Breaking the log-jam for Southern California gas-fired development projects and resetting the market for project financing across the continent, CPV Sentinel closed financ­ing and entered construction on its $900 million, 800MW gas-fired peaking facility near Palm Springs, California, in May of this year. This article summarises the development challenges the project faced, and details its financing terms.

Southern California development: Not for the faint-hearted

Competitive Power Ventures (CPV) began development of the Sentinel project in 2006 in partnership with GE. In response to the announcement of a power purchase solicitation by Southern California Edison (SCE), CPV Sentinel located an excellent site at the far eastern end of SCE’s reliability area next to the Devers substation and SoCal Gas’ main pipeline. Over the course of 2007 and 2008, CPV Sentinel successfully bid into both the fast and standard tracks of SCE’s solicitation and signed power purchase agreements (PPAs) for 728MW (the capacity of the project under summer peak load conditions). Responding to SCE’s request for efficient, fast-starting, peaking capacity, CPV Sentinel based its plant on eight of GE’s highly efficient, aero-derivative LMS 100 gas turbine generators.

In the early stages of development, CPV Sentinel believed that water might be the most difficult challenge. The Palm Springs desert location made dry cooling impossible and the area did not have sufficient wastewater production to supply the Project’s needs. Working with the Desert Water Agency, however, CPV Sentinel was able to design an innovative water plan that allowed the use of fresh water from the site in exchange for, firstly, importing fresh water to the area from elsewhere in California and, secondly, conserving an equal amount of fresh water usage elsewhere in the Palm Springs area.

All looked well for financial close of the project at the end of 2008. Indeed, based on the commercial and permitting progress of the Project, GE Energy Financial Services (EFS) joined as a 50% owner in the second quarter of 2008. Shortly afterwards, the project began meeting with potential lenders to arrange financing. Then lightning struck – in the form of a California state court decision that barred the South Coast Air Quality Management District from issuing emissions offsets to power projects from its priority reserve programme. This decision effectively placed a moratorium on all thermal power plant development in Southern California.

Working closely with a wide range of California stakeholders and policymakers, CPV Sentinel ushered the passage of legislation that served to exempt Sentinel from this moratorium. Ultimately, California legislators agreed that the Sentinel Project, with its 10-minute start capability and highly efficient operating flexibility, was essential to meeting the state’s renewable portfolio standard goal of generating 33% of California power from renewable sources by 2020, in significant part because of its ability to facilitate the integration of wind and solar power into the electric grid.

The passage of the legislation and its ultimate implementation took nearly two years. During this period, CPV Sentinel worked closely with its equipment supplier, GE Aero, and its contractor, Gemma, to hold the project together. In addition, CPV Sentinel received strong support from SCE to maintain the PPAs. Ultimately at the end of 2010, the project obtained its California Energy Commission construction and operating permit and was ready for financing. Based on this progress, Diamond Generating Corporation (DGC), the US power division of Mitsubishi Corporation, joined the project ownership group and agreed to be the project’s plant operator.

The CPV Sentinel financing

Sentinel’s major commercial contracts

An overriding principle of CPV Sentinel’s development was to create a project that properly addressed all major com­mercial risks.

The bedrock of the project is its 10-year power purchase and tolling agreement (PPTA) with SCE. This agreement, the product of two successful competitive bid submissions, provides for fixed capacity payments for 10 years covering all of the project’s fixed costs. As a tolling agreement, the PPTA requires SCE to provide the fuel and generally allows the project to pass through fuel transportation costs. The major responsibility of the project under the PPTA is to have the plant capacity available, especially in the peak summer months, and to achieve a certain heat rate.

The first obligation of the project under the PPTA is to complete construction and achieve commercial operation by the summer of 2013. In order to assure satisfaction of this requirement, the project entered into a fixed price, turnkey engineering, procurement and construction agree­ment with GEMMA, which it married to a turbine purchase agreement for the eight LMS 100 units with GE AERO. This tightly structured construction contract package pro­vides the project and its lenders with a high level of price and schedule certainty for completion of the facility.

With these major contracts in hand as well as with the permits and all the ancillary agreements in place, CPV, GE EFS and DGC were ready to raise the financing to make CPV Sentinel a reality.

The financing

The sponsors collectively committed to provide about 25% of the roughly $1 billion of total capital required to finance, construct and operate the project. To meet Sentinel’s remaining capital needs, in December 2010, the sponsors approached a broad group of lenders to assess their ability to play a lead role in financing of CPV Sentinel.

The project sponsors selected five joint lead arrangers to structure a non-recourse financing facility and requested that each of the five commit to 25% of the project’s ulti­mate $795 million in credit facilities to provide execution insurance. Those lenders were Mitsubishi UFJ Financial Group, RBS, Natixis, ING and SMBC. The lead arrangers were also asked to close the financing in the face of out­standing litigation against the state and federal agencies’ authorising emissions offsets for the project.

The joint lead arrangers undertook significant due diligence around the litigation and became comfortable that the project would not be adversely affected. They then structured a construction/term loan to maximize leverage for the project sponsors by sizing to a 1.35x projected debt service coverage ratio. This defined a new standard for fully contracted gas fired power projects, because the previous benchmark had been 1.40x.

After obtaining underwriting commitments from the five joint lead arrangers, a bank meeting was held on 28 April 2011. Attendance at the bank meeting confirmed the high level of interest from a wide range of project lenders. The project was able to establish a competitive advantage as the first gas-fired project in a string of project finance transactions (most of which were generation projects in California with 10-year PPAs) to come to market in the second quarter of 2011. As the first thermal deal to come to market and the first to close, the CPV Sentinel financing set new struc­tural and pricing benchmarks adopted in sub­sequent project financings.

Despite a heavy slate of project finance transactions in market, a total of 17 additional banks – at senior managing agent, co-agent, and participant levels – committed to the transaction. The financing brought in commitments of $1.55 billion, resulting in a roughly 2x oversubscribed transaction. This deal proved market capacity for large transactions and re-opened the broadly syndicated project financing market. A single financial closing was achieved 26 May 2011, just 4 weeks after launch of syndication. ■