power: Scrap booked

An unusual deal on two levels, not only is Lea Power a rare bond financing for a greenfield power plant, but the project uses generating equipment that has been salvaged from mothballed projects and the stock of other sponsors.

Sponsored by ArcLight's Energy Partners Fund III (with Genova Power as developer), Lea Power is a CCGT power project near Hobbs, New Mexico that is positioned to supply both that state's power market and West Texas.

The developers originally intended that the plant be built using bank debt. But the enhancements needed to make the scheme bankable, and the 25-year full power purchase agreement at the heart of the project, made a bond financing the better option.

Lead arranged and managed by Calyon and Lehman Brothers, the financing comprises a $304.5 million 26-year 144A bond priced at a 6.595% coupon, and around $120 million in equity (backed by a $20 million equity letter of credit). Letters of credit (L/C) amount to $428.6 million, of which the most important is a $307 million construction L/C, priced at 162.5bp over Libor.

The final issue – originally planned at $327 million – was sized so that it can be entirely prepaid by the construction L/C, which falls away after completion: The deal also features a $75.5 million performance L/C, a $15.5 million debt service L/C, a $15.6 million interconnection L/C and $15 million working capital L/C.

The project is on the same site as the Xcel Energy-owned Maddox and Cunningham plants and is being developed in response to a request for proposals from Xcel subsidiary Southwestern Public Service Company (SPS).

A joint venture between Genova Power Solutions and Centennial Power, then a subsidiary of MDU Resources, was selected preferred bidder on 31 October 2006. Genova and Centennial then selected ArcLight as equity provider for the project.

ArcLight Energy Partners Fund III owns the project company, Lea Power Partners, and although not a first for a power fund, few have provided such greenfield development equity.

The Lea Power bid was based on a combination of long-term low-cost financing and low-cost equipment. Genova's principals, with a long background in project development, managed to salvage equipment from other producers that had not obtained suitable locations or power purchase agreements.

The developer secured grey market equipment from a variety of sources – a GE steam turbine/generator and two Aalborg heat recovery steam generators from the site of the abandoned McAdams power project in Mississippi; and the McAdams project, with which Genova was familiar, a former TECO property on which the Florida utility had ceased construction.

The developer also secured two Mitsubishi 501F turbines from Tenaska, which had in turn bought them from AES' stock of unused turbines. All of this equipment, as well as a water use reduction system from SPX, and a boiler from CMI, benefit from manufacturers' warranties.

When operational, the plant will sell power to SPS (rated BBB/Baa1 by S&P and Moody's) under a 25-year tolling-style power purchase agreement whereby SPS fuels the plant, has full dispatch rights and purchases capacity at a fixed price. The project is therefore not exposed to volume, price, or commodity risk. Lea Power is also reimbursed for non-fuel variable operating costs through a separate fixed-price energy payment.

Construction started in late 2006 with Centennial Power's sister company, Colorado Energy Management (CEM) as EPC contractor. The plant will have a capacity of 604MW during the winter but drops to around 504MW in summer because it uses air-cooling technology that reduces the project's water consumption and is more sensitive to ambient temperatures than a water-cooled plant.

The participation of Centennial/CEM caused unforeseen ratings and construction risk issues when its owner MDU sold both Centennial Power and CEM to Montana Acquisition Company, a new company formed by energy industry executive Paul Prager and the Natural Gas Partners VIII fund that subsequently became Bicent Power. Calyon responded with the $307 million letter of credit to support the construction risk profile.

The deal features a range of lender comforts. In the sponsor base case, debt service coverage ratios (DSCR) are 1.4x until 2021, rising to 1.5x until the maturity of the bonds. And although DSCRs in a high dispatch scenario could dip below 1.2x – for example the incremental cost of major maintenance is forecast to exceed revenue earned from variable energy payments and thus an increase in dispatch could put pressure on expected cash flow – the pre-funding of major maintenance and the inclusion of a reserve equity L/C ensure that funds are available to pay for both maintenance and debt service.

Major maintenance is funded on a five-year forward-looking basis and the major maintenance reserve account (MMRA) can be accessed by the bondholders in the event of a debt service payment shortfall. The major maintenance prefunding mechanism also requires an increase in contributions to restore the balance of the MMRA if it is drawn to pay debt service. In addition, the restricted payments test prevents distributions if the MMRA is underfunded and a $13 million reserve equity LC is available to help bridge a temporary payment gap in either debt service or major maintenance.

Lea Power Partners
Status: Closed 24 July 2007
Size: $460 million
Location: Hobbs, New Mexico
Description: 550MW gas-fired power project bond financing
Developers: Genova Power Solutions, Centennial Power
Equity provider and owner: ArcLight Energy Partners Fund III
Debt: $305 million in 144A bonds, backed by $307 million in letters of credit
Lead arrangers and bookrunners: Calyon and Lehman Brothers
Independent engineer: E3 Consulting
Owner's engineer: Burns & Roe
Environmental consultant: CH2M Hill
Project company legal counsel: Paul Hastings
Lender legal counsel: Milbank Tweed
Insurance consultant: Moore-McNeil