Financing for the construction of the £240 million Great Yarmouth power station closed on December 16, 1999. Together with the £1.251 billion acquisition of the Fiddler's Ferry and Ferrybridge plant by Edison Mission Energy and the £1.857 billion Drax deal by AES, Great Yarmouth shows how invaluable the UK power sector has been to project financiers last year.

Sponsored by BP Amoco and Atlantic Richfield (ARCO), the project involves the construction of a greenfield 400MW gas-fired merchant power plant to be developed near the Great Yarmouth coastal resort in Norfolk, eastern England.

Construction of the plant started in December 1998 and will be completed by the second quarter of 2001 when the plant will be operational. The sponsors have reached a 15-year gas supply agreement with ARCO British, while a consortium made of General Electric and Bechtel is responsible for the construction of the plant and the 42km gas fuel pipeline. General Electric will operate the plant for a period of 12 years.

Financing has been lead arranged by Societe Generale in London and syndication began in the second half of 1999. First round of syndication closed in August with participants signing up by December 16 when the deal officially closed. Abbey National Treasury Services, Bayerische Landesbank, Bank of Tokyo-Mitsubishi, Hypovereinsbank, Industrial Bank of Japan, KBC Bank, Royal Bank of Scotland joined as co-arrangers. Lloyds TSB Bank joined with a take-and-hold position. Pricing of the facility starts at 115bp over Libor climbing to a ceiling of 160bp. Debt to equity ratio is 87.5:12.5.

Allen & Overy acted as legal adviser to the lenders, while Latham & Watkins acted for the consortium. David Miles,  a partner at Latham & Watkins in London, says: "The project financing terms of Great Yarmouth set a new benchmark in the market; for example, the longest tenor of any UK merchant power plant debt financing at 20.5 years. With the strength and timing of the project and the support of Societe Generale, the sponsors were able to obtain very competitive terms.

"It is too early to predict whether the UK government is planning any sort of relaxation to the current moratorium on the development of new plants. But it will be interesting to see what happens if and when the new electricity trading arrangements are introduced which could be later this year." Robin Kendall, director in project finance at Societe Generale in London says: "Financing for Great Yarmouth has been a challenge in the sense of being able to offer a very competitive price without overstepping the market. But the future for the UK power market does not look too promising. It is unlikely there will be more financing for greenfield power stations in the UK until the present moratorium on the development of new gas-fired plants is lifted."

While waiting for new directions from the government, London-based financiers will be busy putting together packages for the acquisitions of existing plants by a number of especially US sponsors interested in strengthening their presence in the European power market. Tim Spray, associate director in syndication at SG in London says: "The response of local and international financiers to UK power deals has been exceptional throughout 1999. Now much of the enthusiasm present in the UK power market is likely to spread to other European countries such as Italy and Spain. What has been happening in the UK is that a number of US sponsors valued the importance of having power assets in the portfolios. It is in this view that opportunities in the European market become very attractive for a number of them."

SG's Kendall says: "New frontier for limited recourse finance of power deals will be achieved in the coming months. More international and local developers present in the UK market will be interested in the option of selling-off existing assets in need of serious upgrade or with difficulties in the cash flows." This is in response to the wishes of international sponsors to move more freely in the power market rather than remain tight in the dimension of developers. Nevertheless, the increasing competition felt in the market raises a number of issues. SG's Spray adds: "There is some concerns over the level of exposure financiers are pushed into by the developers. The market has evolved quite considerably over the last year and more aggressive agreements are now in demand. The biggest frontier for the year 2000 will be financing of such projects through the bonds market."

Abroad, interesting opportunities will be on offer in Europe where power utilities such as Italy's Enel are planning to flood the market with 35,000MW worth of generating capacity. Both developers and financiers expect a consolidation of the power sector to feature highly in Germany and Italy with a string of acquisition activities. Italy's Council of State recently reconfirmed tariffs on existing grandfathered projects, a move that could spark a new set of activities in the Italian power market with a number of existing deals going into refinancing.

In the UK power sector the next move is likely to focus on the financing for the purchase of UK power assets by NRG Energy in the US, including the 665MW gas-fired Killingholme and, subject to confirmation, Blyth power plants.