Energy Capital Partners has not exclusively made its name as a buyer of merchant power assets, though it shows a greater flair for buying and turning them around than most of its contemporaries. Several of its assets have past lives as troubled project financings, and some of their contemporaries limp on thanks to lender and sponsor forbearance. ECP’s EquiPower Resources refinancing and subsequent repricing capitalised on a shift in power and fuel market fundamentals in the two markets where EquiPower operates – PJM and ISO- New England.

EquiPower owns five power plants – 812MW Lake Road and 548MW Milford plants in Connecticut, 264MW MassPower 168MW Dighton in Massachusetts, and the 568MW Liberty plant in Pennsylvania. ECP bought Dighton, MassPower and Lake Road from BG in March 2010 for $450 million, after low gas prices doomed BG’s hopes of creating a captive downstream market. BG in turn had bought Dighton in 2006 from then-bankrupt Calpine, MassPower in 2007 from a group of sellers led by distressed debt investor Silver Point and Lake Road in 2006 from its lenders.

The other two plants in the EquiPower portfolio were bought from financial investors. Deutsche, Credit Suisse, Morgan Stanley and Bank of America were among the institutions that brought in a rumoured $430 million when they sold Milford in January 2011, while Strategic Value Partners, which bought into Liberty’s project debt and eventually took the plant over, sold up in August 2011.

ECP refinanced the acquisition of the three BG plans and Milford with a $425 million term loan and $100 million revolving credit led by Barclays, its long-standing financial adviser, Credit Agricole and Union Bank. That debt was priced at roughly 425bp over Libor, though it had a Libor floor of 1.5%, and an original issue discount of 1.5%.

But the acquisition of Liberty shifted EquiPower’s focus dramatically. It is the only asset located in PJM (the others are in ISO-NE), and the only asset that uses GE 7FA technology (the other plants all use Alstom equipment, except MassPower, which uses GE 7EA turbines). It also accounts for about 47% of the portfolio’s revenues.

In New England, the price of natural gas almost always determines power prices, but while Liberty, located near Philadelphia, is in a part of PJM where gas predominates, it is able at times to substitute for coal capacity at off-peak hours when gas prices are low.

However, all of the plants have enjoyed solid recent operating histories, all run at capacity factors of around 70%, and are all low heat-rate, high-efficiency generators, with and average age of about 11 years. The portfolio’s revenues consist of capacity payments, which are known until 2015, and benefit from a floor until 2017, and spot market revenues.

The New England plants benefit from financial hedges structured as heat rate call options, which recognise that the plants operate in gas-dominated markets, but are also structured around their operational profiles. The hedges are a standard part of the financing package for merchant power plant acquisitions.

According to Alan Dunlea, EquiPower’s chief financial officer, ECP anticipated incorporating Liberty into the EquiPower portfolio relatively soon after buying it when favourable financing market opportunities presented themselves to do so. The contribution of Liberty would allow EquiPower to refinance that plant’s subordinated debt with holding company debt. The refinancing would also allow EquiPower to strengthen the New England part of the EquiPower portfolio by restructuring the New England hedges at the same time.

The existing hedges, which ran to 2014-16, were exposed to basis risk, because they were linked to gas price indices that did not perfectly reflect the prices at which New England generators bought gas, and in turn the price at which they dispatched power. The refinancing would fund a $60 million payment to hedge counterparties Goldman Sachs, Macquarie and Barclays.

EquiPower would wait until the timing was right to put in place a hedge for Liberty, instead agreeing a price floor on 250MW of its capacity with ECPs Fund II-A. The fund had ample resources to meet the maximum $65 million exposure, and EquiPower has since found third-party hedges to replace the guaranteed floor.

The refinancing closed in May 2012, and consisted of a 6.5-year $685 million first lien term loan, and a $90 million five-year revolving credit, together with a seven-year $200 million second lien loan. The first lien loan priced at 500bp over Libor with a Libor floor of 1.5%. The leads were, as ever, Barclays, together with Deutsche Bank, Goldman Sachs, Morgan Stanley.

As the influx of cash into the leveraged loan market gathered pace during 2012, and the portfolio built up a stronger operational history, the sponsor approached the leads about a repricing. It also planned to increase the revolver to $100 million, with $20 million of that taking the form of an unfunded commitment from a relationship bank, and the rest being cash collateralised

The leads held a conference call with investors, offering the 1% call premium specified in the documentation for the May deal, and in exchange receiving a drop in the Libor floor to 1.25%, and a drop in the pricing to 425bp. EquiPower would make back the all-in cost of the premium, about $7 million, in a year’s debt service savings.

The portfolio is exposed to considerable merchant risk beyond 2015, though in PJM, in particular, environmental compliance costs threaten to drive many coal-fired competitors out of business. But the portfolio still features low leverage, a very generous 12-month debt service reserve, much of it funded with draws on the revolver, and restrictions on the use of asset disposals, which favour first lien, and then second-lien lenders. 

EquiPower Resources Holdings, LLC
Status
Refinancing closed, deal repriced
Size
$685 million
Description
Refinancing and then repricing of a 2,260MW portfolio of merchant gas-fired capacity
Sponsor
Energy Capital Partners
Lead arrangers
Barclays, Deutsche Bank, Goldman Sachs, Morgan Stanley
Debt
$685 million 6.5-year first lien term loan, a $90 million 5-year first lien working capital facility, $200 million 7-year second lien term loan
Sponsor legal counsel
Latham & Watkins
Lender legal counsel
Milbank Tweed
Independent engineer
Shaw
Market consultant
CRA
Insurance adviser
Moore-McNeil