Beowulf Energy and Natural Gas Partners have closed the $790 million financing for the acquisition of MDU Resources' power businesses. The deal features a broad mix of fuel types, untested buyers, and took place during a period of instability in US credit markets. The financing, however, closed within a month of its launch, features a solid set of underlying power purchase agreements (PPAs), and did not have to accommodate substantial existing debt.

MDU Resources owns utilities in Montana, North Dakota, South Dakota and Wyoming, and also owns substantial mining and upstream gas operations in the US. It decided, as part of a review of its business, and in recognition of private equity interest in power, to sell its US power assets. It is retaining, for now, a Brazilian transmission business.

Goldman Sachs ran an auction for Centennial Power, which owns 603MW of power capacity, and Colorado Energy Management (CEM), which develops and operates power projects. Beowulf Energy, founded by Paul Prager, a former commodities trader, and Natural Gas Partners' Fund VIII put forward a winning $600 million cash bid, and also agreed to assume $36 million in project debt. Beowulf is an investor, along with Centennial, in the 225MW Trinity power project in Trinidad.

The portfolio consists of Hardin, a 120MW coal project located in Montana that sells power to Powerex until 2010, Mountainview, a 67 MW wind project that sells power to the California Department of Water Resources until 2011, Brush 1 (50MW, combined cycle) 3 (25MW simple-cycle) and 4A (138MW combined cycle), all of which are gas-fired and sell power to Public Service Company of Colorado (1 and 3 to 2017, and 4D to 2022), 50% of Hartwell, an International Power-operated 310MW simple-cycle project in Georgia that sells electricity to Oglethorpe Power until 2019, and San Joaquin, a 48MW simple cycle plant that sells power to Southern California Edison until 2010.

The assets come with a variety of power purchasers, with an average rating of A, a solid mixture of fuels, and a solid operating history. Hardin, for instance, entered service last year, and San Joaquin and Brush 1 and 3, the oldest units, have been in service since 1990. Barclays, which advised the buyers on their purchase, is providing a hedge for Hardin beyond the end of its PPA, if the offtaker, a BC Hydro subsidiary, does not renew.

Goldman joined Barclays Capital as lead arranger of the $660 million debt for the Bicent Power acquisition vehicle, for which they held a bank meeting on 12 June. The debt breaks down into a $300 million seven-year first lien term loan, a $30 million first lien five-year revolver, a $120 million five-year letter of credit, and a $130 million 7.5-year second lien term loan. The sponsors are contributing $130 million in equity, of which Beowulf is providing 16.7% and NGP 83.3%, and are funding the remainder of the purchase price with a $50 million payment-in-kind tranche at an intermediate holding company.

The project has its antecedents in the US 'B' loan market, in particular one of the earliest applications of the B loan to generating assets, which was ArcLight's $300 million Teton Funding financing in 2004. However, of Bicent's portfolio, only Hardin is subject to any project level debt, in the form of a small $36 million loan, while most of the Teton assets had some form of project debt. According to Prager, however, the buyers only seriously considered the B loan market.

The ratings on the deal, at BB-/Ba3 (S&P/Moody's) on the first lien and B-/B1 on the second, suggest a portfolio that is richly valued and highly leveraged. The projects feature minimal exposure to commodity prices, however, beyond a small amount of basis risk on the Barclays hedge, and deal shuns the covenant-light approach that several power borrowers, most notably LS Power, have taken in recent months. The financing benefits from a sweep of excess cash throughout its life, but no mandatory amortization.

Probably the most challenging part of the financing process was convincing the ratings agencies that the CEM operations did not expose the borrower to undue construction risk. Says Prager: "The rating agencies and lenders were initially concerned that CEM could be subject to the same risks as large turnkey contractors but we and our financial advisors were able to get the comfortable that in fact CEM was a very different animal." CEM's business is confined to operations contracts and cost-plus construction contracts, where the risk of overruns is passed on to the client.

Nevertheless, the deal went to market just as sentiment in US debt and credit default swap markets turned against lower-rated credits, as part of the volatility that has accompanied the increase in defaults on subprime mortgages. Payment-in-kind debt, in particular, has attracted negative commentary, but Bicent lined up Barclays as the buyer of 100% of the PIK as soon as the purchase agreement was signed.

The debt priced roughly in line with its pricing talk, if slightly at the high end. The first lien debt has a margin of 200bp over Libor, while the second lien debt has a margin of 400bp. These levels are consistent with other recent power transactions, but the portfolio would be a good candidate for a bond refinancing. Pushed on whether this is a possibility, Prager is cautious. "We will see. First we intend to scale the vehicle."

Bicent Power
Status: Closed 10 July
Size: $790 million
Location: Western US and Georgia
Description: 603MW (net) contracted power portfolio
Sponsors: Beowulf Energy (16.7%) and Natural Gas Partners fund VIII (83.3%)
Purchase price: $636 million (including assumed debt)
Equity: $130 million
Debt: $450 million in first lien, $130 million second lien, $50 million mezzanine payment-in-kind
First lien and mezzanine lead arranger: Barclays
Second lien lead arranger: Goldman Sachs
Borrower legal counsel: Paul Weiss
Lenders' legal counsel: Shearman & Sterling
NGP legal counsel: Chadbourne & Parke
Market consultant: PA Consulting
Independent engineer: Black & Veatch
Insurance consultant: Moore McNeil
Environmental consultant: Tetra Tech