Hazelwood Refinancing
Australian Power Deal of the Year 2002
Hazelwood Refinancing
In 2002, Australia witnessed the refinancing of the Hazelwood merchant power plant in Victoria, the country's sixth largest power plant and Victoria's second largest with a capacity of 1600MW. Its defining points are the size ? it was the largest power deal to close last year ? at $1.187 billion ? and the mitigation of market risk inherent in merchant power deals. The debt profile is another key feature, allowing for a unique ?lumpy' Capex programme.
International Power majority owns the plant (91.8%). Commonwealth Investment Services and Commonwealth Bank of Australia hold the remaining portion. The project company is called Hazelwood Power Partnership. A club of four banks led the transaction: ANZ Investment Bank, Royal Bank of Scotland (Australia) Bank of America and SG. Five banks came in at sub-underwriting stage. They were: Abbey National Treasury Services, BOS International (Australia), Bank of Tokyo-Mitsubishi (Australia) and Credit Agricole Indosuez Australia.
The deal was completed in April 2002, with debt split into two tranches comprising a term loan and a bullet tranche. The first, Tranche A, is a A$782 million fully amortising term loan with a maturity of 12 years including refinancing assumptions. Tranche B is the A$445 million bullet with a maturity of eight years. The margin reflects market risk: starting at 155bp over Libor in years one to five, stepping up to 170bp for years six to eight. From years nine to twelve it flexes upward to 185bp. A working capital facility of A$20 million is also provided.
The 12-year loan was launched in March. Participants came in at A$35 million for a manager's position, A$50 million for lead manager position and A$65 million for a senior lead manager position. The five sub-underwriters funded A$125 million each.
Hazelwood power plant has an associated brown coal open cut mine adjacent to it. The plant itself is a brown coal-fired thermal station that has been in operation by a private company for the past six years, although it is 30 years old. It was in fairly poor condition when International Power took it on. The total capacity is formed from eight units of 200MW, fed by the adjacent coal mine. When the plant was taken over for the original financing, two of these units were not in operation and one had major problems. The original financing was back in 1996, when debt was raised to purchase the plant during the Victoria government's power privatization programme.
The original financing was due to mature in 2008. The refinancing package allows for the capital expenditure programme and takes into account the expected life of the assets. Richard Schroder, senior manager of project and infrastructure finance, ANZ Investment Bank says: ?from the sponsor's point of view, the original debt carried a very aggressive debt repayment profile. This one has a life that matches more closely ? 12 years ? when the life of the power station is 25-30 years. This is an extended term of debt which makes extra cash flow available.?
Output from the plant will be absorbed into the National Grid ? so there is a prevailing pool price (similar to the old UK system). The plant will supply 12% of the national electricity demand. Says Schroder: ?You can enter into contracts with retailers, like an interest rate swap so you can hedge your position.?
There is a ?payment relief' plan for certain stages of the turbine upgrade programme that Hazelwood is undertaking to cover outgoings for equipment purchases. For example, if new equipment were to be needed in year two and again in year five, it would be beneficial to have a payment relief in that period. Peter Barlow, corporate finance director of International Power, says by way of explanation: ?we have a reserve of capital expenditure ? a build-up of capital reserve in cashflow so the money is ready if needed.?
The market risk associated with merchant power plants ? particularly in the current power climate ? needed to be mitigated. Extensive due diligence was carried out by an external market consultant. So market price, supply and demand and any future power plants was examined thoroughly before funding went ahead. The real risk was what the price for power was going to be for electricity dispatched. Again, due diligence gave price predictions. The possibility of future interconnectors and carbon taxes was a consideration in this area.
Barlow says: ?We can't get rid of market risk. But we have a lot of experience in trading so we have some ability in selling forward. But at the end of the day it's still a merchant plant, so we can try to smooth effects by contracting forward by a year or two.?
The refinancing facility, with its layered pricing rise, is cheaper for the foreseeable future. The pricing has dropped slightly from the original financing ? when Hazelwood was acquired the market was aggressive. Barlow comments: ?The margin encourages the deal to be refinanced ? we put a lot of capital expenditure into the plant, extending its life continously. We are looking to refinance again many years ahead.?
In general, the Hazelwood power plant transaction was a difficult transaction to complete. Banking appetite for merchant power risk was at a low at the time of refinancing now compared to when the original financing was done in 1996.
Barlow of International Power sums up: ?We were very pleased with the deal. It was a good deal for everyone. We got good support from our banks ? we support a relationship banking strategy. This has been a big refinancing, very successful, done at the right time.?
Hazelwood Power Partnership
Status: closed April 2002
Location: Victoria, Australia
Description: Refinancing of Australia's sixth largest power plant
Sponsors: International Power (91.8%), Commonwealth Bank of Australia and Commonwealth Investment Services hold the remaining shares
Debt: A$1.187 billion divided into two tranches
Lead arrangers: ANZ Investment Bank, Bank of America, Royal Bank of Scotland and SG.
