Edison Mission Energy closed $617 million in debt financing for its 479MW Walnut Creek simple cycle natural gas-fired peaker plant in California on 27 July. The deal is the first greenfield thermal plant financed with debt at both the project company (opco) and holding company (holdco) levels in the US since the credit crunch climaxed in 2008.

Santander and Union Bank were joint bookrunners and BBVA, Scotia, Societe Generale and WestLB were mandated lead arrangers of the financing. The debt is split between a $442 million construction and term loan at the opco level, a $53 million holdco construction and term loan and $122 million opco letters of credit and working capital facilities. Banco Sabadell, CIBC, CIT, DnB Nor, DZ Bank, Intesa Sanpaolo, Siemens Financial Services, Sumitomo Mitsui Banking Corporation participated. The sponsor contributed $120 million in equity.

The opco and holdco debt structure is common for refinancings and plant acquisitions, and wind projects, because of the requirements of tax equity providers, in the past often featured backlevered commercial bank debt. But the arrangement is less common for greenfield thermal projects in the US and has not been used since at least the credit crunch in 2008.

The fact that lenders were willing to provide both opco and holdco debt indicates their continued comfort with contracted power plants despite the continuing weak economic outlook for the country. In addition, demand for peaking capacity in California is expected to increase as utilities move towards fulfilling the requirement that 33% of electricity sold in the state comes from renewable sources, many of them intermittent, by 2020.

Edison Mission is paying for the increased leverage. The holdco loan priced at 400bp over Libor, significantly higher than the opco loan that starts at 225bp over Libor and steps up by 25bp after the third, sixth and ninth years to 300bp over Libor at maturity in 2023. The Libor rate on both loans during construction is swapped to a fixed rate of 0.81% until the end of May 2013, and then to 3.59% from 2013 to 2023.

The spread on the opco loan is in line with the 225bp over Libor pricing on both Competitive Power Ventures, Diamond Generating and GE Energy Financial Services (EFS) $800 million Sentinel peaker debt and Calpine and GE EFSs $845 million Russell City combined-cycle plant debt that closed in May and June, respectively. All three facilities are in California. Despite the higher holdco debt spread, Edison Mission says the opco and holdco debt structure optimised its cost and terms of financing.

Walnut Creek is located in the City of Industry outside Los Angeles, and will use five 100MW GE LMS100 generators. Southern California Edison, like Edison Mission an Edison International subsidiary, will make capacity and energy payments to the project under a 10-year power purchase agreement. The facility will be connected to the Edison-owned Walnut substation and receive gas from an existing Southern California Gas-owned pipeline that also runs next to the site.

Final permitting of the plant was not without its difficulties. The California Energy Commission (CEC) approved it in February 2008 but stipulated that Edison Mission acquire emissions offsets and RECLAIM credits a nitrogen oxide and sulphur oxide trading scheme in Los Angeles and Orange counties for some of the pollutants produced by the facility before construction could begin. The developer applied for certification from the state regulatory body in November 2005.

Edison Mission closed a $56 million sale-leaseback deal with AES for two units of its 904MW Huntington Beach power plant to meet the CECs emissions offset requirements in May. The two-year deal, after which the units could be retired, allowed the developer to claim exemptions for 90% of future emissions from Walnut Creek and proceed with its construction and financial close. Edison says it took three years to close a deal for the needed offsets due to the need to first find suitable credits and then receive the required approvals from multiple agencies. It financed the transaction with short-term notes that were repaid with proceeds of the plants project debt. AES retains control of the two generating units, their operations and dispatch.

The common ownership of both sponsor and offtaker did not trouble the states regulators enough to hold up the financing. Californias utilities were required to sell the majority of their wholly-owned power plants after the state deregulated its electricity market in 1996. A spokesperson for the CEC says it strives to write conditions that will assure that they [power plants] are constructed and operated in a safe and environmentally protective manner no matter who the owner might be. They add that Walnut Creeks ownership played no factor in the commissions approval of the project.

Lenders, on the other hand, would have been extremely encouraged by the common ownership, because the likelihood of either affiliate walking away from the project is slim. Their comfort with the arrangement had more of an impact on the projects leverage than its pricing, however.

Kiewit holds the engineering, procurement and construction contract for the power plant. Construction is scheduled to begin during the third quarter with operations commencing in 2013. Morgan Lewis was legal counsel and E3 technical adviser to the sponsor. Chadbourne & Parke was counsel to the lenders.

Walnut Creek Energy

Status: Closed 27 July 2011
Size: $737 million
Location: City of Industry, California
Description: 479MW natural gas-fired peaker
Offtaker: 10-year power purchase agreement and capacity payments from Southern California Edison
Sponsor: Edison Mission Energy
Equity: $120 million
Debt: $442 million construction and term loan, $53 million holdco construction and term loan, $122 million letters of credit and working capital facilities
Bookrunners: Banco Santander and Union Bank
Arrangers: BBVA, Scotiabank, Societe Generale and WestLB
Participants: Banco Sabadell, CIBC, CIT, DnB Nor, DZ Bank, Intesa Sanpaolo, Siemens Financial Services, Sumitomo Mitsui Banking Corporation
Legal counsel: Morgan Lewis (sponsor), Chadbourne & Parke (lenders)
Technical adviser: E3
EPC contractor: Kiewit