North American Single-Asset Power Deal of the Year 2001
Three separate deals share the honours as the best single-asset
financing in 2001 ? Cottonwood, Magnolia and Rebud. InterGen's
three standalone financings, which were syndicated separately but
essentially mandated together, are the most innovative response yet
to the predicament of pure independent power producers operating in
merchant markets. That a sponsor with so little in the way of
ancillary capital markets business to offer can build up such a
loyal bank following is a tribute to InterGen's structural savvy.
InterGen's entry into the US markets is a late one. At least part of the reason for this is historical ? InterGen started life as the international side of a Bechtel/PG&E joint venture whose US side became the National Energy Group. The other is that this (now) Shell and Bechtel joint venture has little of the clout or the balance sheet to build up a large portfolio.
Panda Energy and Tenaska, both privately held, have reacted by bringing in better capitalised partners ? TECO and Mitsubishi respectively ? on selected ventures. InterGen, however, does have an advantage in its relationship with Coral Energy, the trading arm of 68% parent Shell. Coral is that rarity in the merchant marketplace, a triple-A credit.
But while a straightforward tolling agreement, not to mention a watertight EPC contract with Bechtel, would have driven down the cost of capital substantially, it would not have provided much in the way of operational or financial flexibility. The solution lay in using this marketing experience to reap any upside from merchant market fluctuations whilst creating a fluid capital structure that gives comfort to banks depending on how the plant operates.
The borrowing base approach has its precedents in the oil and gas industry, and was a response to the difficulty of creating a stable and affordable financial profile when selling on to spot markets. Its essence is that leverage, expressed as either the debt-to-equity ratio or the distributions available to the sponsor, varies according to the level of contracted output and forward and historical price levels.
InterGen, together with financial advisor Deutsche Bank, put together a structure on the first deal, Cottonwood, based on the premise that it would create a structure with debt service coverage of 1.5 times. But merchant plants traditionally require at least 2.2 times coverages to be financeable. Any adverse changes in the mix of contracted and uncontracted output ? or in forward prices ? would trap cash at the project level. Or, to put it another way, InterGen is willing to forgo equity distributions to maintain the economics of the project as it was originally pitched to lenders.
The three plants are located in the south-central region of the US. Cottonwood, a 1200MW combined cycle gas-fired plant, is sited in the sliver of Texas that is not part of the ERCOT power pool. Redbud is a 1100MW plant in Luther, Oklahoma, that sells into the SERC-TVA pool, and Magnolia is a 900MW facility sited in Benton County, Mississippi, that also sells into SERC. All three are under construction by Bechtel.
The effect of the borrowing base is first reflected in the debt commitment for each plant ? the headline figures of $568 million (Cottonwood), $430 million (Magnolia) and $402 million (Redbud) are simply the maximum level of debt that can be taken out on the facilities. The first change comes at the end of construction, when an initial gearing level is set based on contracts in place. From then on, alterations to the capital structure come more in the form of blocks on distributions. The allowed distributions are set according to periodic reviews of forward and historical prices.
InterGen's plan's for Cotonwood are a good indication of the profile that it will eventually use for the plants. It wants to run the plant with a mix of 25% of output sold on the day-ahead market, 30% contracted or hedged out to three years or more, and the remaining 45% to swing between short and long-term contracts. The financing includes a merchant liquidity reserve ? good for six months' interest payments ? that is an additional source of comfort for banks.
The first leads to be mandated were Deutsche and BNP Paribas, who last worked with InterGen on the Bajio deal. However, shallowness in the syndications market meant that the sponsor effectively mandated the other plants at the same time. Intergen sees its core bank group in terms of rotating top slots, so that the lead arrangers have to commit at a lower level on subsequent financings. So, in return for lower level participation in the Cottonwood deal, Dresdner Kleinwort Wasserstein and Citibank Salomon Smith Barney took the top slot on Redbud and ABN Amro and Credit Lyonnais were the leads on Magnolia.
There is very little to separate the deals in terms of their structure. Indeed sources close to Intergen say that it saved a large amount of money in legal fees for the subsequent financings. The only major difference is that the tenor available on the final two, construction plus eight years, is two years longer than that on Cottonwood. This may have been down to greater comfort and familiarity in the bank market for the later ones, but InterGen says that the difference is more attributable to avoiding a clogged up refinancing window when the debt matures.
There is no set plan about when the plants will be refinanced, although at this point the capital markets would be a possibility. There is a cash sweep embedded in the financing that starts in year six on Magnolia and Redbud. The pricing also steps up over the life of the loans, starting at 162.5bp over libor during construction, 175bp for years three to five, 250bp for years six to seven and 275bp thereafter.
The influence of the structure has been immediate. Not only has it been copied for InterGen's cross-border La Rosita project, but it has been enthusiastically adopted by NRG Energy on both its $2 billion construction revolver and the single-asset McClain deal. If current poor reception of portfolio deals in the bank market continues, more sponsors will pile into the structure.
InterGen North America
Status: closed February, October and December 2001
Size: $2.2 billion
Location: Texas, Oklahoma and Mississippi, USA
Description: standalone financing for three merchant plants using a rotating bank group and a borrowing base capital structure
Sponsor: InterGen
Debt: $1.548 billion, in three facilities, in a mixture of construction loans and equity bridges
Arrangers: Deutsche Bank, BNP Paribas (Cottonwood), Citigroup, Dresdner Kleinwort Wasserstein (Redbud), ABN Amro, Credit Lyonnais (Magnolia)
Maturity: 8 years (Cottonwood), 10 years (Magnolia and Redbud)
Lawyers to the sponsor: Bracewell & Patterson
Lawyers to the lenders: Dewey Ballantine
Independent engineer: RW Beck
Market consultant: PACE Global Energy
InterGen's entry into the US markets is a late one. At least part of the reason for this is historical ? InterGen started life as the international side of a Bechtel/PG&E joint venture whose US side became the National Energy Group. The other is that this (now) Shell and Bechtel joint venture has little of the clout or the balance sheet to build up a large portfolio.
