Alphagen
Americas Project Lease Deal of the Year 2002
Alphagen
A combined lease and private placement issue, Kinder Morgan president Anthony Lannie, restricts his comments on the $194.25 million combined bond/lease financing of the 535MW CCGT Alphagen project closed on 24 April 2002 to ?Yes [he would do it again]?.
The Kinder Morgan deal is essentially a US capital markets transaction within a US leveraged lease, and although rare, not in itself unique. Where Alphagen differs from past transactions is that the project is structured with five different equity classes, all providing for contingent equity contributions in the event that specific risks are realised.
Many leveraged lease financings are sale-leaseback transactions. In their simplest form, they involve the issuance by a newly formed, special-purpose bankruptcy-remote vehicle (SPV) (traditionally an owner or business trust, but increasingly a limited liability company, called the owner lessor) of limited recourse debt, whether directly or through a pass-through trust. In combined lease/bond deals the special purpose vehicle simply issues bonds to cover the debt portion of the deal.
In the Alphagen structure, Kinder Morgan Power, a subsidiary of Kinder Morgan, is building the $364.1 million plant but the facility is owned by AlphaGen Power LLC, a special-purpose lessor owned by the CIT Group: in structural terms Alphagen is therefore the construction company/owner prior to lease commencement. Alphagen has a 40-year lease agreement with a single-purpose limited liability company, Triton Power Michigan LLC (the construction agent prior to lease commencement). In turn, Kinder Morgan Power is developer, contractor and sponsor for Triton Power.
There are numerous drivers behind Alphagen-like transactions. Lease equity provides a favourable tax position with the equity holders receiving part of the depreciation expenses of the deal. For them the benefit lies in the tax deduction derived from the ownership of a depreciable asset, as well as in the expected rate of return through the lease payments. And equity providers tend to like the way these deals match the revenue stream on the one side with the expenses on the capital side.
The format also offers a number of advantages for the sponsor. In the Kinder Morgan case there is favourable accounting treatment in a quasi off-balance sheet format: resembling something between an asset financing and a project finance capital markets transaction. As a result the project no longer hits the company's after tax earnings.
Those deals done within a project finance structure also allow for an off-credit ruling from the ratings agencies. Consequently, in some cases there is the possibility of sponsors obtaining a higher debt rating than their own on the owner/lessor debt, and therefore an even greater reduction in borrowing cost.
Alphagen finances the 535MW combined-cycle Triton plant, in Jackson, Michigan. The facility has signed a 16-year tolling agreement with Williams Energy Trading and Marketing, owned and guaranteed by the Williams Companies. The 22-year financing therefore features a six-year merchant tail.
However, the financial structure has substantial liquidity built into it. The project has a traditional six-month debt service reserve. There is $24 million in committed contingent equity during the merchant period that can be drawn for a debt service shortfall fall, although if drawn, it will not be replenished. The transaction also has a cash trap that provides for all equity distributions to be trapped until the sum of the remaining committed contingent equity plus the trapped cash equals a full year's debt service reserve. Furthermore, there is a clawback in the deal that commits any past equity distributions during the merchant period up to $24 million to the project if needed. On this basis, Standard & Poor's concluded that the project has enough financial strength for a BBB- even with the merchant tail.
Equipment is being supplied under fixed-price contracts with GE and Deltak. Kvaerner Songer is carrying out site construction and The Washington Group is performing engineering and design.
The most interesting technical aspect of the plant is that it uses a proprietary turbine configuration, dubbed Orion. The configuration's chief benefit is that it enables the plant to start up extremely quickly and without undue stress to components, and to maintain a consistent heat rate. The turbines used are six GE LM6000 turbines and one GE Frame 7EA, as well as two steam turbines.
Given the speed with which the plant can be started up, it may be able to realise substantial premiums for providing rapid-response, yet cost-effective power. It also explains why Kinder Morgan managed the construction process.
