Cory Cogen: liquid in a cold climate
Lead managers RBC Dominion Securities and BMO Nesbitt Burns have
completed a private placement of C$182 million ($118 million) for
the Cory Cogeneration project. Cory's sponsors are ATCO Power, a
regular Canadian project finance user, and the municipal power
authority for Saskatchewan Province, SaskPower. The deal is a
useful pointer as to where to find liquidity in the often shallow
Canadian dollar market, although the country's electricity majors
have so far been shy in diversifying away from corporate finance
structures.
Cory follows in the tradition of the Joffre cogeneration deal, which marked the most ambitious use yet of the unincorporated joint venture ownership structure. The C$379 million deal was funded through a mixture of bank debt (led by WestLB and RBC) and an institutional tranche provided by John Hancock. This time round the sponsors approached the bond market alone. As one deal participant put it, ?we examined the bank option for approximately ten minutes. But they're not interested in going out beyond five to seven years?.
One reason for this is that, whilst shallow, the Canadian bond market still has small pockets of liquidity. Another is that there is some demand from US institutions for Canadian assets, even though the spreads available north of the border are slightly lower than can be found on US institutional debt. Very few project sponsors in the US have so far been keen to tap these expensive sources, creating a small body of pent-up demand. A further reason for the approach to the bond market, which traditionally has more conservative structural demands, is that Saskatchewan is further away from becoming a competitive electricity market.
The 228 MW project is under construction at the Potash Corporation of Saskatchewan's (PCS) Cory Mine near Saskatoon. PCS Cory is lined up to take the steam from the project, which it will use to clean potash. This agreement only accounts for about 2% of project revenues, although steam is vital to PCS' operations and will be required for a bare minimum of ten years. SaskPower is lined up to take the electrical output from the plant under a 25-year power purchase agreement, although payments are linked to availability, meaning that operational risk is a much more significant factor than would be the case with a take-or-pay deal. Moreover, the two offtakers have taken on much of the fuel, foreign exchange and regulatory risk on the deal.
Sasketchewan is fairly far from the restructuring that has been observed in Alberta and Ontario, although electricity demand in the region is growing. Certainly the prospect of a privatization of SaskPower, and its transformation from what is now essentially a government credit, had to be considered. SaskPower is currently rated at A (stable) by Dominion Bond Rating Services (DBRS), which also rated the project at A (low).
There were surprisingly few questions from the agency about the unincorporated joint venture, the uniquely Canadian structure that mimics the contractual set-up of a special purpose vehicle without triggering the tax consolidation SPVs receive under the domestic tax code. Given the speedy depreciation treatment afforded to cogen projects, sponsors want to offset it against the relatively large corporate income, rather than the small flows of a project company. Pipeline projects, on the other hand, with a slow and low depreciation schedule, tend to seek financing as partnerships.
Cory Cogeneration is, therefore, an incorporated funding entity, which lends-on the proceeds of the bond issue on a pro rata basis to the two sponsors who each have a 50% ownership (rather than equity interest) in the project. The situation might be expected to create a number of headaches for lenders and lawyers, although in practice the various duties and responsibilities of the sponsors are laid out in exhaustive detail and outside factors in any default are treated as a cross-default. A bankruptcy at either ATCO or SaskPower is for the time being a remote possibility, although in the event of difficulties at one the lenders are able to take over and funnel any dividends back to the healthy partner. The only possible difficulty is that courts sometimes view such ventures as partnerships, which alters how the sponsors have to account for their liabilities.
The bonds were issued at the start of May to a select group of institutions in both the US and Canada and have a maturity of 24 years. Because the deal was privately placed, pricing details are hard to come by, although the issue probably priced slightly inside similar US paper. ATCO is moving forward with a similar series of projects, including the recently closed Scotford deal.
Cory follows in the tradition of the Joffre cogeneration deal, which marked the most ambitious use yet of the unincorporated joint venture ownership structure. The C$379 million deal was funded through a mixture of bank debt (led by WestLB and RBC) and an institutional tranche provided by John Hancock. This time round the sponsors approached the bond market alone. As one deal participant put it, ?we examined the bank option for approximately ten minutes. But they're not interested in going out beyond five to seven years?.
One reason for this is that, whilst shallow, the Canadian bond market still has small pockets of liquidity. Another is that there is some demand from US institutions for Canadian assets, even though the spreads available north of the border are slightly lower than can be found on US institutional debt. Very few project sponsors in the US have so far been keen to tap these expensive sources, creating a small body of pent-up demand. A further reason for the approach to the bond market, which traditionally has more conservative structural demands, is that Saskatchewan is further away from becoming a competitive electricity market.
The 228 MW project is under construction at the Potash Corporation of Saskatchewan's (PCS) Cory Mine near Saskatoon. PCS Cory is lined up to take the steam from the project, which it will use to clean potash. This agreement only accounts for about 2% of project revenues, although steam is vital to PCS' operations and will be required for a bare minimum of ten years. SaskPower is lined up to take the electrical output from the plant under a 25-year power purchase agreement, although payments are linked to availability, meaning that operational risk is a much more significant factor than would be the case with a take-or-pay deal. Moreover, the two offtakers have taken on much of the fuel, foreign exchange and regulatory risk on the deal.
Sasketchewan is fairly far from the restructuring that has been observed in Alberta and Ontario, although electricity demand in the region is growing. Certainly the prospect of a privatization of SaskPower, and its transformation from what is now essentially a government credit, had to be considered. SaskPower is currently rated at A (stable) by Dominion Bond Rating Services (DBRS), which also rated the project at A (low).
There were surprisingly few questions from the agency about the unincorporated joint venture, the uniquely Canadian structure that mimics the contractual set-up of a special purpose vehicle without triggering the tax consolidation SPVs receive under the domestic tax code. Given the speedy depreciation treatment afforded to cogen projects, sponsors want to offset it against the relatively large corporate income, rather than the small flows of a project company. Pipeline projects, on the other hand, with a slow and low depreciation schedule, tend to seek financing as partnerships.
Cory Cogeneration is, therefore, an incorporated funding entity, which lends-on the proceeds of the bond issue on a pro rata basis to the two sponsors who each have a 50% ownership (rather than equity interest) in the project. The situation might be expected to create a number of headaches for lenders and lawyers, although in practice the various duties and responsibilities of the sponsors are laid out in exhaustive detail and outside factors in any default are treated as a cross-default. A bankruptcy at either ATCO or SaskPower is for the time being a remote possibility, although in the event of difficulties at one the lenders are able to take over and funnel any dividends back to the healthy partner. The only possible difficulty is that courts sometimes view such ventures as partnerships, which alters how the sponsors have to account for their liabilities.
The bonds were issued at the start of May to a select group of institutions in both the US and Canada and have a maturity of 24 years. Because the deal was privately placed, pricing details are hard to come by, although the issue probably priced slightly inside similar US paper. ATCO is moving forward with a similar series of projects, including the recently closed Scotford deal.
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