Progress Energy, through its Progress Ventures affiliate, closed a $440 million portfolio deal on 21 March. The deal is the first time that Progress has encountered the syndicated project finance and the experience has been ? to say the least ? educational. The transaction is also the first big-ticket project financing in the US power market by arranger JP Morgan Chase since a pre-merger Chase closed the Liberty deal at the end of 2000.

Progress has been formed through the merger of CP&L and Florida Progress Corporation, two mid-sized utilities serving the Carolinas and Florida. Like its neighbours, Southern, TECO and FPL Corporation, it wants to capture a slice of the wholesale market in the hitherto completely (and still largely) regulated southeastern US power markets. Its vehicle for unregulated energy investments is Progress Ventures, which handles merchant generation, energy marketing and fuel properties.

For Progress the key concept in the deal is the relationship. The old Chase's slogan was that the right relationship is everything, and Progress appears to have taken up this mantra enthusiastically. JP Morgan snared the arranging mandate as the back best positioned to use its balance sheet on its client's behalf, and most able to gain from ancillary business.

Morgan responded by putting together an impressive, and innovative, off balance sheet structure in which debt was treated as an ownership interest. The deal was superficially similar to synthetic leasing, at least similar enough to be an uncomfortable prospect in a post-Enron environment. Given, however, Citi's (albeit difficult) close of a project/synthetic financing for FPL's RISEP deal, participant wariness was probably more extensive.

Progress' portfolio is scattered throughout the Carolinas, Florida and Georgia, and Ventures is, for the time being, unlikely to move far outside of its service territory. It has been unusually unwilling to publicly release details of the plants covered by the facility, although a November 2001 Federal Energy Regulatory Commission (Ferc) filing indicates that it formed a subsidiary, Progress Genco Ventures, with five plants:

? Effingham, a 537MW plant located in Georgia, interconnected to Savannah Electric and Power, with an in-service date of June 2002

? Rowan, a 500MW plant located in North Carolina, interconnected to Duke Energy, and in operation

? DeSoto, a 320MW plant located in Florida, with a tolling agreement through FPL

? Monroe, a 160MW plant in Georgia, interconnected with Georgia Power

Several plants are simple-cycle peaker facilities, which are notoriously hard to finance, and whilst Progress wants to keep between 75% and 85% under contract, agreements were apparently not immediately included in the financing structure.

An initial approach to the market was made at the time of the filing, and participant response was initially cool. Several banks, including some that effectively came in on the facility, were highly critical of the syndication approach taken by the arranger. Perhaps missing familiar faces at the bank meeting, some believed that Morgan had pitched corporate, rather than project bankers, on the deal. One commented, only half-jokingly, that JP Morgan Chase had lost touch with its audience after such a long absence.

Tom Sullivan, treasurer at Progress Energy, stresses that the potential lenders were all banks with records in project finance lending. They were, therefore, the infuriatingly choosy universe of lenders familiar to Progress' peers. Credit committees look very dimly upon US risk at present, especially peaker plants with, as the initial draft suggested, five year power purchase agreements on a five-year deal.

The arranger and the sponsor tweaked the deal over the end of 2001 and the start of this year to make it more palatable. The first aspect to go was the aggressive company structure. To be fair to Progress, although this has not been confirmed by Sullivan, the sponsor has been undergoing a reorganisation, especially with regard to the Monroe station, formerly owned by CP&L. The portfolio was to have included the 720MW Richmond station, but North Carolina regulators blocked the transfer. This suggests one reason behind the reduction of the facility from $480 million to its final size. Another Ferc filing says that the main reason behind the reorganisation was to improve Progress' tax profile.

The contractual structure also emerged in a cleaner form, especially with regard to the offtake agreement, now understood to be essentially a Progress credit. Another lingering area of doubt lay with the contractor on the portfolio, Gemma Power, a well-known, but thinly capitalised, contractor. Gemma's obligations are also understood to carry a Progress wrap. Structural adjustments tended to cross credit desks piecemeal, possibly worrying bankers used to dealing with tidy and voluminous info memos. Sullivan says ?this is a reasonably fair description of the process, but it was symptomatic of the events occurring in the marketplace at the time and the fact that we deemed it necessary to make changes after the initial deal structure was launched based upon feedback from the bank group.?

Despite, or perhaps because of, this mauling, the deal that emerges is exceptionally strong, and now closer in spirit to the recently completed Southern Power deal (sold on, again by Citi) than a complex structured deal. The deal is very conservatively leveraged since, as Sullivan explains, ?we'd like to have the option of a capital markets take-out of this facility and that will require a strong rating?. It sold down solidly and was oversubscribed to a list of banks, some of which make a rare appearance at agent level.

The list has not been publicly released but is understood to include NordLB, TD Securities, Fleet and DZ at the top level; Bank of Scotland, Royal Bank of Scotland, Fortis and BNP Paribas at the next tier and Scotia, Tyco and BankOne below that. Progress should be pleased to have raised its money without having to pull the deal, or flex the pricing, although its future plans are hazy and distant. One good reason for a lull would be to ensure that Progress' rating is maintained. Moody's Investors Service has assigned a negative outlook to its Baa1 rating, partly as a result of this increase in merchant activity.

Banks committing at a top level, particularly those without a bond franchise, are committing to the deal largely for what the status says to bank and sponsor peers. However, JP Morgan, after a lull, will return soon with the Attala mandate, which is still slated to have a leveraged lease structure.