Duke completes Californian portfolio financing
Duke Energy's financing of its Californian portfolio is symptomatic
of the frenetic competition for US power assets and the desire to
keep sponsor balance sheets free of debt for further acquisitions.
The financing quickly follows Southern's merchant portfolio transaction, although the Duke deal, at $470 million, is considerably smaller than the $1.54 billion raised by Southern.
Duke bought three plants in California in June of last year - the Moss Landing, Morro Bay and South Bay facilities - as part of its plans to expand into the deregulated market in California from its base in the Carolinas. The 3,200MW of generating capacity, all combined cycle gas-fired plants, constitute a major part of the state's wholesale electricity market and occupy a wide geographical spread across the state to minimise the effect of local fluctuations.
The assets were purchased last year for $501 million - Moss Landing and Morro Bay from PG&E, and South Bay from San Diego Gas & Electric. South Bay is held on a 10-year lease from the Port of San Diego. Most significantly, at the end of the lease Duke will own the relevant air permits, which can be used for further expansion work.
The move is unusual for a sponsor that prefers whenever possible to undertake newbuild projects. One of the facilities, Moss Landing, is undergoing refurbishment to reduce Nitrogen Oxide emissions, and two units at Morro Bay may be retired within the next four years.
Nevertheless, Duke believes that the strategic position of the plants made them extremely good candidates for acquisition. However it has had to ensure adequate separation for the asset vehicle, especially since the loan's pricing is dependent on the ratings that it receives. For Duke Energy senior vice-president and treasurer David Hauser, the package could be sold on the basis of its cash flows, which are projected to be strong enough to get an investment grade rating.
This is important since the majority - $360 million - of the financing is made up of a bridge loan with a term of 364 days, with the option for Duke of extending the facility for up to two more years.
It is this flexibility that points to Duke's wider financing ambitions - the ability, where feasible, to tap the capital markets at a later date. At present Hauser will not commit himself to the strategy unequivocally, but it remains every generator's ambition to concentrate financing on a corporate basis.
A further two tranches, totalling $90 million, will be used to fund required capital expenditure and working capital needs. $80 million of this will be earmarked for the former as part of certain environmental commitments, including the Moss Landing work. Syndication on the $80 million facility and the bridge facility was launched at a Duke sponsored bank meeting at the start of November.
Pricing on the deal reflects some of the difficulties in predicting the movements of electricity prices, rising over time. For the first six months of the loan's life this stands at 125bp over libor, and then rises to 137.5bp for the next three months, and finally to 150bp for the further three months. After the end of this period the loan must receive a rating, expected to be at the upper end of BB. Duke has already entered into discussions regarding the final shape of the rating, which could affect the pricing beyond this point. In the event of the facility being extended, the margin rises by 16.25bp for each of the two years.
Hauser says that Duke was the driving force behind the deal, a sign that US power sponsors are leading the way in devising financing strategies whose flexibility leaves them in the best position to exploit their assets to the maximum. Despite requiring the funds at the same time as finishing documentation from the arranger, Hauser says that the banks were very receptive. Credit Suisse First Boston managed to put together co-arrangers extremely quickly: "they understood from the beginning that we wanted flexibility".
In return the banks get the comfort of a cash sweep if Duke Energy Generating's rating slips below investment grade. The cash sweep would take up 80% of post-servicing cashflow. Hauser accepts that this was an important feature for the banks, but does not see too much to fear from future operating conditions, in particular where they affect revenue streams from dispatch into the Californian grid.
CSFB was under pressure to get banks into the deal on time, and moved fast to bring in Bank of Montreal and SG. The perceived window of opportunity prior to the holiday season drove their approach to the market. The extension asked for was as much a response to over-subscription as to a process of education of those further down in syndication, says CSFB's Jim Finch. Merchant power risk is understood well down the sell-down: "we're moving away from credit being provided on the strength of contractual support".
For generators wishing to tap capital markets, the creation of such ratings-driven portfolio vehicles will become increasingly important. Given the conservatism of models used to forecast electricity price levels, sponsors need to put in place airtight covenants to maintain their creditworthiness.
California's electricity market is even now moving into a new stage. The first to be deregulated, it is now entering into a process of re-regulation. Although destined to form the cornerstone of an eventual national generating presence, it was important to communicate California's peculiarities, its "unique credit perspective" as Finch puts it.
