Financings for greenfield gas-fired projects in the UK are rare. When ESB Energy International closed on the £1 billion ($1.58 billion) 884.6MW Carrington combined-cycle project in September 2012, it had been 4.5 years since the most recent deal, for the 850MW Severn Power combined-cycle gas turbine project.

Several variables have held up such projects, which added unwanted complexity to the closing of the $835 million Carrington financing. European lenders have offered much shorter tenors amid the Eurozone crisis and with looming Basel III capital requirements, so assembling large bank groups has been a struggle.

The UK government, in a bid to meet aggressive targets for carbon dioxide emissions reduction, has discouraged thermal development. And multiple UK generators have idled capacity, as spark spreads – the difference between spot power prices and gas prices – remained depressed. SSE and Centrica, for example, idled 2GW of gas-fired capacity during the second quarter of 2012. UK banks, responding to pressure from government (which controls several of them), have focused on renewables.

Carrington overcame cautious lender sentiment towards the UK power market, but also the fact that the financing is heavily dependent on the credit of its sponsor. Project developer Carlton Power was selling its remaining 15% stake to ESB, a subsidiary of the Irish state-owned utilities group, as financial close neared. ESB had bought an initial 85% stake in the plant from Carlton in 2008.

ESB also had to educate the lender community on what was essentially an internal 20-year tolling agreement between Carrington Power (CPL), the project’s special purpose vehicle, and ESB itself. The arrangement stipulates that the project will either get capacity payments or energy payments, depending on how it is used.

And ESB had to overcome lender reluctance to finance projects with Irish sponsors. “Easily a highlight of Carrington was that an Irish sponsor, in its current situation, was able to close long-term project financing,” says a lender close to the Carrington deal. “At the beginning of the year, that would have been very difficult to achieve. There hasn’t been a lot of appetite appetite for Irish, Portuguese and Greek deals.”

ESB managed to line up a guarantee from SERV, the Swiss export credit agency (ECA), for nearly half of the debt. The Organisation for Economic Co-operation and Development rules that govern ECAs’ activities have generally discouraged the aggressive offering of cover in other OECD countries. But recently several renewables deals have been OECD-to-OECD, and JBIC, for instance, participated in another UK award-winning deal, the Intercity Express Programme. “It’s really a precedent for how this type of deal will have to get done in the future,” says a market observer in London.

It was clear soon after ESB distributed teasers for the deal that the SERV wrap would be needed. ESB needed to recruit a large club of lenders, but lenders were either uneasy with the idea of lending beyond 10 years – or simply wouldn’t participate at all.

SERV is participating on the back of Alstom’s presence, alongside Duro Felguera, as the project’s engineering, procurement and construction contractor, and as sole operations and maintenance contractor. With SERV attached to the Carrington deal, lenders viewed financial close as inevitable, putting aside forbidding gas market fundamentals and the project’s ownership structure. Still, financial close dragged on from the first quarter of 2012 to the third quarter, after low spark spreads prompted lenders to re-assess the viability of gas-fired generation projects.

Carrington features six tranches, including an uncovered £249 million commercial bank facility and the £214 million covered bank facility. Both tranches are pari passu and will draw down on a pro rata basis. “Normally, you don’t have a 50:50 split – or in this case, near it – for uncovered and covered tranches,” says a banker familiar with the deal. “And you almost never see ECAs play in western Europe.”

RBS, Lloyds, Santander and BBVA participated in the uncovered piece, which has a 10-year tenor, consisting of construction plus seven years, of which Lloyds took a £72 million ticket. HSBC and KfW-IPEX were the lenders in the 17-year SERV tranche, which has a tenor of construction plus 14 years. Société Générale provided a £59 million letter of credit. The 17-year term loan is fully amortising, while the 10-year term loan is partially amortising and features a balloon payment at maturity. The financing also includes working capital, standby and VAT facilities.

Carrington, located in Manchester, is expected to be online in 2016, and has a projected efficiency rate of 57%, compared to an average for gas-fired power of 47%. Operations will start when the UK’s capacity margin is expected to be at its lowest, according to the Office of Gas and Electricity Markets, thanks to the anticipated retirement of about one-fifth of the country’s existing power generating capacity. ESB’s willingness to support Carrington may yield bumper returns. 

Carrington Power Limited
STATUS
Closed September 2012
SIZE
$1 billion
DESCRIPTION
884.6MW gas-fired project, located near Manchester, UK
SPONSOR
ESB International
DEBT
$835 million
EXPORT CREDIT AGENCY
SERV
LENDERS
BBVA, HSBC, KfW IPEX, Lloyds, RBS, Santander, Société Générale
SPONSOR LEGAL ADVISER
Linklaters
LENDERS’ LEGAL ADVISER
Ashurst
LENDERS’ MODEL AUDITOR
KPMG
LENDERS’ TECHNICAL ADVISER
Parsons Brinckerhoff
SPONSOR’S INSURANCE ADVISER
AON
LENDERS’ INSURANCE ADVISER
INDECS Consulting
LENDERS’ MARKET ADVISER
Poyry