Termoli: Silencing the critics

IPPs backed by a merchant credit are rare beasts nowadays, and when one comes along the wider market often vilifies it. But not only has Termoli's sponsor, Energia SpA, obtained exceptional terms, but Banca Monte dei Paschi di Siena (MPS) has booked a solid deal. The lead ran a club style syndication one year on from financial close that ended oversubscribed.

The total cost of constructing the 760MW plant, which is located near Campobassa in the Biferno Valley of Termoli in the Molise region, is about Eu405 million. In January 2004 financial close was reached for a Eu260 million main debt facility with a tenor of 10 years (three years construction, seven operation) and a Eu65 million VAT facility, solely underwritten by MPS.

When all was quiet during 2004, the wider market coursed with murmurs that the deal was a struggle to syndicate because MPS had done the deal on terms too favourable to Energia. Yet MPS was biding its time whilst local legal challenges were made to the administrative courts concerning the plant's permitting. The challenge was turned down on first hearing, appealed, and then turned down again ? on both counts for lack of standing. Although one final avenue of appeal is still available, this is now highly unlikely.

MPS did not risk souring the market with these actions pending, and waited until the end of 2004 to begin syndication. Ultimately, nine further banks came in on the deal, six Italian institutions and three Austrian. The Austrian banks have followed Austrian utility group Verbund, which has a 37.5% stake in Energia, while the remaining majority stake is held by Carlo de Benedetti's group of investors CIR SpA (62.5%). The borrower is a wholly-owned Energia SPV, Energia Molise SpA.

The participating institutions are: MPS; Interbanca; Efibanca; Banca Popolare di Lodi; BAWAG; Bank Austria; RZB; Banca Popolare di Milano; Banca Popolare di Novara and Banco di Brescia.

Although the deal has a long-term debt/equity split of about 65/35 (and a short-term split of 80/20) pricing is tight. Pricing starts at 220bp over Euribor during construction, and ratchets down at intervals of 200bp, 190bp, and 180bp. The sub-underwriting stage was met with healthy appetite and such was the interest from the invited banks that MPS's eventual hold position could have been reduced further.

MPS's hold position is about 20% of both the long term and VAT debt facilities. The VAT facility has a maximum tenor of five years and is repaid on receipt of VAT credits.

Termoli is part of Energia's plan to take an increasing share of the Italian generation market. In January 2003 Energia, together with Electrabel/Acea, acquired Tirreno Power (formerly Interpower), the third generation company (genco) to be privatised by Enel. Tirreno Power is the fourth electricity production company in Italy, with a net installed capacity of 2,611MW.

The Termoli deal bodes well for Energia's next merchant project financing, for the 760MW Modugno plant in Bari. The deal is lead arranged by MPS, BNL, Efibanca and WestLB. Financing for Modugno will be structured differently from Termoli with a different amortisation schedule and shorter tenor at six years. Close is anticipated by the end of the first quarter. (see Italian power feature in this issue)

Also in the pipeline for Energia are 760 MW plants in Aprilia (Latina), Bertonico/Turano Lodigiano (Lodi), and Pisticci (Matera). Energia is also developing renewable generating projects, with an emphasis on new wind farms.
Energia's decision to use for merchant structures for its forthcoming greenfield financings is largely because it does not have the required credit strength to provide a tolling agreement, which would possibly give it cheaper project debt.

Merchant deals give it extra flexibility to capture the maximum in the upside of electricity prices, and it prepares the sponsor for an eventual IPO when Energia reaches sufficient size ? this is expected to be when Termoli, Modgnuo and Aprilia have been financed and constructed.

As an indication of Energia's financial position, in the first half of 2004 the consolidated financial statements of Energia Group showed indebtedness of Eu47.8 million, down from the 2003 figure of Eu88.7 million. The improvement was mainly due to a capital increase of Eu150 million offset by the investment of about Eu81 million made in the Termoli plant, and by the change in working capital of around Eu30 million.

A consortium of Vatech and Technip won the EPC contract for Termoli's construction. Construction began at the beginning of 2004, and the plant will be on-line by the end of 2006.

Whilst MPS has been vindicated in syndication, the MLAs on Modugno were putting a deal together when syndication on Termoli was thought to have struggled, so Energia did not get similar terms again. Termoli probably sets a high bar for future deals ? while the Italian market is witnessing a belt-tightening on margins for tolling plants, there appears some abatement on the merchant front, at least for the time being. The next merchant deal of similar leverage to Termoli will pay a higher margin.

Energia Molise
Status: Reached financial close 20 January 2004, club to sign end of February 2005
Size: Total cost of the plant is Eu400 million; Eu260 million main debt facility ($326 million) and Eu65 million VAT facility
Location: Molise region, Italy
Description: Financing for a 760MW CCGT plant near Campobasso in the Biferno Valley of Termoli.
Sponsors: Energia SpA (Verbund, 37.5%; CIR Group, 62.5%)
Lead arrangers: Banca Monte dei Paschi di Siena; Interbanca; Efibanca; Banca Popolare di Lodi; BAWAG; Bank Austria; RZB; Banca Popolare di Milano; Banca Popolare di Novara and Banco di Brescia
Legal counsel to the lenders: Allen & Overy
Sponsor legal: In-house
Technical advisers: Stone & Webster
Market advisers: Ilex
EPC: Vatech; Technip