Southern Power
North America Project Bond
Deal of the Year 2002
Southern Power
The capital markets are assumed to be closed to US power developers after a collapse in confidence in the sector, and doubts about future power prices. If this situation is universal, investors have been able to get the message through to Southern Power. Southern's inaugural bond issue was oversubscribed, increased, and was one of the few true genco financings, and the only one with meaningful construction risk, to close this year.
Southern Power is the new vehicle for non-regulated asset development at Southern Company. Southern, together with FPL Energy, Entergy and Progress Energy, dominates the power markets of the southeastern US. It owns the regional utilities Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric.
Southern also set up the merchant generation player that would become Mirant, and profited mightily from its spin-off at the height of the merchant power boom. Mirant has since gone through a painful process of retrenchment, and Southern finance officials, many of whom worked alongside the Mirant personnel, are sympathetic to their situation. Southern Power, however, is a more focused, less ambitious, play, one designed to be more in tune with Southern's core utility strengths.
Its genesis is the request for capacity put out by Southern's utility arms, for plants located within its service territory. The process was transparent, and was open to all interested generating players, but Southern's newly-formed development division was the clear favourite to pick up the bulk of the contracts, and did so. All but one went to Southern Power, the lone exception being Dynegy's ability to secure an offtake deal. The power purchase agreements have terms of between 4 and 15 years.
While there is a temptation to decry the lock on the regional power market held by Southern and its peers, there is little in the way of regulation that can overcome the competitive advantage held by experienced and grounded local utility developers. Moreover, the bid process probably offered the best chance of securing competitive terms for consumers.
Southern Power plans to have 10,000MW online by the end of 2010, and will concentrate upon having firm contracts lined up for its power. In this goal lender sentiment, Southern's own preference, and the likely regulatory environment in the southeast are probably in conjunction. Southern wants to have half of its planned capacity online by the end of this year, so its growth plans are more realistic than those of its predecessor ? little surprise so long as Southern Power does not have to satisfy a picky retail equity base.
Southern's portfolio consists of a number of modern, efficient gas-fired plants, since gas is the fuel of choice in the region. All of them have their development and construction managed by Southern Company, which has a long track record of construction on its own books. The facilities to be constructed are Goat Rock 1+2 (1,286MW), Wansley (1,134MW), Dahlberg (810MW) and Autaugaville 1+2.
The initial construction work was funded through a bank financing led by Citigroup. This $850 million revolving credit resembled earlier deals from Calpine and NRG, but with a far higher level of sponsor support. As of September 2002, Southern had drawn down $500 million from this facility. It has the ability to draw down more under the covenants, since the note issue goes some of the way towards paying down earlier draws.
The bank deal had another useful side benefit, in that it enabled the banks to put in place some of the rules and ratings-related adjustments that would make a bond issue run more smoothly. It received a public rating ? still something of a rarity for a project finance loan ? of Baa1 from Moody's Investors Service.
The covenant structure on the loan extended into the bond indenture and carried roughly the same provisions as other generation companies. It is similar in style to a corporate financing, an impressive feat since Southern Power does not boast the fuel or geographical diversity of its peers. It is also exposed to fair degree of construction risk.
At least some of this is mitigated by the fact that Southern Company, through its operations and management arm, guarantees completion on the plants. Offtake risk is largely in the hands of Southern Company, which will guarantee, where possible, the power purchase obligations of its utility subsidiaries. Indeed the utility operations and dispatch of power plants are coordinated to a high degree by Southern Company HQ in Atlanta.
Southern Company, moreover, needs to keep a high proportion of equity in the structure ? recourse debt cannot stand at more than 60% of total capitalisation. Southern is also unable to take more than 10% of the portfolio's capacity out ? in theory keeping a high level of collateral in the vehicle. However asset additions and removals can take place according to upfront criteria, so that lender approval is not automatically required.
The final important restriction is that 80% of the portfolio's cashflows should be derived from contracted power, and that dividend streams would be restricted if this did not happen. This eased considerably the ratings pressure on what was 10-year bullet refinancing risk.
Bookrunner on the bonds was Citibank/Salomon Smith Barney, joined by Lehman Brothers. The deal was several times oversubscribed, and came in with pricing of 137.5bp over the 10-year treasury. Indeed the issue was increased from $560 million to $575 million as a result of strong investor demand.
Southern is now in possession of a construction vehicle that with luck will not have to be restructured and a solid investor following. It plans a second issue in June of this year but could wait if lender sentiment turns particularly nasty. It has also started aa commercial paper programme, assigned a P-2 rating from Moody's. If Southern Power wanted to take over the rest of the US the assumption must be that at these terms the banks would be quite happy to follow.
Southern Power Company
Status: closed June 2002
Size: $575 million
Location: southeastern US
Description: partial bond refinancing of existing construction debt for a contrated portfolio of gas-fired assets
Sponsor: Southern Company
Bookrunners: Citigroup, Lehman Brothers
Maturity: 10 years
Lawyers to the lenders: Dewey Ballantine
Lawyers to the sponsor: Balsch & Bingham
Market consultant: PA Consulting
Deal of the Year 2002
Southern Power
The capital markets are assumed to be closed to US power developers after a collapse in confidence in the sector, and doubts about future power prices. If this situation is universal, investors have been able to get the message through to Southern Power. Southern's inaugural bond issue was oversubscribed, increased, and was one of the few true genco financings, and the only one with meaningful construction risk, to close this year.
