If rising natural gas prices, permitting worries and bank wariness of exposure levels were not keeping independent power producers on their toes already, then another crisis in generation could be round the corner. This is the probable deficit in turbine production over the next few months, widely believed to be insufficient to meet planned capacity additions already announced. With order backlogs likely to increase, manufacturers have taken to buying up rivals to meet their commitments. GE Power Systems added units from Alstom, Kvaerner and Thomassen last year in a bid to give itself flexibility in dealing with customers.

The customers, on the other hand, have to make a different set of choices. The smaller generators will continue to deal with the issue via the standard engineering procurement contract, and factor in allowances for the foreseeable delays. The titans of power generation want to add capacity at a much faster rate and often shun the pace and lack of economies of scale of the fixed-price contract. Whether this is dressed up as the ?Calpine Construct? system of project development, or simply expressed as a desire to ensure adequate part stockpiles, the larger corporates want to plan their construction according to their own timetable.

The cynical observer might see the $7.8 billion turbine trust deal currently being finalised by PG&E as a calculated riposte to some of its Californian counterpart's more aggressive deals. Not only has Calpine called for another $2.5 billion construction revolver but placed an order for 21 GE F series turbines back in July 2000. PG&E's deal doubles the number of turbines, making it the largest turbine financing deal ever, and also builds upon its continued fondness for synthetics, recently seen in the Lake Road and La Paloma deals.

Such rivalries can only be a good thing if they go towards alleviating, at least partly, California's shortages. SG, however, the arranger on this PG&E deal as well as its synthetic antecedents, now have to persuade the market that this indeed a credible alternative to the ever more corporatised deal structures that have come out in the last 18 months. So far, indications are that the deal will not be fed into the market in one chunk, and only a fraction of the synthetic's debt will immediately be syndicated.

Dynegy, Transalta and Enron have all been aggressive users of turbine lease structures in the past, whether as cross-border lilos or leveraged lease deals. The hallmark of this deal, however, is the flexibility in expansion that a turbine trust gives the generator, coupled with its avoidance of cash downpayments. The similarities with the Calpine revolver do exist, most particularly in the need to gain bank syndicate approval for any drawdowns. Since the vehicle used to own the turbines is a trust however, the deal does not appear on PG&E's balance sheet, anywhere.

The dollar figure used for the purposes of sizing the deal is a slightly misleading one since, like the figure for the impact of the deal on corporate earnings, it relies upon interpretation of US accounting regulations. The crucial interpretation is that the turbine, if in practice inseparable from the project to which it is assigned, can only remain off balance-sheet if the entire project is accounted for that way. As one source close to the deal puts it, ?moving turbines from peaker plants is just about permissable, and possible, but for a baseload plant the transport costs would probably outweigh the synthetic benefits?. The applicable statements are the Emerging Issues Taskforce, 00-13 and 97-10, which deal with the imcompatibility of, respectively, real estate assets and project expenditure with the synthetic. The trust structure, with nominal allocations to planned, but not assigned, projects is an attempt to reconcile these.

The synthetic is an accounting play rather than a tax one, ultimately, and the sponsors are eager to point out that whilst the turbines form the core of the deal, to call it a turbine financing is a little wide of the mark. The turbine agreements were concluded the same way, however, and consist of four 7FA and 19 7FB GE Power Systems and 21 Mitsubishi MHI501G units. The former will be most useful in the construction of large baseload gas plants and the latter for inside the fence and cogen deals.

The deal is for three years and the ultimate goal for each of the units is for them to be taken outside of the trust as and when they become used for a financeable project, whether as a leveraged lease, a synthetic or a straight non-recourse deal. The hope for PG&E is that as this situation arises the boost to its earnings is not suddenly lost at the cross-over point, either by using further balance-sheet friendly structures or as the plants become operational and earnings accretive.

SG's contribution breaks down into three sections: an A section of $300 million collateralised by either an equity infusion or the posting of treasuries, and inefficient but secure move, and two further sections that account for the bulk of the remaining nominal $7.5 billion. Only the first is currently in general syndication, the remainder will probably be sold on as and when PG&E need to draw it down. It has stressed that it has no desire to see the select group of banks that it has asked to support the second two stretched by their exposure to the company's credit.

The financing takes care of plant financing needs until 2004, but this is unlikely to see the west coast giant out of circulation. Aside from the need to refinance plants when they come out of the trust, the deal also signals a willingness on the part of PG&E explore the possibility of portfolio financing. It does not yet amount to a commitment, but the fact that standalone synthetics will not dribble through any more would give a strong impetus to the establishment of a large and strong generating ability working outside of PG&E's core market.