The Eu305 million ($364 million) project debt (senior term and letters of credit) for Ireland's second independent power project (IPP) - the 400MW Tynagh Energy combined cycle gas turbine (CCGT) - reached financial close on 27 August. The project is the first to take advantage of the proposed new pool and gas market arrangements in Ireland to be implemented in 2006.

Tynagh Energy is a joint venture between Mountside Properties and Gamma - a major Turkish construction company best known in Ireland as the contractor on Ireland's first IPP Huntstown in 2002. Mountside is a private company led by Martin Blake whose other ventures include Premier Dairies and Thermal Waste Management.

Construction on the plant started before financial close and Gama Power Systems is a partner with General Electric in the EPC consortium. The deal was a fairly rapid structuring given that when construction started only the heads of terms on the EPC were in place.

Ireland has a looming capacity shortage but the dominance of ESB, combined with low electricity prices, has made it very difficult for the Irish government to attract IPP investment. So strong is ESB's position that in the interim to liberalisation in 2006 the government has set up a virtual IPP structure whereby suppliers like Viridian can speculate on power auctioned off by ESB.

The new 400MW plant will be equivalent to around 10% of Ireland's installed power capacity.

Last year the Irish power regulator, the Commission for Energy Regulation (CER), ran a competition for 10-year offtake contracts from ESB. Gama and Mountside Properties won out against stiff competition from AES, RWE, Bord Gais and Scottish Southern. The CER also awarded a 150MW contract to the Aughinish Alumina combined heat and power project, sponsored by Glencore.

Although a major comfort to lenders, the terms of the ESB offtake only covers 90% of output under a capacity for differences (CFD) payment where the state guarantees to make up the difference between the pool price and an agreed fixed rate.

The remaining 10% has been taken by RWE under a tolling deal where RWE assumes the electricity price volatility risks. In return RWE has been contracted initially for 10 years of full gas supply to fuel the plant, and RWE npower, which operates over 8000MW of plant in the UK, will operate and maintain the plant.

According to the arrangers, the unusual tolling arrangement combined with the O&M contract required lengthy negotiation. In addition the plant had no IPC licence.

The deal was lead arranged by KBC Finance Ireland and Royal Bank of Scotland, and their respective subsidiaries IIB Bank Limited and Ulster Bank Ireland, with Investec arranging an additional mezzanine tranche.

Financing comprises Eu300 million of 12-year senior project debt underwritten by RBS and KBC with the additional Eu25 million in mezzanine split 50-50 between Investec and the lead arrangers. Investec originally held a 40% share in Tynagh Energy, which it sold to Gama at financial close. Equity in the project is around Eu30 million.

The arrangers are keeping silent on the senior debt pricing but it is believed to be around the 120bp level. The deal will be out to syndication in early October and the arrangers have already had a number of reverse enquiries. With the combination of ESB and RWE offtakes, Tynagh should prove popular with lenders.

With the plant already under construction, tenor on the deal is split between a two-year construction period (the plant is due to enter operation in March 2006) and 10 years operation. Consequently there is no operational tail on the 10-year ESB offtake agreement. However there is provision to extend the loan to 13 years should the liberalised market post-2006 take off.

With liberalisation on the way Tynagh may yet be joined by more real IPPs. The possibility of a Huntstown 2 has recently been mooted by Viridian. Although Viridian was both sponsor and offtaker on the original deal it is unlikely that it would have the appetite for all the power in a second plant.

Tynagh Energy

Size: Eu360 million

Status: Financial close 27 August 2004

Description:

Project financing for Ireland's second IPP

Sponsors:

Gama (80%); Mountside Properties (20%)

Project debt: Eu305 million

Lead arrangers: KBC Finance Ireland; Royal Bank of Scotland

Mezzanine agent and arranger:

Investec

Legal counsel to sponsors:

Matheson Ormsby Prentice

Legal counsel to lenders:

Linklaters; A&L Goodbody (Irish law)

Legal counsel to mezzanine agent: Norton Rose

O&M contractor: RWE npower

Offtakers: ESB; RWE

Fuel supply: RWE