Longview Power: Cleaner and leaner

Private equity funds have had a long presence in the US power market. The bigger generalist funds have become avid buyers of operational power plants, while a slew of smaller dedicated funds have built a profitable niche bringing new plants to completion. Longview illustrates what a well-capitalised private equity player can do when it turns its hand to greenfield development.

Longview is a 769MW supercritical coal-fired project, located in Monongalia County, West Virginia, and is one of the first coal projects using this technology to be project financed. It was the largest single-asset power project financing in the US in 2007, and had the largest amount of merchant exposure of any greenfield financing from last year.

The sponsor, First Reserve, employed a mixture of bank and institutional term loans, but eschewed high leverage, and high-priced debt, in favour of a simple promise to inject its equity at completion. Ratings agencies and lenders grudgingly accepted that such a promise, from a large fund with deep-pocketed investors, did not require enhancement.

In essence, First Reserve used its financial muscle to put together a project that allows it to benefit from high prices in its host power market. New projects have typically sold as much of their output ahead as possible, usually to public or private utilities. If a sponsor is desperate it can contract with a bank's energy trading desk for as much revenue as it needs to satisfy ratings agencies.

Longview has contracted 40% of its capacity with PPL Energy Supply, the marketing arm of the local utility, for five years, and will sell the rest on the merchant market. "We approached the development of this project with views on the direction of power, fuel and carbon prices that we've gained from our other investment, and Longview is a chance to benefit from them," remarks Mark McComiskey, a managing director at First Reserve.

First Reserve bought GenPower after its principals had struggled to put together a workable finance package. GenPower is now a portfolio company of the fund, and likely to be the vehicle for its future development efforts. The developer had already hired Goldman Sachs and WestLB as financial advisers, and the two banks stayed on following the October 2006 purchase.

The two banks assembled a $1.1 billion debt package that steered clear of pricey second-lien debt in favour of a combination of first lien bank and B loan debt and high levels of equity. The debt broke down into a $250 million construction bank term loan, a $75 million revolving bank credit, a $350 million two-year delayed draw institutional term loan, a $300 million funded institutional term loan, a $100 million synthetic letter of credit and a $25 million synthetic revolving credit.

The split between bank and bond debt reflects the developer's immediate expenditure requirements rather than the relative appetite of the two markets. Pricing on the institutional debt, at 225bp over Libor, was a shade lower than the bank debt's 250bp, however. But the lead arrangers were able, with the delayed-draw institutional term loan, to get B loan lenders to accept a 24-month delay, a record for the market.

Thus, while the Longview financing stands firmly in the pre-crunch era, it would likely have survived a shift to an entirely bank-financed structure with only a small increase in debt service costs.

The sponsor wanted to avoid the drag on earnings of putting in all its equity at financial close, and the expense of backing a promise to contribute equity with a letter of credit or other bridge. Instead it spent its time convincing lenders and the ratings agencies that a fund's promise to contribute equity was both robust and irrevocable. Fund XI's investors include institutions such as CalSTRS, The Canadian Pension Plan Board, which has C$300 million ($300 million) invested, and Netherlands-based ABP. These limited partners would have to cover this equity contribution if First Reserve could not, and would also have to make up for their fellow investors' shortfalls.

The agencies were sceptical, but provided a BB-/Ba3 (S&P/Moody's) rating to the $1.1 billion debt, the most that could be supported at that rating level. Of the $930 million in promised equity, $500 million has a letter of credit guarantee, while another $430 million is deferred and is subject to investor guarantees.

The hedge with PPL is likewise enough to provide some revenue certainty to the debt, while the equity is fully exposed to the merchant market in the western part of the PJM power pool. First Reserve's bet is that it will be difficult to build additional baseload capacity in the area, which will experience shortages from 2011, and that Longview's comparatively low emissions will mean it is less exposed to carbon compliance costs than other older coal plants.

Longview's supercritical technology might not be new, but its water treatment is more interesting. The plant takes acid-laden waste-water from the region's mines, treats it, and uses it in cooling. The plant that will perform the treatment is being financed separately, as is the coal mine that will supply the plant, which is also a First Reserve property, and for which WestLB also recently closed a $120 million financing.

Longview Power LLC
Status: Closed 28 February 2007
Size: $2 billion
Location: Monongalia County, West Virginia
Description: Construction financing for 769MW supercritical coal-fired power project
Sponsor: First Reserve Fund XI
Equity: $500 million direct commitment backed by letter of credit, $430 million deferred committed contribution.
Debt: $250 million construction bank term loan, $75 million revolving bank credit, a $350 million two-year delayed draw institutional term loan, $300 million funded institutional term loan, $100 million synthetic letter of credit and $25 million synthetic revolving credit.
Maturity: Seven years (Six for the bank revolving credit)
Joint lead arrangers and bookrunners: Goldman Sachs, WestLB
Documentation agents: Natixis, Union Bank of California
Sponsor legal counsel: Simpson Thacher & Bartlett (financing); Brown Rudnick (EPC); Bowles Rice McDavid Graff & Love (permitting); Skadden, Arps, Slate, Meagher & Flom (for PPA) Klehr Harrison (Pennsylvania)
Lender legal counsel: Latham & Watkins,
Sponsor power market consultant: PA Consulting
Lender power market consultant: Navigant
Independent engineer: RW Beck
Coal and water supply, and environmental consultant: Marshall Miller & Associates
Lender insurance adviser: Moore-McNeil
Sponsor insurance adviser: Aon