Cottonwood: InterGen’s US first
Financing closed in February on the 1200MW Cottonwood project,
InterGen's first entry into the US power market and an innovative
attempt to maintain high leverage levels in an atmosphere where
bank comfort has traditionally dictated financing terms. Indeed,
the buzz created by the deal in the lending community bodes well
for the two other projects that InterGen plans to bring to the
market by the end of June.
InterGen has traditionally kept out of the US market, a result of the historical distinction that made it the international arm, the flipside of the USGen venture (now PG&E's National Energy Group). Since the two no longer have any parents in common, InterGen has decided to enter the fiercely competitive south-eastern power pool with a financing that incorporates a way of controlling equity distributions over time to take account of circumstantial changes in regional electricity markets. Moreover, it now has the marketing muscle on hand to mitigate wherever possible the price fluctuations of a developing deregulated industry.
The basis for this strategy is the acquisition of certain assets from Coral Energy, which in the form of Shell has an owner in common with InterGen. These include a sizeable equity stake in Coral as well as pipeline and storage facilities in Texas. Coral, however, will not have Cottonwood at its beck and call, and will be free to continue with its trading on behalf of other partners. The arrangement described as one of ?agency?, means that Coral's client reach will be the most important aspect of the relationship, executing trades called by InterGen according to its own positions. West Griffin, finance head at InterGen North America, says that ?in order to fully manage a merchant plant it is vital that you have a significant trading operation. We would rather use our equity stake in Coral and essentially rent space on their trading floor than build a team from the ground up?.
Cottonwood is a natural gas-fired, combined cycle, 100% merchant plant located south of Deweyville in Newton County, Texas. The plant has been under development for 22 months, the effective start of the generator's US ambitions. It is able to dispatch power into the Southeast Electricity Reliability Council, a pool covering the growing populations of the southeastern US (Florida excepted).
Merchant plants have usually faced two financing options: the non-recourse bank deal, featuring low levels of leverage and a bank-pleasing cash sweep, or on-balance sheet financing. InterGen, under pressure to keep downward equity distributions from its parents Shell and Bechtel to a minimum, has gone for the non-recourse option. The structure used veers closer to the cash sweep position, but is much more sophisticated than the earlier model. It has its roots in the approach used in the oil and gas industry to finance reserves.
The sponsor calls this the ?borrowing base? approach. Put simply, it means that it will forgo upwards equity distributions from the project company to maintain the economics of the project as they were pitched to banks at the time of financing. The cash sweep has traditionally been set at a predetermined level based on past-year data and/or year-ahead price forecasts. InterGen is committed to maintaining a 1.5x debt service coverage ratio whatever the future performance of the plant.
This is recalculated on a yearly basis using up-to-date price information and enhances InterGen's incentive to run the plants as efficiently as possible. More importantly, the 2.2x loan coverages deemed necessary in the merchant markets can be avoided. The system calls for a greater degree of oversight by banks of a project's performance, although the aim of the sponsors is too standardise wherever possible the documentation between the project company and both lenders and marketers.
The plan is 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 mandate for the plants was awarded at the end of 2000 to lead arrangers BNP Paribas and Deutsche Bank. Much has been made of the expectation that those appointed to lead arranger roles on one or more of the sponsor's projects would also come in as participants on other deals. Griffin confirms this strategy: ?we have a good solid group of relationship banks but given our need to access large quantities of capital we hope for support from our banks in all capacities in a transaction?.
The debt breaks down into $543 million of senior bank lending and a $25 million equity bridge loan. The loan has a mini-perm tenor of seven years door-to-door, so as with similar financings in the sector over the last 20 months the aim is to access the capital markets during operations wherever feasible. Griffin says that tax- and accounting-efficient structures will also play a role. ?We are focussed on earnings and will be actively looking at any and all means to improve the earnings profile of our plants?, he says.
Whilst financing close and funding took place on 2 February, the arrangers are now entering the general syndication phase of the sell-down. Co-arranger titles have attracted such arranging luminaries as Citibank, ING and Dresdner, as well as the more familiar names at this tier Royal bank of Scotland, Dexia and KBC Bank, all for $50 million takes. Further sell-down will continue shortly, although it may come up against the launch of American National Power's assault on the market, which is looking for backing for a geographically similar bag of facilities.
Two more facilities are also close to funding ? the Magnolia and Redbud plants. The former mandate has again been snared by BNP Paribas and Deutsche, the latter by Citibank. Says Griffin ?the benefit to lenders is an annual relock using market data no more than three months old under the borrowing base. It provides the equity with the flexibility to alter its contractual arrangements with a little heartache as possible for all of the parties involved?. As industry players maintain, it is this flexibility that makes winners in the US merchant market.