Panda Energy and Tenaska, both privately held, have reacted by bringing in better capitalised partners ? TECO and Mitsubishi respectively ? on selected ventures. InterGen, however, does have an advantage in its relationship with Coral Energy, the trading arm of 68% parent Shell. Coral is that rarity in the merchant marketplace, a triple-A credit.
But while a straightforward tolling agreement, not to mention a watertight EPC contract with Bechtel, would have driven down the cost of capital substantially, it would not have provided much in the way of operational or financial flexibility. The solution lay in using this marketing experience to reap any upside from merchant market fluctuations whilst creating a fluid capital structure that gives comfort to banks depending on how the plant operates.
The borrowing base approach has its precedents in the oil and gas industry, and was a response to the difficulty of creating a stable and affordable financial profile when selling on to spot markets. Its essence is that leverage, expressed as either the debt-to-equity ratio or the distributions available to the sponsor, varies according to the level of contracted output and forward and historical price levels.
InterGen, together with financial advisor Deutsche Bank, put together a structure on the first deal, Cottonwood, based on the premise that it would create a structure with debt service coverage of 1.5 times. But merchant plants traditionally require at least 2.2 times coverages to be financeable. Any adverse changes in the mix of contracted and uncontracted output ? or in forward prices ? would trap cash at the project level. Or, to put it another way, InterGen is willing to forgo equity distributions to maintain the economics of the project as it was originally pitched to lenders.
The three plants are located in the south-central region of the US. Cottonwood, a 1200MW combined cycle gas-fired plant, is sited in the sliver of Texas that is not part of the ERCOT power pool. Redbud is a 1100MW plant in Luther, Oklahoma, that sells into the SERC-TVA pool, and Magnolia is a 900MW facility sited in Benton County, Mississippi, that also sells into SERC. All three are under construction by Bechtel.
The effect of the borrowing base is first reflected in the debt commitment for each plant ? the headline figures of $568 million (Cottonwood), $430 million (Magnolia) and $402 million (Redbud) are simply the maximum level of debt that can be taken out on the facilities. The first change comes at the end of construction, when an initial gearing level is set based on contracts in place. From then on, alterations to the capital structure come more in the form of blocks on distributions. The allowed distributions are set according to periodic reviews of forward and historical prices.
InterGen's plan's for Cotonwood are a good indication of the profile that it will eventually use for the plants. It wants to run the plant with a mix of 25% of output sold on the day-ahead market, 30% contracted or hedged out to three years or more, and the remaining 45% to swing between short and long-term contracts. The financing includes a merchant liquidity reserve ? good for six months' interest payments ? that is an additional source of comfort for banks.
The first leads to be mandated were Deutsche and BNP Paribas, who last worked with InterGen on the Bajio deal. However, shallowness in the syndications market meant that the sponsor effectively mandated the other plants at the same time. Intergen sees its core bank group in terms of rotating top slots, so that the lead arrangers have to commit at a lower level on subsequent financings. So, in return for lower level participation in the Cottonwood deal, Dresdner Kleinwort Wasserstein and Citibank Salomon Smith Barney took the top slot on Redbud and ABN Amro and Credit Lyonnais were the leads on Magnolia.
There is very little to separate the deals in terms of their structure. Indeed sources close to Intergen say that it saved a large amount of money in legal fees for the subsequent financings. The only major difference is that the tenor available on the final two, construction plus eight years, is two years longer than that on Cottonwood. This may have been down to greater comfort and familiarity in the bank market for the later ones, but InterGen says that the difference is more attributable to avoiding a clogged up refinancing window when the debt matures.
There is no set plan about when the plants will be refinanced, although at this point the capital markets would be a possibility. There is a cash sweep embedded in the financing that starts in year six on Magnolia and Redbud. The pricing also steps up over the life of the loans, starting at 162.5bp over libor during construction, 175bp for years three to five, 250bp for years six to seven and 275bp thereafter.
The influence of the structure has been immediate. Not only has it been copied for InterGen's cross-border La Rosita project, but it has been enthusiastically adopted by NRG Energy on both its $2 billion construction revolver and the single-asset McClain deal. If current poor reception of portfolio deals in the bank market continues, more sponsors will pile into the structure.
InterGen North America
Status: closed February, October and December 2001
Size: $2.2 billion
Location: Texas, Oklahoma and Mississippi, USA
Description: standalone financing for three merchant plants using a rotating bank group and a borrowing base capital structure
Sponsor: InterGen
Debt: $1.548 billion, in three facilities, in a mixture of construction loans and equity bridges
Arrangers: Deutsche Bank, BNP Paribas (Cottonwood), Citigroup, Dresdner Kleinwort Wasserstein (Redbud), ABN Amro, Credit Lyonnais (Magnolia)
Maturity: 8 years (Cottonwood), 10 years (Magnolia and Redbud)
Lawyers to the sponsor: Bracewell & Patterson
Lawyers to the lenders: Dewey Ballantine
Independent engineer: RW Beck
Market consultant: PACE Global Energy
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