Lenders view peaker plants, which come on- and off-line at short notice to capture value from spikes in wholesale electricity prices, as a very risky proposition. This deal, which mixes up a solid contractual element with an unprecedented series of enhancements, could well be a template deal for the 6500MW of peaking capacity that is currently planned for the United States.

Elwood is a 1049MW plant located 50 miles from the lucrative load pocket of Chicago, Illinois. It consists of nine simple-cycle GE 7FA turbines installed in two phases: the first four units were in place in 1999, and the next five were in place in July 2001. The construction was carried out by GE Power Systems, and work was funded on the parents' balance sheets.

The sponsors, however, have put in place a number of power purchase agreements with regional utilities. Two units, of 313MW, were taken by Westcoast Energy subsidiary Engage but subsequently sold to Exelon, which now have a total of 783MW in capacity when its existing contracts are added. Utilticorp subsidiary Aquila Energy Marketing takes a further 626MW from the remaining four units. The Exelon units are contracted till 2012 and the Aquila units until 2016 and 2017.

Dominion and People's Energy wanted to take the plants off balance sheet but encountered little interest from the bank market, which wanted low leverage and short tenor. Since a miniperm and its concomitant refinancing risk held little attraction for sponsors that had already fronted construction costs, the two decided on a bond issue. Credit Suisse First Boston, the financial advisor, won the bookrunner's mandate.

The power purchase agreements from Exelon and Aquila are not take-or-pay, and the units are essentially at their call. The agreements are structured, however, with availability payments that cover debt service for the period of the PPAs. Thereafter, Aquila has an option to continue the agreement until 2021 and 2022, but it is possible that the plant would be selling its capacity on a merchant basis.

This factor has produced a stringent set of structural enhancements to trap cash and service debt, despite the fact that 56% of the debt should have been repaid after the first contract falls away. According to sources close to the transaction, the enhancements are considerably more robust than a standard debt service reserve and cash trap, both in terms of the quality of the tests and their length and stringency.

Under the financing agreement, if the coverages are less than four times, then cash is trapped. Similar financings have aimed at coverages in the region of 1.7 to 2.5 times. Distributions look four years forward and one-and-a-half years back. However, if the capacity becomes fully contracted, the debt service coverage ration could fall as low as 1.2 times. According to an analysis by Moody's Investors Service, the combination of a standard one year's debt service account and the enhanced PSA Reserve Account should collateralize 85% of the remaining debt in the merchant period.

Nevertheless, market sentiment is still choppy, and the bonds went out into a market that has not faced a great deal of single-asset paper and certainly none since September 11. Indeed, the only previous deal to emerge this year has been the $435 million FPL Doswell issue, underwritten by Goldman Sachs. Received wisdom was that it would be the solid corporate deals that would mark the return of energy paper after the attacks. This prediction should have been tempered by the knowledge that the majority of generators (Calpine notably excepted) had concluded their corporate capital markets activity for the year already.

Elwood, however, came directly up against the Northeast Generation project bond, led by Citibank Salomon Smith Barney. Liquidity appears to have been good, although there has been some grumbling on the Elwood side that Northeast priced so wide that Elwood was forced to follow suit. The bonds priced on 12 October with a coupon of 8.159%. The project received a rating of Baa3 from Moody's and a BBB- from Standard & Poor's.

The only severe black mark noted by the ratings agencies is the absence after 2002 of a firm gas supply contract. At present Cinergy is providing gas, but the intention on the part of the sponsors is to have something firm in place to avoid any downgrade. Some investors have suggested that the sponsors might have taken this opportunity to try and lock in current low gas prices, but the indications are that Dominion and People's will look at the issue when current uncertainty surrounding the fortunes of energy marketer has subsided.

The deal marks a new way to get peakers beyond the suspicious eyes of bank credit committees and a sure pointer to an imminent renaissance in capital markets activity. So long as the present flight to quality impacts more upon weak corporate credits rather than the structured issues, sponsors can look forward to a year of attractive tenors and high leverage levels. Elwood could also be one way to wean sponsors off the expensive lease market.