InterGen has traditionally kept out of the US market, a result of the historical distinction that made it the international arm, the flipside of the USGen venture (now PG&E's National Energy Group). Since the two no longer have any parents in common, InterGen has decided to enter the fiercely competitive south-eastern power pool with a financing that incorporates a way of controlling equity distributions over time to take account of circumstantial changes in regional electricity markets. Moreover, it now has the marketing muscle on hand to mitigate wherever possible the price fluctuations of a developing deregulated industry.
The basis for this strategy is the acquisition of certain assets from Coral Energy, which in the form of Shell has an owner in common with InterGen. These include a sizeable equity stake in Coral as well as pipeline and storage facilities in Texas. Coral, however, will not have Cottonwood at its beck and call, and will be free to continue with its trading on behalf of other partners. The arrangement described as one of ?agency?, means that Coral's client reach will be the most important aspect of the relationship, executing trades called by InterGen according to its own positions. West Griffin, finance head at InterGen North America, says that ?in order to fully manage a merchant plant it is vital that you have a significant trading operation. We would rather use our equity stake in Coral and essentially rent space on their trading floor than build a team from the ground up?.
Cottonwood is a natural gas-fired, combined cycle, 100% merchant plant located south of Deweyville in Newton County, Texas. The plant has been under development for 22 months, the effective start of the generator's US ambitions. It is able to dispatch power into the Southeast Electricity Reliability Council, a pool covering the growing populations of the southeastern US (Florida excepted).
Merchant plants have usually faced two financing options: the non-recourse bank deal, featuring low levels of leverage and a bank-pleasing cash sweep, or on-balance sheet financing. InterGen, under pressure to keep downward equity distributions from its parents Shell and Bechtel to a minimum, has gone for the non-recourse option. The structure used veers closer to the cash sweep position, but is much more sophisticated than the earlier model. It has its roots in the approach used in the oil and gas industry to finance reserves.
The sponsor calls this the ?borrowing base? approach. Put simply, it means that it will forgo upwards equity distributions from the project company to maintain the economics of the project as they were pitched to banks at the time of financing. The cash sweep has traditionally been set at a predetermined level based on past-year data and/or year-ahead price forecasts. InterGen is committed to maintaining a 1.5x debt service coverage ratio whatever the future performance of the plant.
This is recalculated on a yearly basis using up-to-date price information and enhances InterGen's incentive to run the plants as efficiently as possible. More importantly, the 2.2x loan coverages deemed necessary in the merchant markets can be avoided. The system calls for a greater degree of oversight by banks of a project's performance, although the aim of the sponsors is too standardise wherever possible the documentation between the project company and both lenders and marketers.
The plan is 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 mandate for the plants was awarded at the end of 2000 to lead arrangers BNP Paribas and Deutsche Bank. Much has been made of the expectation that those appointed to lead arranger roles on one or more of the sponsor's projects would also come in as participants on other deals. Griffin confirms this strategy: ?we have a good solid group of relationship banks but given our need to access large quantities of capital we hope for support from our banks in all capacities in a transaction?.
The debt breaks down into $543 million of senior bank lending and a $25 million equity bridge loan. The loan has a mini-perm tenor of seven years door-to-door, so as with similar financings in the sector over the last 20 months the aim is to access the capital markets during operations wherever feasible. Griffin says that tax- and accounting-efficient structures will also play a role. ?We are focussed on earnings and will be actively looking at any and all means to improve the earnings profile of our plants?, he says.
Whilst financing close and funding took place on 2 February, the arrangers are now entering the general syndication phase of the sell-down. Co-arranger titles have attracted such arranging luminaries as Citibank, ING and Dresdner, as well as the more familiar names at this tier Royal bank of Scotland, Dexia and KBC Bank, all for $50 million takes. Further sell-down will continue shortly, although it may come up against the launch of American National Power's assault on the market, which is looking for backing for a geographically similar bag of facilities.
Two more facilities are also close to funding ? the Magnolia and Redbud plants. The former mandate has again been snared by BNP Paribas and Deutsche, the latter by Citibank. Says Griffin ?the benefit to lenders is an annual relock using market data no more than three months old under the borrowing base. It provides the equity with the flexibility to alter its contractual arrangements with a little heartache as possible for all of the parties involved?. As industry players maintain, it is this flexibility that makes winners in the US merchant market.
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