The $422 million in senior debt for Pure Energy Resources’ 512MW Bayonne Energy Centre marks the return of bank appetite for limited merchant risk in the US. Bookrunners Credit Agricole, Investec and WestLB, with agents GE Capital and Intesa Sanpaolo, and participants LBBW and Societe Generale, were willing to accept a complex offtake agreement with the plants’ sponsors ArcLight Capital and Hess Corporation that leaves the plant partially exposed to the New York ISO Zone J market.

The glut of capacity from the power boom of a decade ago left many US pro­ject finance lenders sitting on distressed mer­chant loans. Most US project finance bank­ers agree that fully merchant plants are not financeable and will not be for some time. The financing for Bayonne nominally ex­poses lenders to some mer­chant risk, and also asked them to accept a fund – ArcLight – as an offtaker.

Bayonne is a simple-cycle natural gas-fired peaker located on industrial land on the New Jersey side of New York har­bour. It is designed to provide power to the New York ISO zone J during demand peaks and is connected to the city with a 10.9km submarine cable to the Gowanus substation in Brooklyn. The zone has some of the highest peak hour energy demand in the country.

The financing was split into a $370 million construction term loan, a $10 million working capital facility, a $19 million debt reserve letter of credit and $23 million in additional letters of credit facilities to cover construction and interconnection costs. It has a term of six years plus construction, roughly eight years door-to-door. Pricing starts at 325bp over Libor, then rises in 25bp steps to 375bp where it remains until maturity. The average debt service coverage ratio is 1.4x. The sponsors contributed $135 million in equity each, totalling $270 million, to the project. The initial leads sold down tickets of $50 million to $75 million each.

Hess’ trading group is managing the plant’s dispatch for the duration of the 15-year offtake agreement. For the first six years, both sponsors will buy 100% of the plant’s capacity, split ArcLight 37.5% and Hess 62.5%. In year seven, the amount they buy will step down to 75% of capacity, with the same ratio. The amount will continue to step down for the remainder of the offtake agreement, going to 50% in year eight and 25% in year 11 before reaching zero at the end of the offtake agreement in year 15. After that, the sponsors are betting on continued strong demand for electricity from NYISO Zone J.

“The fact that we were able to get the financing done shows the strong character of the project,” says Timothy Leary, vice-president, finance, at Pure. “Especially considering that the project shows some elements of merchant risk.” Asked how the project could be applied to the wider market, he notes that Bayonne was “unique” but says that flexibility, as embodied in the offtake agreement, was critical in reaching close.

The merchant aspect did not concern the lenders on the deal for two main reasons. One, the debt should be repaid by year eight, though most participants expect it to be refinanced before that, and, two, the plant’s location in the New York City ISO. Still, the debt priced at 325bp over Libor, 75bp higher than the fully contracted Marsh Landing – the only other completely new-build conventional power plant in the US to close in 2010 – despite both deals closing within a month of each other, largely on account of its merchant exposure.

Hess will sell its portion of the power generated to its existing retail customers in the region. ArcLight will sell its share of the plant’s output through its subsidiary Arc­Light Energy Marketing, on the NYISO merchant market.

Pure first approached Hess about the pro­ject in 2007 and on 23 April 2009 pre­sented the project to the City of Bayonne Planning Board for approval. That Octo­ber, the developer and sponsors applied for certification to construct, operate and main­tain the submarine cable with the New York State Public Services Commission.

Approvals came quickly. The Bayonne city council gave its support to the project on 10 November 2009 and the commission signed off on the cable on 11 Dec­em­ber 2009. The US Coast Guard, New Jersey Department of Envir­onmental Pro­tec­tion and US Army Corps of Engineers also had to provide their own approvals for the project. Construction on the plant began in August 2010 and is expected to continue for 16 months with operations starting by 1 April 2012.

Rolls Royce will supply eight Trent 60 WLE dual-fire gas turbine generators to the plant. Each generator has a 64MW capa­city. The three-phase 345kV sub­marine cable will be manufactured and installed by ABB. Caldwell Marine International is a subcontractor for ABB on the installation. Barton Malow Company will construct the plant and install the turbines under a fixed-price contract with Pure. BEC Construction Management, also an ArcLight subsidiary, will oversee all construction activities. When operations start, an existing Hess-owned pipeline will provide natural gas.

Bayonne Energy Centre
Status: Closed 19 September 2010
Size: $692 million
Location: Bayonne, New Jersey
Description: A 512MW simple-cycle natural gas fired peaker
Developer: Pure Energy Resources
Sponsors: ArcLight Capital and Hess Corporation
Equity: $270 million
Debt: $422 million
Bookrunners: Credit Agricole, Investec and WestLB
Agents: GE Capital, Intesa Sanpaolo
Participants: LBBW, Societe Generale
Borrower counsel: White & Case
Lender counsel: Milbank
Market consultant: Energy Security Analysis
Independent engineer: E3 Consulting
Insurance consultant: Moore-McNeil
Plant construction contractor: Barton Malow Company
Cable installer: Caldwell Marine International
Construction oversight: BEC Construction Management
Turbine manufacturer: Rolls Royce
Cable manufacturer: ABB