The plant had some cost overruns but structures designed to deal with such issues, as well as the potential for a declining sponsor or offtaker credit, are among the chief innovations on the financial side.
The unique equity structure in Alphagen comprises four tranches of preferred equity and one tranche of common equity, portions of which are funded up front. These act as reserves that can be called upon should certain risks trigger them. Kinder Morgan Power funds all preferred equity positions with Kinder Morgan providing a guarantee. CIT and its partner, Investment Management Holdings (IMH), provide the lease equity.
Williams Energy has an option to purchase the class B equity and up to half of the class C equity at the end of the tolling period. If any contingent equity is called on, the common equity investors must pay out to maintain their 3% equity interest.
If either Kinder Morgan's or Williams' rating falls to ?BB', equity distributions to the party that was downgraded are trapped until its portion of the contingent equity commitment is cash reserved. Because cash collateral is not immediately posted, and because a downgrade to ?BB+' triggers no cash trap, any downgrades to a contingent equity provider could also lead to a downgrade of the project's rating.
Despite general market wariness over lease structures, and a difficult US power market generally, investor appetite for the Alphagen bond was strong: $250 million in orders versus the $194.25 million required. Nevertheless, the market is still split as to whether such deals have a future. Certainly the days of the synthetic power lease are gone. But true lease financing, as Alphagen demonstrates, remains a useful instrument.
AlphaGen Power LLC
Status: Closed 24 April 2002
Total Cost: $364.1 million
Location: Michigan, US
Description: Combined bond and US leveraged lease financing for a 535MW CCGT plant
Borrower: AlphaGen Power LLC
Sponsor: Kinder Morgan Inc
Total project debt: $194.25 million in senior secured bonds
Equity: Up to $162.8 million in funded equity contributions
Maturity: 22 years with approximately 13.5 year weighted average life
Sole placement agent: Citigroup
Lease equity: $58.5 million
Lease equity providers: CIT and Investment Management Holdings
Legal counsel to sponsor: Bracewell & Patterson
Legal counsel to lease equity: Winston & Strawn
Engineering consultancy: Harris
Alphagen
A combined lease and private placement issue, Kinder Morgan president Anthony Lannie, restricts his comments on the $194.25 million combined bond/lease financing of the 535MW CCGT Alphagen project closed on 24 April 2002 to ?Yes [he would do it again]?.
The Kinder Morgan deal is essentially a US capital markets transaction within a US leveraged lease, and although rare, not in itself unique. Where Alphagen differs from past transactions is that the project is structured with five different equity classes, all providing for contingent equity contributions in the event that specific risks are realised.
Many leveraged lease financings are sale-leaseback transactions. In their simplest form, they involve the issuance by a newly formed, special-purpose bankruptcy-remote vehicle (SPV) (traditionally an owner or business trust, but increasingly a limited liability company, called the owner lessor) of limited recourse debt, whether directly or through a pass-through trust. In combined lease/bond deals the special purpose vehicle simply issues bonds to cover the debt portion of the deal.
In the Alphagen structure, Kinder Morgan Power, a subsidiary of Kinder Morgan, is building the $364.1 million plant but the facility is owned by AlphaGen Power LLC, a special-purpose lessor owned by the CIT Group: in structural terms Alphagen is therefore the construction company/owner prior to lease commencement. Alphagen has a 40-year lease agreement with a single-purpose limited liability company, Triton Power Michigan LLC (the construction agent prior to lease commencement). In turn, Kinder Morgan Power is developer, contractor and sponsor for Triton Power.
There are numerous drivers behind Alphagen-like transactions. Lease equity provides a favourable tax position with the equity holders receiving part of the depreciation expenses of the deal. For them the benefit lies in the tax deduction derived from the ownership of a depreciable asset, as well as in the expected rate of return through the lease payments. And equity providers tend to like the way these deals match the revenue stream on the one side with the expenses on the capital side.
The format also offers a number of advantages for the sponsor. In the Kinder Morgan case there is favourable accounting treatment in a quasi off-balance sheet format: resembling something between an asset financing and a project finance capital markets transaction. As a result the project no longer hits the company's after tax earnings.
