In 2003, in response to Ireland’s growing power generation capacity requirements, the Irish power regulator – the Commission for Energy Regulation (CER) – launched a capacity competition with the aim of bringing in new generating capacity to the marketplace, writes Max Thompson.

However, because of the looming energy shortage, the dominance of Ireland’s state-owned Electricity Supply Board (ESB) and low electricity prices, attracting IPP investment into the country has been an uphill task. Nonetheless, the CER received bids from Bord Gais Eireann/Scottish and Southern, AES, Ireland Power Energy, Viridian Power and Tynagh Energy Limited (TEL)  – a consortium formed of Turkish construction giant Gama, Irish property developer Mountside and Investec Bank.

To the surprise of many observers, on the 26 November TEL – the ‘new kid on the block’ – was notified that it had been selected as provisional preferred bidder – taking the tender from under the noses of the more established players. In December 2003, TEL’s position was formalised.

The €312m (US$417m) Tynagh project is only Ireland’s second IPP – although as we shall see this is debatable –  and the 400MW CCGT plant will be the first to take advantage of the country’s proposed new pool and gas market arrangements which are to become effective in 2006.

The Project

Around 14 months ago, Dublin-based Mountside Properties – a private company formed by former Martin Blake – approached the Investec Bank with a proposal.

With easy access to the Irish power grid and gas network and, perhaps most importantly, the power hungry west of Ireland, Mountside told Investec that it had acquired the perfect site for a power plant. Specifically, with the right backers on board, Mountside said the Galway site could be developed to meet the bidding criteria laid down by CER’s power capacity tender.

By this stage, Mountside had forged links with major Turkish construction company Gama. The firm had some experience of constructing Irish power projects – having been involved in the construction of two small peat-fired stations and the Viridian operated 343MW Huntsdown power station – but was keen to expand its operations in the country.

Investec Bank partner Andrew Neill told IJ that the bank was attracted to the Mountside approach because it was ‘out of the ordinary and allowed Investec to integrate its growing project advisory, sponsorship and mezzanine arranging capacities within the power sector.'

Once on board, Investec took a 40 per cent stake in the venture but made it clear that it did not regard the project as a long term venture and would, at some point after financial close, sell its stake.

At the time the TEL consortium won the CER bid, it was a 40:40:20 joint venture, respectively formed of Gama, Investec and Mountside. However, after financial close was achieved on 27 August this year, Investec carried out its pledge to sell it stake and it sold its 40 per cent share to Gama.

A JV of US giant General Electric and Gama was appointed as EPC contractor, and, at the time of writing, the 400MW facility was around 50 per cent complete and two months ahead of its March 2006 target date for the start of commercial operations.

Financing

The project’s €312.5m construction required a senior debt of €250m (US$334m) for which the Royal Bank of Scotland (RBS) (including its subsidiary Ulster Bank Ireland) and KBC Finance Ireland (KBC) (including its subsidiary IIB) were appointed as underwriters and arrangers on a 50/50 basis.

Investec – which has forged something of a reputation for taking on relatively small, but nonetheless high risk, mezzanine debts –  as well as being one of the original sponsors, assumed the role of mandated lead arranger for a mezzanine debt of €25m (US$33m).

Investec also underwrote 50 per cent of the debt with KBC and RBS each underwriting 25 per cent. Although Investec was the official mezzanine MLA, there was considerable overlap and fluidity between senior and mezzanine debt financiers. Following syndication, Allied Irish Bank, Bank of Scotland, Bayerische Hypo-und Vereinsbank, IIB and Ulster Bank Ireland became arrangers.

Pricing throughout the mezzanine debt’s seven year tenor was set at Libor plus 625 basis points.

The tenor for the final maturity on the senior debt was set as 31 December 2018, however, a target maturity was set for 31 December 2015. John O’Connor – vice president of KBC’s power and energy division – explains: ‘We have a schedule of repayment profile that takes thirteen years to repay, and,  on top of that we have added on target repayments which will mean that all the debt is repaid in ten years. A failure to meet the scheduled repayments is a debenture default but a failure to meet the target dates is not a default but does lock up mezzanine and shareholder payments.’

The other arrangers involved in the senior debt financing are: Allied Irish Banks, Bank of Ireland, Bank of Scotland, BayerischeLB, Fortis Bank, LBBaden-Wurttemburg, MCC SpA, Bayerische Hypo-und Vereinsbank AG, Norddeutsche Landesbank Girozentrale, Bank of Tokyo-Mitsubishi.

The pricing for the construction period was set as Libor plus 130 basis points. For the first three years of operations the pricing will drop to Libor plus 125 and then, will rise to a maximum of Libor plus 160 during the eleventh to the thirteenth years of operation.

The debt:equity ratio at the time of financial close was therefore more accurately a debt:mezzanine:equity of senior debt of €250m, a mezzanine debt of €25m and equity of €37.5m or 80:8:12.

The Offtake Agreement

Under the terms of the ESB offtake agreement, 89 per cent of the output from Tynagh will be covered by a capacity and differences agreement (CADA) – a vehicle through which the state guarantees to make up the difference between the pool price and an agreed fixed rate – with the remaining 11 per cent to be tolled by RWE.

The deal was structured in such a way that the dominant CADA was sealed initially with ESB and it formed the basis for the financing of the project. The RWE tolling agreement was added at a much later stage but before financial close.

RWE – which also signed a 10-year gas supply deal – assumed the electricity price and volatility risks on the 11 per cent bought back via the tolling agreement.

Legal

The legal advisor to the banks on the senior debt were Linklaters and Irish law firm A&L Goodbody. Norton Rose advised the banks for the mezzanine portion of the debt and Mason Hayes Curran was advisor to the government and Matheson Ormsby Prentice advised the sponsors.

Linklaters partner Jeremy Gewirtz said that the trickiest hurdle the advisors had to overcome was not the conclusion of the somewhat unusual offtake agreement, but more the fact that the deal took place against a background of uncertainty and deregulation in the Irish energy market.

Gewirtz said: ‘The market is undergoing significant change as it moves towards full deregulation. To a certain extent there was some educated guesswork as to the likely shape of the markets. There was a need to strike a deal now that is capable of flexing with the markets.’

Gewirtz also said that Huntsdown aside, the lack of private power deals to date in Ireland means that the regulatory authorities are reluctant to offer comfort to lenders in relation to matters such as connection arrangements and licensing. However, Gewirtz added: ‘This may well change with increased deal flow.’

Conclusion

The financing of the Tynagh power project has been regarded as something of a success story and has claimed – perhaps to the chagrin of Viridian – a number of firsts.

Not only is it Gama’s first independent project, it is, according to O’Connor, the first genuine IPP in the country. O’Connor told IJ: ‘If you were to talk about a genuine third party IPP, then I would suggest that the Tynagh project is the first.

‘Although technically Viridian will claim its Huntsdown facility as being the first, as far as I am concerned, Viridian is an incumbent and has a monopoly in the north of Ireland, just as ESB monopolises the south of Ireland.’

O’Connor also applauded the conduct and development of Gama. He says: ‘Although it was involved – as a contractor – in Huntsdown, for Gama the Tynagh project is a major development. It is an 80 per cent shareholder as well as the JV partner with GE for the EPC.’

TEL’s newly appointed general manager Arif Ozozan, who heads up TEL’s Irish operations,  pointed out that regardless of whether the station is the first or second IPP, the investment in the project can only be a positive development.

Ozozan said ‘The plant will provide a stable and reliable power source in the west of Ireland and will encourage further foreign investors to locate in the region.’

Tynagh at a glance: