PG&E repeats with La Paloma
Last month Citibank led a $730 million loan and synthetic lease to
finance for PG&E National Energy Group's 1,048 MW La Paloma
gas-fired power generating plant. Yet, as the largest greenfield
merchant power plant in California, La Paloma does not fit the mold
of many power project financings, say market observers.
The project's participants sought to replicate the financing of PG&E National Energy Group's 792MW Lake Road Generating in Killingly, Connecticut, which was also arranged by Citibank.
In Project Finance November, 1999, Joe Cooley, managing director, finance at PG&E National Energy Group, explained that the company ?...did not want to reinvent the wheel for every transaction.?
Lake Road co-arrangers Deutsche Bank and Societe Generale were joined by 17 banks in a syndication that was solidly oversubscribed. Paribas, Dresdner Bank, and Credit Lynonnais joined the La Paloma financing as co-agents. Citibank invited 35 relationship banks to participate.
Financing for the $460 million Lake Road plant was structured as a project-financed synthetic lease, using securitized commercial paper. The deal represented the first time such a blend of financing had been used in the bank market.
?The lease financing structure meets certain economic objectives for us as a whole and meets our cookie cutter approach,? comments John Barpoulis, managing director, finance, at PG&E National Energy Group in Bethesda.
?Although there's never really such thing as a cookie cutter approach, by trying to replicate this structure we're provided with flexibility surrounding our assets which we need over this period of deregulation,? comments Barpoulis, who adds that the company plans to create regional asset companies over the next five years that contribute 30% of corporate earnings by 2002.
Barpoulis says, PG&E National Energy Group plans to bring approximately 15,000 MW to market by 2002, at a rate of roughly one project per quarter over the next couple of years. The company's upcoming projects include an 800 MW power plant in Mantua Creek, NJ and a 1000 MW facility in Athens, NY.
Even though the La Paloma financing was oversubscribed and the market's reception mirrored that of the Lake Road financing, bankers and sponsors say syndication exceeded their expectations.
At Citicorp in New York, vice president, project finance, Nasir Khan explains that synthetic leasing can present attractive tax advantages.
?The huge benefit of using a synthetic lease is that for accounting purposes you get the operating benefits ? you get the operating to earnings benefits and at the same time you preserve the tax benefits,? comments Khan. ?Since you are now not technically the owner of the assets you don't have to charge depreciation expense.?
?You want to have expenses so that you pay less taxes and the beauty of a synthetic lease is that it allows you to do that. Effectively, it allows you to state higher earnings on your income statement and lower earnings on your tax statement, which lowers your tax burden,? adds Khan.
La Paloma's $730 million financing includes a $25 million debt service reserve facility, $15 million working capital, $374 million of commercial paper backed by the parent PG&E Corp., rated A/A3 and issued through a Citibank managed conduit, $295 million term loan B tranche, and $21 million in certificates. Sponsors also have a 55% equity stake.
The loan is priced as follows: 137bp for the construction phase, 150bp for the end of the construction through year five, 225bp for years six through ten, 237.5bp for years 11 through maturity.
According to Khan the large commercial paper funding, used in both the Lake Road and La Paloma financings is appealing to sponsors who like the low cost and security of payments.
In addition, Khan says the commercial paper acts like a bridge loan during the construction period, except that commercial paper market funding costs may be lower.
?The commercial paper is funded in the market and the cost of it is backstopped by the banks. So in the event that the conduit falls through, the banks are on the hook, so the company always has certainty of funding,? comments Khan.
A 100% cash sweep option loan after year seven of the loan's tenor is another feature of the financing, PG&E National Energy Group selected so they would have an opportunity to refinance.
?The deal is door to door 18-years for the non-recourse loan and B-notes and the cash sweep is something that occurs beginning in the 17th year and we see it as a way for banks to recognize that we have a very strong incentive to refinance before the seventh year. There's also other incentives for us to refinance including increases in pricing,? comments Barpoulis.
Both Barpoulis and Khan agree that La Paloma's central risk is that by selling 100% of its capacity on a merchant basis into the California market it will be subject to power price fluctuations.
Khan says investors fears over merchant risks were allayed by power price projections provided by Colorado-based, market consultants, Hagler Vailly.
?Independent market consultants provide you with long term projections for power prices and a very detailed analysis of how they do it and the market is bought off on this ? the bank market, the bond market, everybody relies on the projections by these market consultants,? says Khan.
Barpoulis attributes the three key risks to that the fact that La Paloma was the largest financing of a merchant plant to date, both in terms of amount and megawatt size; secondly, that it's one of the first merchant plant financings in California; and finally, given Y2K fears, there were several concerns about how a financing of this size would be received early in the year 2000.
The project's participants sought to replicate the financing of PG&E National Energy Group's 792MW Lake Road Generating in Killingly, Connecticut, which was also arranged by Citibank.
In Project Finance November, 1999, Joe Cooley, managing director, finance at PG&E National Energy Group, explained that the company ?...did not want to reinvent the wheel for every transaction.?
Lake Road co-arrangers Deutsche Bank and Societe Generale were joined by 17 banks in a syndication that was solidly oversubscribed. Paribas, Dresdner Bank, and Credit Lynonnais joined the La Paloma financing as co-agents. Citibank invited 35 relationship banks to participate.
Financing for the $460 million Lake Road plant was structured as a project-financed synthetic lease, using securitized commercial paper. The deal represented the first time such a blend of financing had been used in the bank market.
?The lease financing structure meets certain economic objectives for us as a whole and meets our cookie cutter approach,? comments John Barpoulis, managing director, finance, at PG&E National Energy Group in Bethesda.
?Although there's never really such thing as a cookie cutter approach, by trying to replicate this structure we're provided with flexibility surrounding our assets which we need over this period of deregulation,? comments Barpoulis, who adds that the company plans to create regional asset companies over the next five years that contribute 30% of corporate earnings by 2002.
Barpoulis says, PG&E National Energy Group plans to bring approximately 15,000 MW to market by 2002, at a rate of roughly one project per quarter over the next couple of years. The company's upcoming projects include an 800 MW power plant in Mantua Creek, NJ and a 1000 MW facility in Athens, NY.
Even though the La Paloma financing was oversubscribed and the market's reception mirrored that of the Lake Road financing, bankers and sponsors say syndication exceeded their expectations.
At Citicorp in New York, vice president, project finance, Nasir Khan explains that synthetic leasing can present attractive tax advantages.
?The huge benefit of using a synthetic lease is that for accounting purposes you get the operating benefits ? you get the operating to earnings benefits and at the same time you preserve the tax benefits,? comments Khan. ?Since you are now not technically the owner of the assets you don't have to charge depreciation expense.?
?You want to have expenses so that you pay less taxes and the beauty of a synthetic lease is that it allows you to do that. Effectively, it allows you to state higher earnings on your income statement and lower earnings on your tax statement, which lowers your tax burden,? adds Khan.
La Paloma's $730 million financing includes a $25 million debt service reserve facility, $15 million working capital, $374 million of commercial paper backed by the parent PG&E Corp., rated A/A3 and issued through a Citibank managed conduit, $295 million term loan B tranche, and $21 million in certificates. Sponsors also have a 55% equity stake.
The loan is priced as follows: 137bp for the construction phase, 150bp for the end of the construction through year five, 225bp for years six through ten, 237.5bp for years 11 through maturity.
According to Khan the large commercial paper funding, used in both the Lake Road and La Paloma financings is appealing to sponsors who like the low cost and security of payments.
In addition, Khan says the commercial paper acts like a bridge loan during the construction period, except that commercial paper market funding costs may be lower.
?The commercial paper is funded in the market and the cost of it is backstopped by the banks. So in the event that the conduit falls through, the banks are on the hook, so the company always has certainty of funding,? comments Khan.
A 100% cash sweep option loan after year seven of the loan's tenor is another feature of the financing, PG&E National Energy Group selected so they would have an opportunity to refinance.
?The deal is door to door 18-years for the non-recourse loan and B-notes and the cash sweep is something that occurs beginning in the 17th year and we see it as a way for banks to recognize that we have a very strong incentive to refinance before the seventh year. There's also other incentives for us to refinance including increases in pricing,? comments Barpoulis.
Both Barpoulis and Khan agree that La Paloma's central risk is that by selling 100% of its capacity on a merchant basis into the California market it will be subject to power price fluctuations.
Khan says investors fears over merchant risks were allayed by power price projections provided by Colorado-based, market consultants, Hagler Vailly.
?Independent market consultants provide you with long term projections for power prices and a very detailed analysis of how they do it and the market is bought off on this ? the bank market, the bond market, everybody relies on the projections by these market consultants,? says Khan.
Barpoulis attributes the three key risks to that the fact that La Paloma was the largest financing of a merchant plant to date, both in terms of amount and megawatt size; secondly, that it's one of the first merchant plant financings in California; and finally, given Y2K fears, there were several concerns about how a financing of this size would be received early in the year 2000.
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