Syndication has closed on the £315 million project debt backing International Power/Mitsui's (70/30 respectively) £500 million acquisition of the 1,200MW Saltend Cogeneration plant from Calpine – the first UK merchant deal since the collapse of the price pool.

Saltend is a combined cycle gas-fired plant, with steam recovery technology, located near Hull, in the Humber region – where much of the country's gas-fired capacity is sited. Operational since 2000, it is considered one of the most efficient plants on the grid and has won praise from environmentalists for its clean operations.

A power purchase agreement is in place with the nearby BP Chemicals plants for around 10% of the plant's output; the rest is fed into the Electricity Pool of England and Wales.

Merchant power prices collapsed in 2001 as it became clear there was too much supply in the market and generators began mothballing capacity. In the UK, this was compounded by the introduction of the New Energy Trading Arrangement (NETA), which intensified competition between generators at the same time as fuel prices were rising. Meanwhile, the collapse of TXU Europe, offtaker for several European plants, including the UK's 4000MW coal-fired Drax facility, further depressed the market.

It was against this background that Calpine, which had built a strong reputation with the aid of an almost exclusive US focus, chose Saltend as its breach into the European market. It purchased the plant from Entergy, its original owner, for £562 million (then $810 million) in August 2001. Calpine has now sold the plant for a lower sterling price (£500 million) but a higher dollar price ($862.5 million) due to the weakening of the dollar since 2001.

There was no shortage of interest in the plant after Calpine chose to beat a retreat back to North America, with 13 offers reportedly submitted. This partly reflects the quality of the asset, and also improving market fundamentals. The wholesale UK electricity price has risen to over £35/MWh, from a trough of £17/MWh and looks set to continue on a forward curve.

IP and Mitsui have been on something of a spending spree recently. The Saltend deal follows hot on the heels of their $2.135 billion acquisition of Edison Mission Energy's international portfolio in 2004. There are some similarities between the project financings for the Saltend purchase and the Edison Mission buy-out (known as Normanglade) – both deals, for example, feature mini-perms.

According to mandated lead arrangers Calyon, HSBC, HVB, ING and Royal Bank of Scotland, syndication of Saltend was 50% oversubscribed – a reflection of the conservative debt structuring, which is far removed from merchant deals of the late 1990s. Eight banks – Bank of Tokyo-Mitsubishi, Bayerische Landesbank, Commonwealth Bank of Australia, Lloyds TSB, Mizuho, Natexis, SEB and WestLB – joined the MLAs, each with takes of £20.5 million. The MLAs took £29 million each, except for HSBC, which took £25 million.

With a debt-equity ratio of 55:45, the debt features an eight-year term loan of £275 million, a £30 million eight-year letter of credit and a £10 working capital facility which didn't form part of the syndication and is to be shared equally amongst the five MLAs.

The term loan has a 55% bullet repayment, due at maturity. Partial cash sweeps kick in if cover ratios fall below certain levels to ensure that the repayment profile is adjusted should project cash flows deviate significantly from the initial base case model. A complete cash sweep is available if the cover ratio falls below 1.3x.

Pricing on the debt begins at 205bp over libor in years one to three, rising to 220bp over libor in years four to six and 240bp over libor in years seven and eight. However, these are to be reduced if cover ratios rise above a certain level.

A covenant is in place requiring a rolling power hedge against a fixed proportion of Saltend's merchant output. This is to compensate for the lack of PPAs in place. Non-compliance with the covenant's hedging targets results in an increase in the debt service reserve account from 6 to 12 months of debt service.

The contrast with the financings of the late 1990s is stark. Project debt on the original Saltend financing in June 1998, when the equity holders were Entergy and BP Amoco, was a £646 million 17-year term loan against a total project cost of £790 million. Pricing was 115bp-130bp over Libor.

The latest Saltend financing sets a very different type of benchmark. Whereas in the late 1990s it was possible to raise debt in excess of £400,000/MW for merchant gasfired plants, the new Saltend term loan facility totalled around £230,000/MW. This figure, however, takes into account the 10% offtake agreement in place with BP Chemicals. For pure merchant power, the deal sets a benchmark of £175,000/MW.

Saltend
Status: Syndication closed September 2005
Description: Financing for the purchase of 1,200MW gas-fired cogeneration plant.
Sponsor: International Power/Mitsui (70/30)
Debt: £315 million
Equity: £185 million
Mandated Lead arrangers: Calyon (bookrunner and modelling), HSBC (market), HVB (insurance), ING (technical and documentation) and RBS (bookrunner and documentation)
Participating banks: Bank of Tokyo-Mitsubishi, Bayerische Landesbank, Commonwealth Bank of Australia, Lloyds TSB, Mizuho, Natexis, SEB and WestLB
Legal counsel to lenders: Linklaters
Legal counsel to sponsors: Clifford Chance