Directory of Innovative Financing: United States

United States

Project Title: Power Generation Pooled Public Bond

Project Title: Energy Investors Fund Pooled Portfolio Refinancing

Project Title: California Energy Co./Salton Sea Funding Corp. Debt Refinancing

Project Title: Enron Global Power & Pipelines IPO

Project Title: Independence Funding Corp. Rule 144a Bond Offering

Project Title: Power Generation Pooled Public Bond

Country: United States

Project Costs: $560 million

Sector: Power generation

Status: Pooled public bond issue completed in December 1992.

Sponsors/Lead Manager: Coso Funding Corp. with Lehman Brothers as lead manager.

Purchaser: US institutional investors.

Financing Package: $560 million in senior secured notes.

Innovation: This transaction was the first of its kind in three different areas: a) the first pooled public market project debt financing; b) the first project credit to access the quasipublic underwritten 144A market; c) the first to receive investment-grade ratings from both Standard & Poor's and Moody's Investor Service.

Pooling the debt of three operating power projects owned by California Energy under the aegis of one new special purpose corporation's debt security created a cross-collateralization of cash flows from Southern California Edison contracts, but not

assets. This transaction's proceeds were then advanced to each Coso partnership, which in turn agreed to provide the others with "support loans" if needed to service debt in the event one of the projects experienced cash flow shortfalls. By pooling the three projects, Coso avoided having to refinance the three projects separately - something that would not have been possible in public bonds for projects of this size.

Brief: The project involved the refinancing, through a closed-end pooled structure, of three operating 80MW geothermal project partnerships owned by California Energy and Caithness Corporation. Each of the partners agreed to provide support loans to each other in case one of the projects experience cash flow shortfalls. This is a key structural component. The Coso financing also includes covenants specific to geothermal projects, but otherwise consistent with other public market independent power project financings.

Project Title: Energy Investors Fund Pooled Portfolio Refinancing

Country: United States

Issue Amount: $125 million

Sector: Power generation

Status: Long-term bonds successfully sold in Rule 144a private placement offering, July, 1994

Sponsors/Lead Manager: Energy Investors Fund, a limited partnership with a $160 million portfolio of equity investments in US independent power projects, using Lehman Brothers as lead manager and CS First Boston as co-lead manager.

Purchaser: US institutional investors.

Financing Package: Proceeds of $125 million, 9.45% 17-year secured bond issue used for three purposes: a) accelerated distribution of dividends to EIF limited partners; b) investments in three new projects; and c) establishment of a one-year debt service reserve fund.

Innovation: This financing enabled EIF to provide liquidity for investors in an otherwise illiquid long-term fund. It also enhanced the viability of other power sector equity funds by giving an important indication of market liquidity. By pooling the assets of 16 projects in its portfolio, EIF was able to get an investment grade rating - higher than some of the underlying assets would have received if rated independently -. With this rating in place, it could then obtain long-term maturities matching its assets' cash flows.

The pooling structure repackaged the EIF equity investments into an attractively priced security appealing to conservative long-term buyers usually more interested in fixed-income markets.

Brief: EIF was created in 1988 as a $160 million, 10-year closed-end fund investing in US IPPs, targeting net rates of return of 15-20%. Its managers realized from the outset that these investments would be tied up in essentially illiquid 20-30 year assets, and that by about the seventh of eight years its investors would be demanding to once again have access to their principal.

With interest rates at historical lows in late 1993, EIF began to investigate an appropriate exit strategy for investors. It determined that a pooled refinancing in the capital markets would be a better way to provide this liquidity than alternatives such as selling the portfolio or extending the life of the fund to 20-30 years. But in order to sell new securities to the broadest possible pool of investors it had to obtain an investment grade rating for the entire portfolio. This only became possible after EIF demonstrated that a diversified portfolio could counterbalance all the risks and meet all debt service obligations even after accounting for possibilities such as reductions of up to 30 percent in cash flows of several projects at once or the collapse of the projects with the strongest projected cash flows.

The resulting transaction helped redefine the concept of pooled securitization by applying to project finance equity investors, and provided EIF's limited partners with both the greater liquidity they required and a source of new capital for additional investments.

Project Title: California Energy Co./Salton Sea Funding Corp. Debt Refinancing

Country: United States

Issue Amount: $675 million

Sector: Power generation

Status: Sold in oversubscribed offering, July, 1995

Sponsor/Lead Manager: California Energy Co. (CECI), with CS First Boston as lead manager.

Purchaser: US institutional investors.

Financing Package: a) $475 million in Rule 144a BBB-/Baa3 non-recourse project financed Salton Sea Funding Corp. bonds split into three series: $232.8 million in 6.69%, five-year/2.42-year average life notes, $133 million in 7.37%, ten-year/6.89-year average life notes, and $109.3 million in 7.84% 15-year/12.36- year average life notes; b) $200 million in secured California Energy Co. limited recourse eight-year, 9.875% junk bonds rated Ba3/BB-.

Innovation: With this transaction, California Energy secured low-cost, fixed-rate term financing to pay off part of the $500 million Credit Suisse bank loan it used to acquire its largest competitor, Magma Power Co., in February, 1995. Other proceeds from that issue will be used to refinance existing project debt and fund expansion.

The $200 million offering was considered the first-ever offering of limited recourse notes in the high-yield notes market. It was secured by the assets and cash flows of Magma's stock in the Salton Sea geothermal projects. Other devices were also used to create the profile of a Magma borrowing.

