The $3.57 billion financing for the Texas Genco acquisition is a defining event in the US power market. It has been described as the largest ever non-utility purchase of power assets, and an unprecedented entry by financial players into the independent power business. The buyers of TG's 14,000MW of capacity paid $3.75 billion, of which they contributed $$615 million in equity.

The deal has its precedents, however. By value, if not by capacity the purchase price of $3.75 billion trails the $5 billion that Edison Mission paid for Commonwealth Edison's 9.510MW fleet in 1999. And the investment banks have been avid participants in several financings for Calpine and El Paso, for instance, both as hedge counterparties and as bookrunners.

But the difference between the sponsors, lenders, arrangers, offtakers, and financing structures for the two deals is instructive. The sponsors of Texas Genco (TG) are Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts and Texas Pacific Group, four private equity firms with extensive experience in leveraged buyouts which have teamed up for a single deal. Merchant energy firms, those that still exist, or independent power producers such as Edison Mission, no longer have the resources.

Then there are the lenders. The bookrunners of the TG deal are Citigroup, Deutsche, Goldman Sachs and Morgan Stanley, of which one, Citigroup, was present on ComEd. The leads, which also acted as financial advisers to the sponsors, are Goldman and Morgan Stanley. The leads will have received assistance from project finance specialists within their institutions, but the leveraged buyout teams predominated.

And below them no longer stand project finance lenders, but the loan funds, bond funds, mutual funds and hedge funds that comprise the high-yield and Term B markets. They are now very familiar with the power market, probably more so than most of the new breed of sponsors. Despite a slight recent increase in US interest rates, there has been little sign of abatement in investor appetite - one source at the leads described the market as "frothy".

And while investment banks have been prepared to provide power, as well as financial hedges, to investment grade producers and special purpose vehicles, this is the first time they have relied upon such a lowly rated counterparty. Texas Genco, a merchant producer, has a B1/B senior unsecured rating, while its first priority debt has a Ba2/BB rating.

Texas Genco consists of 5,200MW of coal and nuclear-fired capacity, and 9,000MW of gas-fired capacity. It is all located within the Electric Reliability Council of Texas (ERCOT), and was an 81% subsidiary of CenterPoint Energy. CentrePoint owned the distribution businesses of Reliant Energy, which spun off its merchant assets as Reliant Resources. 19% of Texas Genco was distributed to CenterPoint shareholders and listed.

The sale of the company is a requirement of CenterPoint, part of the deal that Reliant made with Texas regulators in 1999 in moving forward deregulation. Since then, Texas has been one of the most competitive markets in the US, as well as one of the easiest places to build a power plant. Much of the new gas capacity of recent years has been built in Texas, and as a result electricity prices are derived from the price of gas and the relative efficiency of the state's gas-fired fleet.

So Texas Genco was put up for sale to buyers that would have to take on or mitigate merchant risk, but with plants that would benefit from margins much wider than thoser available to gas plants. As gas prices headed up, the lower availability levels of the coal plants became much less important, and the economic value of the gas plants dwindled.

But the buyers financial advisers are two investment banks with the most advanced energy trading capabilities available, as well as solid credit ratings. J Aron, Goldman's commodity division, and Constellation Energy have signed up to contracts for much of the portfolio's output as far as 2008. TG will be looking to contract additional capacity on the portfolio, and Morgan Stanley Capital Group, the other adviser's commodities division, will be among the candidates.

Nevertheless, the debt package goes out beyond the term of the contract, to 2011 in the case of the loans, and to 2014, in the case of the notes. The deal features cash sweeps that trap almost all cash to pay down debt, but does not feature any terms that would encourage the signing of further contracts.

To provide sufficient credit support for the contracts, the deal features a $300 million special letter of credit, provided solely by Deutsche, which will support the current contract, as well as a further $200 million to be provided in support of additional contracts. The final ancillary piece of debt is a $325 million working capital facility.

The original deal was to consist of a $1.375 billion term B loan with a first priority position, and a $1.375 second priority note issue. But the hedge providers required a second priority position, one that would be called upon if TG could not perform its obligations. Since such a claim would arise if power prices rose so high that it could not source alternate power under the agreement, then this claim would likely be accompanied by a rise in the collateral value of the assets.

The ultimate structure consisted of a $1.25 billion note issue, with a maturity of 2014 and a coupon of 6.875%, and $1.625 billion in Term B debt. The term B debt consists of a $1.125 billion initial term loan, and a $500 million delayed draw term loan, both due 2011 and priced at 200bp over Libor. The delayed draw portion will be conditional upon Nuclear Regulatory Commission approval of the purchase of the South Texas Project nuclear plant.

Texas Genco is as good an illustration as any of the changes that have swept the US power industry in the last five years, but serves best as a snapshot - the number of investment banks in the energy business looks like growing, and several commercial banks are likely to angle for a more B loan like approach to the business.

GC Power Acquisition LLC
Status: closed 8 December 2004
Size: $3.65 billion
Location: Texas
Description: 14,000MW coal, nuclear and gas portfolio
Sponsors: Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts and Texas Pacific Group
Equity: $615 million, roughly
Arrangers: Citigroup, Deutsche Morgan Stanley, Goldman Sachs
Seller advisers: Citigroup (financial) Baker Botts (legal)
TG advisers: RBC (financial) Haynes and Boone (legal)
Sponsor advisers: Goldman Sachs, Deutsche Bank and Morgan Stanley (financial), Simpson Thacher & Bartlett, Stroock & Stroock & Lavan, Vinson & Elkins (legal)