Those deals done within a project finance structure also allow for an off-credit ruling from the ratings agencies. Consequently, in some cases there is the possibility of sponsors obtaining a higher debt rating than their own on the owner/lessor debt, and therefore an even greater reduction in borrowing cost.
Alphagen finances the 535MW combined-cycle Triton plant, in Jackson, Michigan. The facility has signed a 16-year tolling agreement with Williams Energy Trading and Marketing, owned and guaranteed by the Williams Companies. The 22-year financing therefore features a six-year merchant tail.
However, the financial structure has substantial liquidity built into it. The project has a traditional six-month debt service reserve. There is $24 million in committed contingent equity during the merchant period that can be drawn for a debt service shortfall fall, although if drawn, it will not be replenished. The transaction also has a cash trap that provides for all equity distributions to be trapped until the sum of the remaining committed contingent equity plus the trapped cash equals a full year's debt service reserve. Furthermore, there is a clawback in the deal that commits any past equity distributions during the merchant period up to $24 million to the project if needed. On this basis, Standard & Poor's concluded that the project has enough financial strength for a BBB- even with the merchant tail.
Equipment is being supplied under fixed-price contracts with GE and Deltak. Kvaerner Songer is carrying out site construction and The Washington Group is performing engineering and design.
The most interesting technical aspect of the plant is that it uses a proprietary turbine configuration, dubbed Orion. The configuration's chief benefit is that it enables the plant to start up extremely quickly and without undue stress to components, and to maintain a consistent heat rate. The turbines used are six GE LM6000 turbines and one GE Frame 7EA, as well as two steam turbines.
Given the speed with which the plant can be started up, it may be able to realise substantial premiums for providing rapid-response, yet cost-effective power. It also explains why Kinder Morgan managed the construction process.
The plant had some cost overruns but structures designed to deal with such issues, as well as the potential for a declining sponsor or offtaker credit, are among the chief innovations on the financial side.
The unique equity structure in Alphagen comprises four tranches of preferred equity and one tranche of common equity, portions of which are funded up front. These act as reserves that can be called upon should certain risks trigger them. Kinder Morgan Power funds all preferred equity positions with Kinder Morgan providing a guarantee. CIT and its partner, Investment Management Holdings (IMH), provide the lease equity.
Williams Energy has an option to purchase the class B equity and up to half of the class C equity at the end of the tolling period. If any contingent equity is called on, the common equity investors must pay out to maintain their 3% equity interest.
If either Kinder Morgan's or Williams' rating falls to ?BB', equity distributions to the party that was downgraded are trapped until its portion of the contingent equity commitment is cash reserved. Because cash collateral is not immediately posted, and because a downgrade to ?BB+' triggers no cash trap, any downgrades to a contingent equity provider could also lead to a downgrade of the project's rating.
Despite general market wariness over lease structures, and a difficult US power market generally, investor appetite for the Alphagen bond was strong: $250 million in orders versus the $194.25 million required. Nevertheless, the market is still split as to whether such deals have a future. Certainly the days of the synthetic power lease are gone. But true lease financing, as Alphagen demonstrates, remains a useful instrument.
AlphaGen Power LLC
Status: Closed 24 April 2002
Total Cost: $364.1 million
Location: Michigan, US
Description: Combined bond and US leveraged lease financing for a 535MW CCGT plant
Borrower: AlphaGen Power LLC
Sponsor: Kinder Morgan Inc
Total project debt: $194.25 million in senior secured bonds
Equity: Up to $162.8 million in funded equity contributions
Maturity: 22 years with approximately 13.5 year weighted average life
Sole placement agent: Citigroup
Lease equity: $58.5 million
Lease equity providers: CIT and Investment Management Holdings
Legal counsel to sponsor: Bracewell & Patterson
Legal counsel to lease equity: Winston & Strawn
Engineering consultancy: Harris
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