Plum Point: Coal creation

The attention lavished on coal-fired generation in the US has not yet resulted in a substantial swathe of financings. LS Power's financing for the Plum Point project illustrates some of the challenges in building new capacity. By the same token, the challenges of building coal plants explain why Plum Point is the most impressive construction financing, and the most impressive deal for a single plant, in 2006.

Plum Point is not only the first construction financing for a standalone coal asset this century, it is the first coal construction financing to take place in the B loan market, and the first coal project to use a price hedge from a financial counterparty. It was the second financing for the revived LS Power, a 1990s developer that again became active from 2004 in buying and building new assets. And the deal closed at the same time as LS power was raising $1.7 billion for financing the acquisition of the Duke Energy North America.

Plum Point is a 665MW pulverised coal-fired power plant, located near Osceola, Arkansas. It dispatches into the South-East Reliability Council market, which features high reserve margins and a number of powerful municipal co-operatives and incumbent utilities. The region is, however, highly dependent on gas to fuel generation capacity, and gas prices have remained persistently high.

LS Power is not the sole owner of the Plum Point project, and has brought in major local customers as co-owners. The developer, though, must strike a balance between maintaining control and accessing funding for the project. The presence of other equity holders, which will fund their contributions to the project from their own resources, also complicates the financing process. Before financial close, LS signed agreements with the Empire District Electric Company (for a 7.5% stake, equivalent to 50MW of capacity), East Texas Electric Cooperative (also 7.5%, for 50MW capacity) and the Missouri Joint Municipal Electric Utility Commission (147MW, or 22.1%). After close it brought in the Municipal Energy Agency of Mississippi for 40MW, or 6%.

LS Power, therefore, needed to come up with debt and equity for the remaining 57% of the project's cost. Of this, equity accounts for $225 million, which LS funded through its own resources and by selling a roughly 20% stake in the project (equivalent to a 35% stake in the issuer, Plum Point Energy Associates*) to EIF Group. Since then, as part of an agreement by which LS Power has acquired a substantial stake in Dynegy, Dynegy has acquired LS Power's 40% stake in the project.

The project has an $875 million engineering procurement and construction (EPC) contract with a joint venture of Zachry, Peter Kiewit and Black & Veatch, which is tied into a tight liquidated damages schedule. The project received all of its air permits and a notice to proceed in March 2006.

The financing was thus assembled so that construction could proceed as fast as possible – in time for a substantial completion in March 2010. At this time, only 90MW of the LS' then 412MW share of the project's capacity was contracted – MEAM was taking 40MW and Empire 50MW under 30-year contracts. In December, Southwestern Electric Cooperative signed up to take 70MW of capacity, but at financial close much the balance of LS' ownership was hedged through natural gas put options with Goldman Sachs' J. Aron, which enabled the project to lock in gas prices at $6.90. Since gas prices closely correlate with power prices, this provides LS with a minimum income from its share of the project, but allows it to benefit from higher gas, and thus power, prices.

The final factor complicating the assembly of a financing was the project's tax situation. The project benefits from a payment-in-lieu-of-taxes (PILOT) arrangement with the City of Osceola, which lowers the project's local property tax liability, and under which the city, which does not pay taxes, is deemed to have ownership on the plant for local purposes. For federal tax purposes, however, the project is deemed to have private owners, and issues tax-exempt bonds under an exception for private issuers engaging in solid waste handing activities.

The initial offering memorandum for the project put forward a $590 million senior secured first term loan with an eight-year maturity, a $65 million six-year first lien working capital facility, and an eight-year $105 million synthetic letter of credit facility to support a $100 million tax-exempt bond issue. The joint lead arrangers and bookrunners were Credit Suisse, Goldman Sachs, Merrill Lynch, and Morgan Stanley, while WestLB was a co-manager. Goldman Sachs underwrote the tax-exempt bonds, which are guaranteed through the cash collateral provided by the synthetic letter of credit.

However, the initial structure was a little too aggressive for the market – the arrangers ultimately broke down the senior debt into a first lien piece of $423 million and a second lien piece of $175 million, and decreased the letter of credit by $3 million, with the working capital facility staying the same. LS also increased the equity contribution from $205 million to $225 million. The first lien is priced at 325bp over Libor, with the second lien pricing at 525bp, of which payment in kind (i.e. with additional notes, rather than cash interest) made up 200bp.

The project, and its financing solution, invites comparisons with the Astoria power project, another asset with promising fundamentals, a high construction price, and a first of its kind contractual profile. It also featured a restructured all-first lien tranche, and EIF as an equity investor. However, the remaining owners are financing their contributions in the tax-exempt market, with Missouri Joint Municipal Electric Utility Commission, for instance, issuing $280 million in debt, insured by MBIA, in May.

Plum Point Energy Associates
Status: Closed 15 March 2006
Size: $970 million
Location: Osceola, Arkansas
Description: Financing for developer's share of a 664MW coal-fired plant
Sponsors: LS Power, EIF US Power Fund II (four regional co-operatives provide funding for the balance of the plant)
Debt: $755 million
Arrangers: Credit Suisse, Goldman Sachs, Merrill Lynch, Morgan Stanley, WestLB
Legal counsel to sponsors: Chadbourne & Parke
Legal counsel to the lenders: Latham & Watkins
Independent engineer: Stone & Webster
Power market consultant: ICF

*Sentence corrected to more accurately reflect EIF's equity position.