Rating agencies justified the investment grade rating for the $475 million offering by pointing to the issuer's strong contracts with Southern California Edison Co., proven fuel supply, high debt service reserves, and other factors.

The transaction involved a multi-disciplinary approach, using several different CSFB departments. Its execution in two different bond markets has set a new benchmark for completion of project financings in the US capital markets.

Brief: CECI is the world's largest independent geothermal power company. In its acquisition of Magma it acquired that company's stakes in the four Salton Sea projects, which it then sought to refinance in the capital markets. Three of those are already operational and the fourth is due to come on line in mid-1996.

Project Title: Enron Global Power & Pipelines IPO

Country: United States

Issue Amount: $208.8 million

Sectors: Power generation; natural gas

Status: 3.7 million shares sold in an oversubscribed NYSE offering in November, 1994

Sponsors/Lead Managers: Enron Global Power & Pipelines (EPP) is an Enron Corp. subsidiary designed to act as a new holding company to own, manage, and operate power projects and pipelines in emerging markets worldwide. Lehman Brothers, Bear Stearns, Donaldson, Lufkin & Jenrette, Smith Barney and SG Warburg were lead managers in this offering.

Purchaser: Retail and institutional investors in the US and Europe.

Financing Package: Through this transaction Enron spun off 48% of the common stock in EPP, which it had only recently formed as a limited liability company. The offering priced at $24/share, near the upper limit of the $22-$25 filing range. In early October, 1995 shares were still trading at $24.

Innovation: This transaction was considered the first equity monetization for emerging market projects to be completed in the capital markets. As a pooled portfolio financing, it raised money for IPPs from a broad range of investors who would not generally have interest in these assets, and gave Enron a vehicle through which it could gradually rid itself of the debt obligations of emerging market projects and thus free up more parent company resources for new development work.

Enron plans to offer EPP all of its ownership interests in all new projects it develops outside the US, Canada and Western Europe upon their completion. EPP intends to fund these acquisitions by issuing additional shares of its common stock - not cash - to Enron, which could then liquidate the shares as a way of monetizing its investments in the projects.

If EPP declines to purchase these assets, Enron may hold them or sell them within a year to a third party as long as it offers them to the new buyer for at least 5% more than it offered them to EPP. This format gives Enron an innovative way of both recycling committed capital into future project opportunities and liquidating its current emerging market holdings in order to generate additional monetization of its projects.

Brief: Enron, an $11 billion-asset integrated natural gas company, created EPP as a vehicle to raise $1 billion of equity over the next five years with little impact on the parent company balance sheet. EPP's initial working assets included 50% interests in four operational projects acquired from other Enron subsidiaries. The largest by far was Transportada de Gas del Sur, Argentina's largest natural gas transportation system. Others listed were Batangas Power Corp. (110MW oil-fired power plant in the Philippines); Subic Power Corp. (116MW oil-fired power plant in the Philippines); and Puerto Quetzal Power Corp. (a 100MW oil- fired power plant in Guatemala). EPP is also expected to grow through power and pipeline acquisitions from Enron and third parties under a preferred purchase rights agreement.

EPP's assets are expected to grow significantly in the coming years. Its initial purchase rights agreement designates development stage projects Enron maintains in the Dominican Republic (185MW Puerto Plata power plant), China (150MW Hainan Island power plant), India (Dabhol 695MW power plant) and Colombia (575km Centragas pipelines), and that the parent company will offer it at prices meeting specified minimum earnings, cash flow and internal rate of return criteria. Enron's future power plants in Colombia, Indonesia, and Turkey, as well as its interest in the 1,800km Bolivia-Brazil pipeline, are being considered for sale to EPP as well.

Project Title: Independence Funding Corp. Rule 144a Bond Offering

Country: United States

Issue Amount: $717 million

Sector: Power generation

Status: Bonds successfully placed in January, 1993

Sponsors/Lead Manager: Sithe Energies, using Salomon Brothers as lead manager and Goldman Sachs and Donaldson, Lufkin & Jenrette as co-lead managers.

Purchaser: US institutional investors.

Financing Package: Investment grade secured notes issues in three tranches: 1) $157.8 million at 7.9% with nine-year maturities; 2) $150.8 million at 8.5% with 14-year maturities; and 3) $408 million at 9% and 20-year maturities.

Innovation: This transaction marked the first time an independent power project had received investment grade rating and obtained capital markets financing in the risky pre-construction phase. It carried no recourse to Sithe, with project cash flows and assets considered the sole source of debt service payments. Among the strong features that enabled the sponsor to get the ratings needed to bypass the commercial loan markets and go straight to institutional investors was the project's strong 40-year power purchase agreement with Consolidated Edison Corp., other long-term sales contracts with Niagara Mohawk Power Corp. and Alcan Rolled Products Corp., and a fixed-price turnkey construction contract with a AAA-rated joint venture of General Electric and EBASCO.

Brief: This limited recourse bond offering secured debt financing for the $863 million 1000MW Independence gas-fired cogeneration project in Scriba, NY. It showed that the public bond markets can be receptive to a properly structured IPP offering. Additional debt was provided in the form of a letter of credit and working capital from Union Bank of Switzerland.

Infrastructure and Financial Markets Division
Private Enterprise and Financial Markets Subdepartment
Sustainable Development Department
Inter-American Development Bank

Last updated: 02/26/07