Q&A: John Foster, Southwest Generation – Part I
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Q&A: John Foster, Southwest Generation – Part I

Denver-based Southwest Generation recently wrapped a refinancing and an asset sale that ultimately put it on its current path to growth. “The new objective, as agreed with our shareholders, is to create a diversified, sustainable, self-funding power generation platform in North America,” John Foster, president and ceo, tells PFR in an exclusive interview. Foster took some time out from Infocast’s7th Annual Projects & Money conference in New Orleans to speak with PFR Managing Editor, Sara Rosner, about th e company’s recent activities and its strategy for building out its portfolio.

PFR: Tell me about Southwest Generation and your new role there, John. What does your hire mean for the company in the bigger picture?

Foster: Southwest Generation was formed in 2008 with the acquisition of Black Hills Corp.’s unregulated assets, which were acquired by Hastings Management Fund and JPMorgan.

These assets were bought right before the Great Recession. A big part of the acquisition analysis involved re-contracting assumptions. When these assets came off contracts in 2011, 2012 and 2013, the re-contracting possibilities were pretty weak. The demand destruction in Colorado and the other markets where these assets were, resulting from the recession, really put a crimp on those assumptions and made it harder to achieve the results that were originally expected.

The team, including David Rhodes and Greg Trewitt, who were part of the original Black Hills team that developed many of these assets, and some other men and women at the company, and Rob Witwer, who came on as counselor, worked very hard, against considerable odds, to get these assets re-contracted over the last several years.

Ultimately, the acquisition financing was coming due this year. It was imperative that the company figure out a way to retire the original debt and stabilize the portfolio. That required, in addition to the refinancing, some de-levering through an asset sale. This resulted in the sale of the company’s Las Vegas assets to Nevada Power. The proceeds from this sale, and execution of a refinancing that took advantage of the current attractive debt market, stabilized the platform and gave us a base from which we can grow now.

Southwest Gen brought me in to structure and execute the refinancing and subsequently asked me to stay on to lead the regrowth of the company. 

PFR: You mentioned the refinancing and the asset sale. Can you describe those deals a bit more and how they evolved?

Foster: Let’s start with the asset sale. Two of the original seven assets were in northern Las Vegas, really at the heart of the load center. The contracts on those assets rolled off at the end of 2013. The company had expected to renew those, enter into new contracts, or extend them. At the same time that was under discussion, legislation passed in Nevada that required Nevada Power to retire the Reid Gardner coal facility. Part of the bargain for Nevada Power was that it was allowed to replace that capacity through new-build or acquisition.

Nevada Power came to us and said, ‘We don’t actually want to extend your contracts now, we’d prefer to buy your assets.’ That wasn’t necessarily initially the highest choice or objective for the company. But as the discussion proceeded, we were able to reach a very attractive valuation for the assets.

Ultimately, being somewhat captive to the Nevada Power system, it turned out to be the right economic choice and it also satisfies the company’s need to de-lever by raising proceeds and paying off the existing debt. That was really important and came together in a short period of time in early 2014 and led to signing that purchase and sale agreement in May 2014. That went to the PUC of Nevada along with a couple of other assets that Nevada Power was either developing or purchasing. That package required a 180-day process to get approved and the ultimate order was issued in October. There were other details around that package, unrelated to our assets, that slowed the final order until December. But that was the key lynchpin to the restructuring of the company without the need for additional equity injections.    

Once we had that filing with the regulatory commission, we launched the refi based on the three remaining contracted assets in the portfolio. There is one in New Mexico called Valencia which is contracted to PNM Resources along with two in Colorado which had been contracted through 2013, Arapahoe and Fountain Valley. Those three formed the basis for the refinance. 

Several of the existing lenders were interested in doing the refinancing. We also had parties from the fixed-rate market and elsewhere proposing different arrangements. We ultimately did an RFP to decide which was the best way to proceed. We decided to go with a term loan A, a nine-year, mini perm loan. We were able to agree on an amortization schedule that extended to the life of our longest PPA. We were able to take advantage of what was obviously a very attractive lending market for contracted assets.

Credit Agricole, which was a lender in the original facility, put together the best proposal and spent the most time with the company helping arrange the pathway forward. We selected them as the lead arranger and then we built a club with five other lead arrangers that rounded out the facility. It was ultimately about $250 million, $165 million in the term loan and the rest in PPA letters of credit, revolver and working capital.

Working with CreditAg, we brought together a group that included Mitsubishi UFJ Financial Group, Sumitomo Mitsui Banking Corp., Prudential, NordLB and Siemens Financial Services. They all actually committed to much larger amounts than we ultimately needed if they all stayed in, which they did. We were able to complete all of the documentation in the September/October timeframe. Then we just waited for the Las Vegas closing. We needed to take those proceeds, along with the refi proceeds, to retire the existing debt. The Las Vegas sale finally closed on Friday, Dec. 19.  We then closed the refinancing on Monday, Dec. 22.  While it went down to the wire, we were able to get it done in time to enjoy the holidays. 

That put us in position, starting in 2015, to begin the regrowth of the platform.

PFR: How did you find the financing market in terms of response for the refi transaction? How are you finding it now? What’s your take on the debt markets as they stand this year?

Foster: They remain very robust. After the Great Recession and the challenges that some of the European banks had in Europe itself, there was definitely a contraction for a number of project finance lenders and in deal terms.That’s really changed over the last several years. Now there are actually a number of new entrants and there is a significant amount of very attractive debt available, both for contracted asset plays and partially contracted assets. It’s a great time to be in the market.  

PFR: You did mention a bit about how you came to work with CreditAg. Can you expand on what it brought to the table or what Southwest Gen looks for when it’s working with lenders?

Foster: Ultimately there were a number of good choices to help us with the transaction. At the end of the day, it wasn’t such a large transaction. You could consider co-leads or even more, but for the size of this transaction that didn’t really make sense.

Credit Agricole distinguished itself in two ways. First, they were extremely constructive in working through some of the issues in the old loan. They were a very positive force in 2013 and early 2014 as the company worked through some issues in the old financing. Second, we did put out a debt RFP asking people to pose terms for some of the key parameters in the loan such as tenor, spreads or how we’re going to do the swaps. Credit Agricole was one of the most creative and aggressive. At the end of the day, it wasn’t our intention to push every part of that refinancing to the absolute maximum limit of what could be done. But we still wanted to be reasonably aggressive. Credit Agricole did a really good job of that.

Check back next week for the second installment of this Q&A.

 

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