Lawyers to the sponsors: Mallesons Stephen Jaques
Lawyers to the lenders: Freehills
Model auditor: Merton
Market consultants: Henwood
Technical consultants: Sinclair Knight Merz
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Hazelwood Refinancing
In 2002, Australia witnessed the refinancing of the Hazelwood merchant power plant in Victoria, the country's sixth largest power plant and Victoria's second largest with a capacity of 1600MW. Its defining points are the size ? it was the largest power deal to close last year ? at $1.187 billion ? and the mitigation of market risk inherent in merchant power deals. The debt profile is another key feature, allowing for a unique ?lumpy' Capex programme.
International Power majority owns the plant (91.8%). Commonwealth Investment Services and Commonwealth Bank of Australia hold the remaining portion. The project company is called Hazelwood Power Partnership. A club of four banks led the transaction: ANZ Investment Bank, Royal Bank of Scotland (Australia) Bank of America and SG. Five banks came in at sub-underwriting stage. They were: Abbey National Treasury Services, BOS International (Australia), Bank of Tokyo-Mitsubishi (Australia) and Credit Agricole Indosuez Australia.
The deal was completed in April 2002, with debt split into two tranches comprising a term loan and a bullet tranche. The first, Tranche A, is a A$782 million fully amortising term loan with a maturity of 12 years including refinancing assumptions. Tranche B is the A$445 million bullet with a maturity of eight years. The margin reflects market risk: starting at 155bp over Libor in years one to five, stepping up to 170bp for years six to eight. From years nine to twelve it flexes upward to 185bp. A working capital facility of A$20 million is also provided.
The 12-year loan was launched in March. Participants came in at A$35 million for a manager's position, A$50 million for lead manager position and A$65 million for a senior lead manager position. The five sub-underwriters funded A$125 million each.
Hazelwood power plant has an associated brown coal open cut mine adjacent to it. The plant itself is a brown coal-fired thermal station that has been in operation by a private company for the past six years, although it is 30 years old. It was in fairly poor condition when International Power took it on. The total capacity is formed from eight units of 200MW, fed by the adjacent coal mine. When the plant was taken over for the original financing, two of these units were not in operation and one had major problems. The original financing was back in 1996, when debt was raised to purchase the plant during the Victoria government's power privatization programme.
The original financing was due to mature in 2008. The refinancing package allows for the capital expenditure programme and takes into account the expected life of the assets. Richard Schroder, senior manager of project and infrastructure finance, ANZ Investment Bank says: ?from the sponsor's point of view, the original debt carried a very aggressive debt repayment profile. This one has a life that matches more closely ? 12 years ? when the life of the power station is 25-30 years. This is an extended term of debt which makes extra cash flow available.?
Output from the plant will be absorbed into the National Grid ? so there is a prevailing pool price (similar to the old UK system). The plant will supply 12% of the national electricity demand. Says Schroder: ?You can enter into contracts with retailers, like an interest rate swap so you can hedge your position.?
There is a ?payment relief' plan for certain stages of the turbine upgrade programme that Hazelwood is undertaking to cover outgoings for equipment purchases. For example, if new equipment were to be needed in year two and again in year five, it would be beneficial to have a payment relief in that period. Peter Barlow, corporate finance director of International Power, says by way of explanation: ?we have a reserve of capital expenditure ? a build-up of capital reserve in cashflow so the money is ready if needed.?
The market risk associated with merchant power plants ? particularly in the current power climate ? needed to be mitigated. Extensive due diligence was carried out by an external market consultant. So market price, supply and demand and any future power plants was examined thoroughly before funding went ahead. The real risk was what the price for power was going to be for electricity dispatched. Again, due diligence gave price predictions. The possibility of future interconnectors and carbon taxes was a consideration in this area.
Barlow says: ?We can't get rid of market risk. But we have a lot of experience in trading so we have some ability in selling forward. But at the end of the day it's still a merchant plant, so we can try to smooth effects by contracting forward by a year or two.?
The refinancing facility, with its layered pricing rise, is cheaper for the foreseeable future. The pricing has dropped slightly from the original financing ? when Hazelwood was acquired the market was aggressive. Barlow comments: ?The margin encourages the deal to be refinanced ? we put a lot of capital expenditure into the plant, extending its life continously. We are looking to refinance again many years ahead.?
In general, the Hazelwood power plant transaction was a difficult transaction to complete. Banking appetite for merchant power risk was at a low at the time of refinancing now compared to when the original financing was done in 1996.
Barlow of International Power sums up: ?We were very pleased with the deal. It was a good deal for everyone. We got good support from our banks ? we support a relationship banking strategy. This has been a big refinancing, very successful, done at the right time.?
Hazelwood Power Partnership
Status: closed April 2002
Location: Victoria, Australia
Description: Refinancing of Australia's sixth largest power plant
Sponsors: International Power (91.8%), Commonwealth Bank of Australia and Commonwealth Investment Services hold the remaining shares
Debt: A$1.187 billion divided into two tranches
Lead arrangers: ANZ Investment Bank, Bank of America, Royal Bank of Scotland and SG.
Lawyers to the sponsors: Mallesons Stephen Jaques
Lawyers to the lenders: Freehills
Model auditor: Merton
Market consultants: Henwood
Technical consultants: Sinclair Knight Merz
Back to contents
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