For Hauser, these portfolio deals offer up just such an opportunity: "I think you're going to see more and more companies setting up creditworthy subsidiaries".
The financing quickly follows Southern's merchant portfolio transaction, although the Duke deal, at $470 million, is considerably smaller than the $1.54 billion raised by Southern.
Duke bought three plants in California in June of last year - the Moss Landing, Morro Bay and South Bay facilities - as part of its plans to expand into the deregulated market in California from its base in the Carolinas. The 3,200MW of generating capacity, all combined cycle gas-fired plants, constitute a major part of the state's wholesale electricity market and occupy a wide geographical spread across the state to minimise the effect of local fluctuations.
The assets were purchased last year for $501 million - Moss Landing and Morro Bay from PG&E, and South Bay from San Diego Gas & Electric. South Bay is held on a 10-year lease from the Port of San Diego. Most significantly, at the end of the lease Duke will own the relevant air permits, which can be used for further expansion work.
The move is unusual for a sponsor that prefers whenever possible to undertake newbuild projects. One of the facilities, Moss Landing, is undergoing refurbishment to reduce Nitrogen Oxide emissions, and two units at Morro Bay may be retired within the next four years.
Nevertheless, Duke believes that the strategic position of the plants made them extremely good candidates for acquisition. However it has had to ensure adequate separation for the asset vehicle, especially since the loan's pricing is dependent on the ratings that it receives. For Duke Energy senior vice-president and treasurer David Hauser, the package could be sold on the basis of its cash flows, which are projected to be strong enough to get an investment grade rating.
This is important since the majority - $360 million - of the financing is made up of a bridge loan with a term of 364 days, with the option for Duke of extending the facility for up to two more years.
It is this flexibility that points to Duke's wider financing ambitions - the ability, where feasible, to tap the capital markets at a later date. At present Hauser will not commit himself to the strategy unequivocally, but it remains every generator's ambition to concentrate financing on a corporate basis.
A further two tranches, totalling $90 million, will be used to fund required capital expenditure and working capital needs. $80 million of this will be earmarked for the former as part of certain environmental commitments, including the Moss Landing work. Syndication on the $80 million facility and the bridge facility was launched at a Duke sponsored bank meeting at the start of November.
Pricing on the deal reflects some of the difficulties in predicting the movements of electricity prices, rising over time. For the first six months of the loan's life this stands at 125bp over libor, and then rises to 137.5bp for the next three months, and finally to 150bp for the further three months. After the end of this period the loan must receive a rating, expected to be at the upper end of BB. Duke has already entered into discussions regarding the final shape of the rating, which could affect the pricing beyond this point. In the event of the facility being extended, the margin rises by 16.25bp for each of the two years.
Hauser says that Duke was the driving force behind the deal, a sign that US power sponsors are leading the way in devising financing strategies whose flexibility leaves them in the best position to exploit their assets to the maximum. Despite requiring the funds at the same time as finishing documentation from the arranger, Hauser says that the banks were very receptive. Credit Suisse First Boston managed to put together co-arrangers extremely quickly: "they understood from the beginning that we wanted flexibility".
In return the banks get the comfort of a cash sweep if Duke Energy Generating's rating slips below investment grade. The cash sweep would take up 80% of post-servicing cashflow. Hauser accepts that this was an important feature for the banks, but does not see too much to fear from future operating conditions, in particular where they affect revenue streams from dispatch into the Californian grid.
CSFB was under pressure to get banks into the deal on time, and moved fast to bring in Bank of Montreal and SG. The perceived window of opportunity prior to the holiday season drove their approach to the market. The extension asked for was as much a response to over-subscription as to a process of education of those further down in syndication, says CSFB's Jim Finch. Merchant power risk is understood well down the sell-down: "we're moving away from credit being provided on the strength of contractual support".
For generators wishing to tap capital markets, the creation of such ratings-driven portfolio vehicles will become increasingly important. Given the conservatism of models used to forecast electricity price levels, sponsors need to put in place airtight covenants to maintain their creditworthiness.
California's electricity market is even now moving into a new stage. The first to be deregulated, it is now entering into a process of re-regulation. Although destined to form the cornerstone of an eventual national generating presence, it was important to communicate California's peculiarities, its "unique credit perspective" as Finch puts it.
For Hauser, these portfolio deals offer up just such an opportunity: "I think you're going to see more and more companies setting up creditworthy subsidiaries".
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