FPL Energy has closed a $400 million construction financing that is much changed since its first incarnation, but may even have benefited from the dearth of high quality paper. Indeed, so tightly structured is it that it resembles a corporate deal ? albeit one with an attractive premium.

FPL Energy is best known as the largest wind developer in the US, but also has a substantial gas-fired fleet. It originally approached banks at the end of 2001 with an ambitious plan for an open-ended construction revolving credit, along the lines of those completed by Calpine and NRG Energy. Scotia Capital, a veteran of the structure, and Citigroup were originally slated to lead.

However, the underwriting requirement proved substantial, and Citi dropped out, to be replaced by Royal Bank of Scotland, looking to expand its role in the US power market. FPL certainly demonstrated a more pragmatic attitude than initial rumours suggested.

The two mandated leads, joined at the beginning of the year by Credit Suisse First Boston and ANZ Investment Bank as lead arrangers, eventually produced a smaller, tighter deal ? one designed to sell strongly into the market. The ultimate financing is a triumph of realism when confronted by a nervous and wary syndication market. Indeed, even the offtake agreement was designed, and priced, expressly with bank lenders in mind.

Funding vehicle FPL Energy Construction Funding LLC owns two project companies. The first owns the Marcus Hook plant, a 744MW combined-cycle cogen plant located inside a Sunoco refinery on the Delaware/Pennsylvania border. The refinery acts as the plant's steam host, but does not directly dispatch power from the plant, which uses GE 7F technology.

The second plant is the Calhoun facility, located in Alabama, a 668MW peaker. This has a contract with Southern Company subsidiary Alabama Power, the load-serving entity for the region. Calhoun's revenue streams are based on availability payments from Alabama Power, to avoid the dispatch problems that have plagued many plants operating in the southeastern US.

However, both plants are backstopped by a tolling agreement with FPL EMI, FPL Group's marketing arm, which therefore carries an A-/A2 (S&P/Moody's) rating. The tolling agreement kicks in straight away on the Marcus Hook plant, which is still in construction, and takes over after the end of the Alabama Power power purchase agreement (PPA) on Calhoun.

The plants' debt is structured as a single mini-perm loan with a term of construction plus 3.5 years, making a total 5-year tenor. While Calhoun is operational, Marcus Hook is still in construction, with a scheduled completion date of 14 May 2004, and a final acceptance date of 15 February 2005. Marcus Hook's contractor is Shaw/Stone & Webster, which has had credit difficulties in the past, with the result that FPL Group is guaranteeing completion.

However, the deal will leave about 80% of the debt on the plant outstanding at maturity, and carries distribution tests rather than a full cash sweep. This refinancing risk is mitigated by the fact that the tolling agreements on the plants are designed to pay off debt and carry a two-year tail. This means that while a bond refinancing is a possibility, there would be little difficulty for banks to roll over the debt and be reasonably assured of repayment.

This is only one example of the ways in which the financing has been informed by the current workout process, which has forced the sharper banks to demand and offer cleaner structures. This has been most obvious in the mechanism by which the borrower seeks, and hopefully obtains, consents and waivers. Moreover, there are trigger events whereby FPL may have to pay out if it does not meet certain corporate financial ratios, but no ratings triggers.

The mandated leads, however, were keenly aware of the need to come to market with a solid finished deal, one which would not make the halting progress, punctuated by periodic changes in pricing and terms, faced by large financings in the past. This deal, while carrying provisions to flex, was priced, and structured, to go.

Indeed the leads anticipated a syndication process that would bring in a larger haul of co-arrangers, and a smaller retail stage. Anecdotal evidence suggests, however, that many of the second-tier banks, those looking to parlay co-arranging slots into smaller lead roles, are cutting back on exposure and activity.

The leads underwrote most of the debt, with Scotia and RBS taking $100 million each (reduced to a $20 million final allocation), ANZ taking $75 million (cut back to $17 million), and CSFB $62.5 million (also cut to $17 million). Three arrangers ? Bank of Scotland, Mizuho and Nord/LB ? took $15 million, and were brought in by invitation, although they do not apparently share league table status.

KfW, KBC, BBVA, Helaba, HSH Nordbank, Landesbank Baden-Wurttemberg, Lloyds TSB, New York Life, UFJ, Fleet, CIT and Allied Irish Banks all took co-arranger slots for a 75bp fee and a final allocation of $14 million, except for KfW, which took $15 million. Co-agents Arab Banking, Bayerissche Landesbank, credit Lyonnais, Erste Bank, Raffeisenlandesbank Upper Austria and SMB finished at $12 million for a 50bp fee. Finally, participations of $10 million came from Bank Hapolaim, Sovereign Bank, Caixanova and Caja Madrid. The loan is priced at 175bp over Libor during construction and 200bp thereafter.

The deal sold better as a project financing than a corporate loan, given the analysis required. The leads approached regional supporters of FPL but found little enthusiasm here, despite the fact that the deal could be pitched, and booked, as a premium corporate asset. The funding vehicle's low leverage ? 44% ? also made its debt attractive.

Bankers should not look out for further project paper from FPL in the near future. Nevertheless, the deal represents a welcome bright spot in an otherwise depressed market.

---

FPL Energy Construction Funding LLC

Status: Closed July 2 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, ANZ, CSFB

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