Sempra Energy Partners and Carlyle/ Riverstone have completed the $465 million financing for the Coleto Creek power plant - the first time an acquirer has accessed the Term B market for a single asset. The deal closed in the same month that CentrePoint found a buyer for the Texas Genco portfolio, and that International Power managed to restructure its Texas-heavy American National Power portfolio. Texas' ERCOT (Electric Reliability Council of Texas, one of the earliest regions to experience overcapacity, might be one of the earliest markets to improve.

Nevertheless, the deal is yet another example of a solidly-contracted asset whose owners decided to avoid the project finance bank market. The new owners claim the deal is a first for a single plant, but the Astoria project came in first (search keyword 'Astoria' on www.projectfinancemagazine.com for more details). However, while the complexities of the Astoria project were used to justify paying up for Term B debt, the buyers of Coleto Creek say that they simply prefer the terms on offer.

Coleto Creek is a 632MW coal-fired plant located at Fannin, in Goliad County, Texas. Built in 1980, it is a relatively efficient coal-fired baseload plant in a state dominated by gas capacity. The plant's former owner is Texas Central Co, (TCC) part of American Electric Power, which has utility and renewable energy interests in ERCOT. TCC had to establish the market value of its generating plants as part of stranded cost proceedings, as the Public Utility Commission of Texas (PUCT) mandates.

AEP, advised by Credit Suisse First Boston (CSFB), issued an information memorandum in June 2003. Sempra Energy and Carlyle/Riverstone formed a partnership, put in an indicative bid for ten of the plants in August 2003, a firm bid on 5 December 2003, were granted exclusivity on 6 March 2004, and reached an initial agreement on 12 March. The deal closed in July, and was not contingent on financing being in place, although the debt issue closed that month.

Sempra Energy formed Sempra Energy Partners in 2003 to acquire energy assets, although Sempra has a long record of involvement in regulated and unregulated energy. Riverstone is based in New York, focuses on energy investments, and has $1.5 billion under management, while Carlyle, while better known as a well-connected and large private equity firm with substantial defence interests, is attracted to the energy sector. Sempra Energy Partners and Carlyle/Riverstone Global Energy and Power Fund II each own 50% of Topaz Power Partners, which owns the assets.

AEP also sold the TCC share of the Oklaunion coal-fired plant on 30 January and the TCC share of the South Texas Project nuclear plant 1 March 2004. In total it received $805 million for a portfolio with a book value of $1.8 billion, but the book value of the Topaz plants, at $266 million, is well inside the purchase price of $430 million. This is an ample demonstration of the effect of new capital on valuations - albeit of contracted plants.

But it is Coleto Creek that is the key asset, and the other plants have little economic value at present, if any. The gas/oil plants are old and inefficient, and while four of them have Reliability Must Run (RMR) contracts, these are presently out of market. The other four are inactive, and Topaz has sold one of them - E.S. Joslin - to Calhoun County Navigation District, which operates the Port of Port Lavaca/Point Comfort.

The sponsors will decide over time what to do with these plants, and options include an outright sale of the plants as are, or a sale of the land for development, or, if prices improve, a retrofit and recommissioning. The buyers have not outlined any immediate plans, but the proceeds are likely to be marginal next to what operating Coleto could bring.

So, Coleto is the sole subject of the financing, and the sponsors have tried to contract out as much of its output as possible. 300MW is contracted for five years, 150MW for two years, and a further 122MW under a number of contracts of between five and ten years. The contracts have a weighted average life of 4.2 years and cover 93% of the plant's capacity. According to sources close to the deal, some of these contracts are with Sempra affiliates, and most are with A-rated counterparties. A final key enhancement was the provision that 75% of excess cash is trapped for prepayment, while a further 25% can only be distributed when debt/ Ebitda is less than 2.75x.

This conservatism in minimising sales onto the merchant market is designed to keep the pricing as low as possible and please the ratings agencies. The deal was still, at Ba2/BB, speculative grade, but far above the levels of most previous financings. The project sold $150 million in eight-year second lien debt priced at 300bp over Libor, $205 million in seven-year first lien debt, priced at 225bp over Libor, as well as $50 million in letters of credit, at 225bp, and a $60 million revolver, priced at 250bp.

No less than three banks - Citigroup, JP Morgan and Goldman Sachs teamed up to provide this $445 million in debt, a sum that each one of them could comfortably have underwritten. The finance teams at Sempra, Carlyle and Riverstone evidently had a difficult time deciding which banks to favour with this business. This alone is a clear sign of a market that has moved from rescue finance back to relationship-driven banking.

Coleto Creek

Status: closed July 2004

Size: $565 million

Location: Goliad county, Texas

Description: acquisition financing for 632MW coal-fired plant

Sponsors: Sempra Energy Partners, Carlyle/ Riverstone Global Energy and Power Fund II

Equity: $100 million

Debt: $150 million in eight-year second lien debt, $205 million in seven-year first lien debt, $95 million in letters of credit

Arrangers:

Citigroup, JP Morgan, Goldman Sachs

Legal counsel to the borrower:

Cleary Gottlieb Steeen & Hamilton

Legal counsel to the lenders:

Shearman & Sterling

Engineer: Stone & Webster

Environmental: EVA

Consulting: Arcadis

Adviser to the seller: CSFB