The £257 million loan backing Conoco's Immingham combined heat and power (CHP) project launched to syndication at the end of February ? despite the challenges of a severely depressed UK power market. The deal, lead arranged by Royal Bank of Scotland, is the first new independent power project (IPP) to have reached financial close since the introduction of the UK's new electricity trading arrangement (NETA) last spring. The deal was signed at the end of January, and syndication is expected to close within weeks.

The realities of the UK power market ? characterised over the last three years by distressed divestments and fierce competition which have sent market prices plunging ? are daunting. Coupled with high fuel prices, this has led to a worryingly low spark spread for power developers. At the same time, the new trading arrangement has exposed generators to unpredictable balancing mechanism prices. In all, this has severely tested the cover ratio limits of many single asset deals.

RBS' structure for Immingham, however, takes such market realities into account. Moreover, the deal benefits from an unprecedented technological advantage ? its combined heat and power (CHP) design. Says a source close to the deal, ?no doubt it has been launched at a very interesting and challenging time for merchant power, but one thing that's unquestionably in its favour is that it's a CHP plant ? a fact that puts it in a different market than existing IPPs.?

In fact, the sponsor's decision to pursue the project followed the UK government's decision to exempt good quality CHP schemes from the controversial climate change levy ? a fact that could mean ?very substantial savings?, according to a banker familiar with the deal.

According to Conoco, CHP technology is ?one of the cleanest and most efficient ways to generate power?. It reduces emissions of harmful gases such as carbon dioxide, sulphur dioxides and nitrogen oxides. By making use of refinery by-products, it also reduces gas flaring and fresh water consumption ? such plants use natural gas-fired combustion turbines to generate power; the steam produced from exhaust turbine energy is in turn used to generate additional power, as well as heat for industrial use.

Ultimately, the plant is expected to be one of the largest CHP plants in Europe, and will be the largest of its kind in the UK.

As relevantly, CHP plants are capable of producing highly competitive prices, notes RBS (although the possible sites that can sustain the plants, given their substantial water requirements, are limited). As such, its design contributes significantly to its bankability. But in the current environment, any greenfield development, it seems, is effectively a bet on such specific technological or locational advantages (of particular benefit to individual schemes), as much as on the extent of existing capacity retirement.

The Immingham deal comprises a 20-year term loan for £232 million and there are also £25 million of working capital and standby facilities. The debt/equity split is 63/37 with equity being injected upfront. The pricing starts at 130bp and notches up to 175bp over the life of the loan. This is roughly in line with market expectation, and reflects the downturn in electricity and financial markets.

The base case annual debt service cover ratio is 2:1. This is based on a forward price curve, which fully takes into account the current price trough. The plant is a merchant facility that will sell most of its output directly into the market. As a control mechanism on the deal, the project company is required to enter into sales contracts to meet debt service requirements.

Conoco is understood ultimately to be making a £500 million commitment to the project, reflecting the heightened level of sponsor support needed to get deals done in the new environment.

The NETA framework is particularly stringent on new plant commissionings ? given its tight control over power supply, which could be difficult to meet, especially with the technical difficulties common to infant plants.

Given the dispatch risk and counterparty credit risks that the new arrangement throws up, devising the right strategy is key for both developers and lenders. The solution lies in the strength of a company's power trading operations, as much as in the kinds of power contracts ultimately negotiated. 90% of Immingham's output will go straight to the National Grid, supported by what one banker describes as ?a very clear and flexible trading regime?.

Conoco will trade power as well as operating the plant. Shell is providing the bulk of the gas under a long-term contract. The remainder will be bought on a merchant basis by the project company.

15% of the plant's revenues will come from steam and power through 15-year contracts with Cononco's Humber refinery at Killingholme, and TotalFinaElf's Lindsey oil refinery nearby. The prices and volumes are not fixed, since the contracts are based on refinery requirement. The Immingham refinery will buy both steam and power while Lindsey is to purchase only steam. Conoco also produces 200,000 t/y of benzene at its Humber complex.

The 730MW facility is constructed by EPC contractor FosterWheeler, and will employ GE 9FA turbines. Conoco is understood to be providing completion guarantees for the construction contract.

Completion is expected for 2004.