FPL Energy encapsulates the change in fortunes in the power business in the US. A strong and cautious sponsor, part of FPL Group and sister to Florida Power & Light, it was often accused of benefitting from patchy deregulation outside of its service territory, while protected at home. It has now emerged as a powerhouse in wind development, and one of the few remaining creditworthy independent power producers.

The history of its FPL Energy Construction Funding deal also illustrates some of the trends facing power sponsors and bankers, including the complete withdrawal of lenders from the merchant business. It does, however, demonstrate the resilience of both FPL and its lead arrangers in crafting a solid, yet innovative, financing package. And, coupled with its American Wind financing (also a deal of the year), establishes FPL as the main sponsor to follow in the US.

FPL has been a sporadic visitor to the project finance market, either for its small wind farms, or the occasional thermal project, such as the $435 million Doswell project bond, led by Goldman Sachs in 2001, or the RISEP synthetic lease, through Citigroup. The Construction deal, an ambitious portfolio financing, was conceived around the same time - at the height of the merchant market. In January 2002, FPL mandated Scotia Capital, co-developer of the construction revolving credit financing, and Citigroup, of RISEP fame, to put together a construction revolver. This would be a miniperm of around $2.5 billion, modelled around successful closes by NRG Energy and Calpine. It was also looking at aggressive, near-corporate pricing.

By April, however, the arrangers, having committed a maximum of $500 million, were finding takes difficult to sell down and were unwilling to underwrite larger amounts. As a result, Citigroup pulled out, to be replaced by RBS. This was by far RBS' largest commitment to a deal, even if it had probably not signed up to a $1.25 billion ticket. The timing, however, was right for a rethink.

By the middle of the year, Enron's bankruptcy, a fall in wholesale power prices and mounting evidence of plant overbuild had drastically altered lender sentiment. As such, the lead banks - RBS and Scotia - were able to persuade FPL to adopt a more conservative structure. This move was probably fortunate, since NRG's Finco revolver, the most aggressive of its type, has not been kind to banks.

The final structure was drastically simpler - a financing vehicle for two plants, of which one was complete and another under construction. The first plant is Marcus Hook, a 744MW combined-cycle cogeneration facility located at a Sunoco refinery on the Delaware/Pennsylvania border. The refinery is the plant's steam host, but does not directly dispatch power from the plant. The second plant is the Calhoun facility, located in Alabama, a 668MW peaker. This has a power purchase agreement (PPA) with Southern Company subsidiary Alabama Power, the local utility. Calhoun's PPA is structured using availability payments from Alabama Power. Calhoun is under construction, with an in service date set for May 2004.

Thus, instead of the completely merchant deal envisaged by the sponsor, the construction loan benefits from the above power purchase agreement, as well as a toll with FPLE-PMI, FPL Energy's marketing affiliate, which carries an A2/A- (Moody's/S&P) rating. This toll was structured to mirror expected merchant revenues over the life of the loan, based on figures provided by PA Consulting. As a result, lenders could be assured of repayment in the event of FPL's disappearance - an unlikely, but not unprecedented event.

The financing was one of three large facilities that had been trailed for much of 2002, and the first part of 2003 - the others were the since-abandoned TECO and Tractebel portfolios. As such it was the subject of a great deal of speculation, the more intense since little had closed in the US since InterGen's peaker portfolio in September 2002. The deal that emerged was priced and structured to sell strongly - 175bp over libor during construction, and 200bp for the rest of the loan. The low pricing during construction reflects the fact that FPL has wrapped the obligations of the EPC contractor - Shaw Group. The loan has a five-year tenor, and hardly amortizes - around 80% will be outstanding at maturity. However, the PPA with FPLE-PMI is structured to pay down debt beyond this point, should the loan be rolled over and capital market funds not be forthcoming.

The debt attracted $965.5 million in commitments - equal to a two times oversubscription. Ultimately, the two leads, joined at the top tier by CSFB and ANZ, two banks looking for wind business from FPL, raised $620 million in retail. This came from 20 participants, and four arrangers - Bank of Scotland, Mizuho Corporate Bank, and Nord/LB.

FPL Energy Construction Funding LLC

Status: Closed 2 July 2003

Size: $911 million

Location: Alabama and Pennsylvania

Description: financing for 744MW cogen plant under construction, and completed 668MW peaker plant

Sponsor: FPL Group

Debt: $400 million

Lead arrangers: RBS, Scotia Capital, ANZ Investment Bank, Credit Suisse First Boston

Tenor: 5 years

Margin: 175bp over Libor pre-completion, 200bp thereafter

Market consultant: PA Consulting

Independent engineer: RW Beck

Insurance: Marsh

Lawyers to the borrower: Steel Hector & Davis

Lawyers to the lenders: Skadden Arps Slate Meagher & Flom