Southern Power is the new vehicle for non-regulated asset development at Southern Company. Southern, together with FPL Energy, Entergy and Progress Energy, dominates the power markets of the southeastern US. It owns the regional utilities Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric.
Southern also set up the merchant generation player that would become Mirant, and profited mightily from its spin-off at the height of the merchant power boom. Mirant has since gone through a painful process of retrenchment, and Southern finance officials, many of whom worked alongside the Mirant personnel, are sympathetic to their situation. Southern Power, however, is a more focused, less ambitious, play, one designed to be more in tune with Southern's core utility strengths.
Its genesis is the request for capacity put out by Southern's utility arms, for plants located within its service territory. The process was transparent, and was open to all interested generating players, but Southern's newly-formed development division was the clear favourite to pick up the bulk of the contracts, and did so. All but one went to Southern Power, the lone exception being Dynegy's ability to secure an offtake deal. The power purchase agreements have terms of between 4 and 15 years.
While there is a temptation to decry the lock on the regional power market held by Southern and its peers, there is little in the way of regulation that can overcome the competitive advantage held by experienced and grounded local utility developers. Moreover, the bid process probably offered the best chance of securing competitive terms for consumers.
Southern Power plans to have 10,000MW online by the end of 2010, and will concentrate upon having firm contracts lined up for its power. In this goal lender sentiment, Southern's own preference, and the likely regulatory environment in the southeast are probably in conjunction. Southern wants to have half of its planned capacity online by the end of this year, so its growth plans are more realistic than those of its predecessor ? little surprise so long as Southern Power does not have to satisfy a picky retail equity base.
Southern's portfolio consists of a number of modern, efficient gas-fired plants, since gas is the fuel of choice in the region. All of them have their development and construction managed by Southern Company, which has a long track record of construction on its own books. The facilities to be constructed are Goat Rock 1+2 (1,286MW), Wansley (1,134MW), Dahlberg (810MW) and Autaugaville 1+2.
The initial construction work was funded through a bank financing led by Citigroup. This $850 million revolving credit resembled earlier deals from Calpine and NRG, but with a far higher level of sponsor support. As of September 2002, Southern had drawn down $500 million from this facility. It has the ability to draw down more under the covenants, since the note issue goes some of the way towards paying down earlier draws.
The bank deal had another useful side benefit, in that it enabled the banks to put in place some of the rules and ratings-related adjustments that would make a bond issue run more smoothly. It received a public rating ? still something of a rarity for a project finance loan ? of Baa1 from Moody's Investors Service.
The covenant structure on the loan extended into the bond indenture and carried roughly the same provisions as other generation companies. It is similar in style to a corporate financing, an impressive feat since Southern Power does not boast the fuel or geographical diversity of its peers. It is also exposed to fair degree of construction risk.
At least some of this is mitigated by the fact that Southern Company, through its operations and management arm, guarantees completion on the plants. Offtake risk is largely in the hands of Southern Company, which will guarantee, where possible, the power purchase obligations of its utility subsidiaries. Indeed the utility operations and dispatch of power plants are coordinated to a high degree by Southern Company HQ in Atlanta.
Southern Company, moreover, needs to keep a high proportion of equity in the structure ? recourse debt cannot stand at more than 60% of total capitalisation. Southern is also unable to take more than 10% of the portfolio's capacity out ? in theory keeping a high level of collateral in the vehicle. However asset additions and removals can take place according to upfront criteria, so that lender approval is not automatically required.
The final important restriction is that 80% of the portfolio's cashflows should be derived from contracted power, and that dividend streams would be restricted if this did not happen. This eased considerably the ratings pressure on what was 10-year bullet refinancing risk.
Bookrunner on the bonds was Citibank/Salomon Smith Barney, joined by Lehman Brothers. The deal was several times oversubscribed, and came in with pricing of 137.5bp over the 10-year treasury. Indeed the issue was increased from $560 million to $575 million as a result of strong investor demand.
Southern is now in possession of a construction vehicle that with luck will not have to be restructured and a solid investor following. It plans a second issue in June of this year but could wait if lender sentiment turns particularly nasty. It has also started aa commercial paper programme, assigned a P-2 rating from Moody's. If Southern Power wanted to take over the rest of the US the assumption must be that at these terms the banks would be quite happy to follow.
Southern Power Company
Status: closed June 2002
Size: $575 million
Location: southeastern US
Description: partial bond refinancing of existing construction debt for a contrated portfolio of gas-fired assets
Sponsor: Southern Company
Bookrunners: Citigroup, Lehman Brothers
Maturity: 10 years
Lawyers to the lenders: Dewey Ballantine
Lawyers to the sponsor: Balsch & Bingham
Market consultant: PA Consulting
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