GenPower and First Reserve completed the financing for the Longview power project on 28 February. The $1.1 billion in debt facilities are the first for a supercritical coal-fired plant in the US. Since such technology will be the preferred option for most of the new coal additions under consideration, the financing deserves some scrutiny.

Longview is a 769MW coal-fired project located near Maidsville, in Monongalia County, West Virginia, close to the border with Pennsylvania. It is designed to run on coal and waste coal extracted from the area's coal mines, which are legion. It will draw water for cooling from an associated project that will treat water in the mines to remove its acid content.

The developer of the project is GenPower, which was formed in 1999, and was the early-stage developer of TECO's Dell and McAdams projects. In October 2006, GenPower and First Reserve formed GenPower Holdings, which took on the developer's slate of projects and team. First Reserve committed to provide not only the equity for the Longview project, but also an additional $500 million over the next five years for further projects.

Probably the most significant aspect of the financing is the high proportion of equity that First Reserve has contributed to the project. Of the total $2.03 billion financing requirement, $930 million will be pure equity. First Reserve will contribute $500 million of this in stages during construction, and its obligations benefit from an A+ letter of credit. The remainder will be contributed to the project after all of the debt has been expended, and is the subject of an irrevocable, but unsupported, agreement from First Reserve.

Equity funds have secured a prominent place in the financing of greenfield power projects, and were present in both the Astoria and Plum Point financings (in both cases EIF group was the provider). What is more unusual is such a large uncovered deferred commitment. While lenders on private equity-driven acquisitions have often been prepared to wait for such a contribution, project lenders, even institutional loan players, have not been asked to display such patience.

First Reserve's Fund XI, which is the source of this equity, must maintain a quantity of cash sufficient to fund this investment at all times, and its contribution would be accelerated if its participants moved to withdraw funds below the necessary level. The beneficiary of the equity commitments is Longview Intermediate Holdings B, which owns Longview Intermediate Holdings C, which owns Longview Power, the borrower.

The reason for the high levels of equity is straightforward – the high cost of second lien bank debt. The $1.1 billion in senior debt on the project was the maximum that would permit a BB-/Ba3 rating, which the project eventually secured. While power projects, or at least those pitched to the bond market, aim for a BBB-/Baa3 rating, and thus gain investment grade pricing, institutional loans tend to experience a sharp hike in pricing at single-B.

"The size of the equity contribution was largely governed by the ratings agencies," says Mark McComiskey, a managing director at First Reserve. "Even if we'd have used a first lien/second lien structure, the knock-on effects on pricing throughout the transaction would have been significant." The ability to defer equity contributions makes a contribution of this size economic for First Reserve.

Moreover, the project's power contract, and the proportion of the plant's output that it covers, encourages such a capital structure. "We were pitched a power hedge by several of the investment banks," notes McComiskey, "but did not want to give up our ability to benefit from potential upside in the region's power markets." Of the project's total capacity, 300MW, or 40% is contracted to PPL Energy Plus under a five-year financially settled contract for differences.

Beyond this period, the project will sell power into the western region of the PJM power pool, where power prices are primarily set by reference to the price of coal. Says McComiskey, "We've done a fair amount of due diligence, and according to our predictions, PJM will be structurally short of both power and baseload capacity by 2011." The new plant will be operating such that its power will be cheaper than most coal plants nearby, and should make attractive margins for the owners selling power on the spot market.

The engineering, procurement and construction contractor is a joint venture of Aker Kvarener and Siemens, which will install a Foster Wheeler boiler at the site. The project will buy coal from Mepco under a 20-year agreement, and Coresco will dispose of the project's ash under an agreement with the same length. The PJM operator has assigned the project firm transmission rights, which allow the project, for a fee, to sell power at eight different nodes in the region, and thus exploit higher prices at these nodes where possible.

GenPower, using a separate financing package, will construct the water treatment and supply facility, known as AMRI. Because it is being used to clean up the acidic water that has built up in the region's abandoned mines, it benefits from tax-exempt financing. It has raised $10 million so far, of a total $70 million project cost. There is also a chance that the pollution control equipment at the plant proper would be eligible for tax-exempt treatment, and provided that a refinancing takes place within a certain period after construction, might be an option for retiring the debt.

The bookrunners for the debt financing were Goldman Sachs and WestLB, both of which had been retained by GenPower before it had secured the First Reserve equity. The bank financing for the plant consists of a $250 million construction term loan and $75 million revolving credit. The two leads also sold a $350 million two-year delayed draw term loan, $300 million funded term loan, $100 million synthetic letter of credit and $25 million synthetic revolving credit, to institutions. The commercial debt has a margin of 250bp over Libor and the institutional debt 225bp.

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
Sponsors: GenPower Holdings, 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; Brown Rudnick; Bowles Rice McDavid Graff & Love; Skadden, Arps, Slate, Meagher & Flom (for PPA)
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
Insurance adviser: Moore-McNeil