When International Power bought the Rugeley Power Station from TXU in June 2001 it cost the company £200 million (US$376.5m), five years later the company was able to use the asset to secure £485 million (US$913.4) of non-recourse financing through three separate but equally priced facilities

Prior to these loans, the 1,000MW power plant had no associated debt but wear and tear was starting to show on the station that began operations in 1972.

International Power also anticipates a change in carbon dioxide allocations making upgrading the ageing building a priority.

Coal-fired plants continue to be of great strategic importance to the UK's energy portfolio as an offset to high natural gas prices and lingering uncertainty to the viability of new-build nuclear projects.

IPR Background

International Power (IPR) has 40 assets operating worldwide with six of those located in the UK. Of those six, the Rugeley station is the only one powered by coal and its newly-acquired Indian Queens is the only oil-fired plant.

The 140MW Indian Queens power station, located in Cornwall, was acquired in a £32 million (US$60.3m) deal which closed the day after financing for the Rugeley plant came through. The money to pay for the peak generation station is believed to have come from the second tranche of the Rugeley loan.

International Power was using natural gas to power three of its UK generation facilities with a combined total output of 1,914MW of power generation prior to this acquisition and excluding Rugeley.

International Power has also partnered with Mitsui to generate some 2,088MW of hydro power in Wales.

The reluctance of power generation companies to rely on the supply of one commodity is hardly surprising given the volatility of prices as energy consumption continues to soar.

Financing

The financing for the project was separated into three tranches:

• A £145 million (US$273m) construction facility to retrofit the power station with flue gas desulphurisation equipment and to work on other projects aimed at extending the life of the plant
• A £145 million (US$273m) term loan to leverage assets
• A £70 million (US$131.8m) working capital facility
• A £125 million (US$235.4m) letter of credit to support trading obligations including securing the plant's supply of coal

Lentjes is the EPC for the installation of the FGD equipment.

International Power mandated six lead arrangers for the deal:

• Bayerische Hypo-und Vereinsbank
• Calyon
• Commonwealth Bank of Australia
• ING
• Mizuho
• RBS

The financing is structured in such a way that refinancing is an attractive option for the borrower. Each tranche has an eight-year term with pricing starting at 140bp over Libor for the first three years with that increasing to 150bp for years four and five. The rate will increase to 175bp over Libor for the final three years.

Banks involved in the transaction have been working on syndication - which is expected to occur in the coming weeks.

Conclusion

International Power's profits from operating assets in Europe rose to £260 million (US$489.6m) in 2005 from £97 million (US$182.7m) the year before. This is largely due to the strong improvement in earning at the Rugeley power station.

With the continued increase in the price of oil putting upwards pressure on the price of natural gas, electricity prices have also been pushed higher.

The relatively cheap price of coal means that each unit of power sold from a coal-fired plant is more profitable than an equal unit from other sources.

While it would be hasty to conclude that this trend of increasing oil and natural gas prices will continue indefinitely, it certainly shows the advantages of having a diversified portfolio. There will always be a margin between the cost of electricity and the cost of supplies for that power.

There have now been a couple of deals done and banks are getting more comfortable with the risks involved. This is reflected in the pricing.

The project at a glance